January 15, 2023
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Editorial: Unveiling the secrets of high-frequency trading


Michael Lewis doesn’t see himself as a business journalist.  “I like to write about markets,” he told a small group of his peers at a conference in Phoenix on March 28. With that simple, declarative sentence, Lewis dropped a subtle hint about his next exposé.

Indeed, a few nights later on “60 Minutes,” Lewis made a jaw-dropping allegation that ripped the façade off high-frequency trading. In the view of his new book, “Flash Boys,” the entire stock market is rigged. As he told the tale, the rigging benefits the operators of sophisticated computer networks who profit by trading a millisecond ahead of large institutions and artificially pump up prices. It also benefits the exchanges that serve as clearinghouses for the trades by generating millions of dollars in fees.

Some Wall Street players are furious, others are in denial. A few top financial journalists are skeptical of Lewis’ claims. The regulators, late to the scene as usual, are now investigating. But Lewis has done an excellent public service by adding an element of transparency to something that had been a bit of a black box. Many experts have been extremely nervous about the opportunities for disaster implicit in this hard-to-control technology, including the so-called flash crash of 2010.

What needs to happen next is for a thorough airing of the high-frequency trading phenomenon with the view toward restoring a better balance between large institutional traders and the so-called Flash Boys. Here’s why:
First, these institutions handle our retirement accounts, pensions and mutual funds, and we deserve the best execution that can possibly be delivered. So do our grandchildren.

Second, the regulators really need to understand how high-frequency trading works so that the markets don’t experience another Flash Crash that could be incredibly damaging to the global economy.

And finally, if U.S. markets are going to retain their position as the deepest, most liquid and most transparent markets in the world, we need a lively public debate on the risks and benefits of high-frequency trading.

It is true that no matter what safeguards are in place, the temptation to rig the markets will always be there because the rewards are so high. But that does not mean, as Lewis has pointed out, that we should tolerate bad behavior.

Lewis, whose previous books include “Liar’s Poker,” “The Blind Side” and “Moneyball,” has taught journalists an important lesson about our craft. Business journalism can be cut-and-dry and kind of boring, but writing about markets and the people who make them in a clear and dramatic way holds an infinite capacity to entertain and educate.