Michael Lewis: “The market is rigged.”

In his influential examination of high-frequency traders’ impact on global stock markets, Michael Lewis references Charlie Munger, Warren Buffett’s close associate, who likened high-frequency trading to allowing rats into a granary.
The core argument in “Flash Boys,” now available in paperback with an updated final chapter, is that electronic trading has tilted the market against average investors, particularly in the United States. High-frequency trading (HFT) firms employ computer algorithms to anticipate the actions of institutions managing pension funds and savings. HFT firms execute transactions in fractions of seconds, enabling them to “front run” human traders, affecting stock prices to secure small profits.
While each profit seems trivial, Lewis argues that the cumulative effect results in billions of dollars lost by investors to these HFT firms, effectively rigging the market. Lewis contends that this phenomenon poses a threat not only to the American market but also to markets in Europe and Asia, infiltrating financial systems worldwide.
The expansion of high-frequency trading into various markets raises questions about market structure, particularly as computerized trading displaces human traders. Lewis highlights the concerns voiced by Martin Wheatley, the head of the Financial Conduct Authority, who noted that HFT comprises 30% of trading on the UK equity market, with higher proportions in the US.

Lewis argues that regulators, particularly in the US, may not take adequate action due to the “revolving door” between Wall Street banks, HFT firms, and regulatory bodies, fostering a “cosy club” culture.
However, despite these challenges, Lewis sees hope in the story of “Flash Boys.” The central figure in the book, Brad Katsuyama, established IEX, an exchange designed to eliminate “predatory opportunities created by speed.” This platform aims to create a fair marketplace where investors can engage on equal terms. Notably, Goldman Sachs has committed to using IEX.
Yet, Lewis’s thesis has its detractors who claim that computer-based trading enhances market efficiency, offering more trading opportunities and increasing liquidity. Rebecca Healey of the Tabb Group argues that many market participants have addressed predatory HFT activities constructively.
Lewis counters that the financial industry’s perverse profit-driven incentives slow or impede cultural change. He believes that without altering these incentives, meaningful change is unlikely.

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