Flash Boys

Asad Dossani
What are the lengths some traders will go to give themselves an edge? How about laying a fiber optic cable across a large part of the US. Why do this? To reduce the time delay between when an order is placed, and when it reaches the exchange. We are talking about reducing delays by just milliseconds.

I recently finished reading Michael Lewis' latest book, Flash Boys. This is a book about high frequency trading (HFT). For those of you interested in learning more about HFT, I highly recommend Flash Boys. Michael Lewis is an excellent writer. He's able to talk about HFT in a way that is informative, coherent, and entertaining.

The basic idea is as follows: HFT firms position themselves to gain a speed edge over other market participants. One such example of this is the fiber optic line. They use this speed edge to front run large investors. Suppose an investor is looking to buy a large block of shares. HFT is able to learn about this buyer's intentions, and buy up shares in advance of the investor. This pushes up the price a little, and then they turn it around and sell to the investor.

And so, the HFT firms use their speed advantage to scalp large investors. Furthermore, the rest of the market insiders all benefit from the HFT firms. The stock exchanges sell privileged access to their data to HFT firms. The brokers favor HFT firms due to the large volumes of commissions they generate.

One of the central themes of the book is that insiders collude to benefit themselves at the expense of outsiders. The outsiders are the long term investors, while the insiders are the exchanges, large banks, brokers, and HFT firms.

This phenomenon is nothing new. It has been going on for a long time in finance. This is primarily because of the incentive structures in place. For example, your broker earns a commission every time you make a trade. What is his incentive? For you to trade as often as possible. This may not necessarily coincide with your own interests.

The good news is that outsiders have better information than they've ever had. Investors and retail traders have access to many of the same tools that the insiders have. Here at the Daily Profit Hunter, our goal is to level this playing field, and provide an edge for retail traders.

Flash Boys is a story about HFT. But it is also a story of investors that fight back against HFT. It is a story about a group of individuals that go out and set up a new stock exchange. And the purpose of this exchange is to operate for the benefit of investors, and prevent HFT from scalping large investors.

The future of HFT remains uncertain. Regulators are slowly regulating HFT, and it remains to be seen what this industry will look like in the future. In India, HFT remains a small portion of the overall market.

What do you think of Flash Boys and high frequency trading? Share your views in the Club or share your comments here.

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1 Responses to "Flash Boys"
Aradhana
10 Feb, 2015
YOu mention in artice on Flash Boys that " Here at the Daily Profit Hunter, our goal is to level this playing field, and provide an edge for retail traders." In saying this, you definitely set a laudable objective. In reality, however, it remains a pipe dream, even with equitymaster. To confirm, just have a look at at price of a share recommended at 2 price points - 2 to 3 trading sessions before its mail is received; and also the difference in the recommended price and lowest price of the 52 weeks. So, even with equitymaster, retail investor gets the crumbs, when skimming seems to have already taken place. Regards,Like 
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