Michael Lewis, author of ‘Flash Boys,’ appeared on Bloomberg Television today to discuss his book, trading and the stock market. Joining Lewis at the tail end of the hour long interview was IEX Group President/CEO Brad Katsyuama and Tradeworx Inc. CEO/Founder, Manoj Narang.
Lewis told Bloomberg Television anchors Stephanie Ruhle and Erik Schatzker that in today’s “rigged” U.S. Stock Market, large investors such as Greenlight Capital’s David Einhorn are like “dumb tourists” led to a casino where the card games are fixed, “It’s very clear people are being front-run.”
Lewis also said: “I don’t regard high-frequency traders as villains….They are wired that way. I think the system is screwed up to exploit opportunities, exploit glitches in the system. They’re not wired to say that this is moral or immoral; they aren’t wired to say is this good for the world. They don’t think that way. ”
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STEPHANIE RUHLE, BLOOMBERG NEWS: And we have a very special hour, as we mentioned, ahead. Michael Lewis is here. He is the author of the hottest book out there right now, “Flash Boys”. It has sparked quite a revolt against high-frequency trading. Erik said top selling book on Amazon today and it’s already had a huge impact on the national conversation. The FBI says it’s opened an investigation into whether any laws have been broken. And today, high frequency trading firm Virtu announced it’s delaying its planned IPO because of all the bad publicity.
Michael Lewis, thank you for being here. Clearly, you are the author when it comes to Wall Street culture. There is no one else out there. But in terms of reaction, you have never gotten such a visceral reaction in such a short time. What do you make of all this?
Michael Lewis, AUTHOR, “FLASH BOYS“: It does – I’ve had one experience kind of like this, and it was when I published “Moneyball,” but in that case they weren’t threatening to throw old baseball scouts in jail for what they did. But the disruption to the industry that that caused feels a lot like this.
And the instigator, there is a character kind of who has taken a different view of the industry and has kind of investigated it one way or another — the main character in this book, Brad Katsuyama — is got a similar feel to me to Billy Beane. And the reaction feels, it reminds me of that, that everybody has to have an opinion about the book right away, no matter whether they have read it or not. So that’s similar.
RUHLE: But is the opinion about the book or about the claim the market is rigged? That’s a big claim.
Michael Lewis: Yes. Well, it is rigged. So it’s not that big a – if you’ve read the book, I don’t think you could put it down and say the market’s not rigged. I really don’t think you – I mean, unless — we can parse the word rig.
ERIK SCHATZKER, BLOOMBERG NEWS: Maybe we should.
Michael Lewis: Let me give you an analogy and I think is a very close analogy to the way the stock market is structured. It’s a casino analogy. So I have a casino and I want to start a poker game in the casino, so I get three card sharks and I tell them, go sit there and start the game. Make it look like a good game’s going on. There are no 4s, 9s, there are no queens in the deck. Only you will know that. And we will pay some tour group operators to bring like a bunch of dumb tourists in to pay with you. They won’t know. You’ll —
RUHLE: Hold on, a bunch of dumb tourists? So is David Einhorn is a dumb tourist?
Michael Lewis: Yes.
RUHLE: Come on now.
Michael Lewis: In this analogy. Hold on. In this analogy, every investor — David Einhorn did not know; he did not understand. He understood that whenever he tried to do something in the market, the market moved like someone knew what he was up to. In the same way that big pension fund managers and mutual fund managers saw when they tried to execute big orders, oh my god, it’s like someone knows I want to buy before I buy. But he didn’t know why. He didn’t know – he didn’t understand that high-frequency traders were putting machines in exchanges to be closer to the exchange so that they could get price information in two milliseconds before him. And so on and so forth.
Let me — can I finish my analogy?
Michael Lewis: So of course the tourists get fleeced all the time in the poker games, because they don’t know the deck is rigged. The poker players pay the casino a cut of what they make. The casinos, operators, pay the tour group – the tour group company money to bring in the tourists.
So in this case, casino’s the exchange, the poker players are the high-frequency traders, and the tour group operators are the banks and the brokers that handle the stock market orders. And I think the analogy is pretty close. So is that rigged? Is that a rigged game? I think it is a rigged game.
SCHATZKER: Well, it’s rigged only inasmuch as – rigged, so –
Michael Lewis: Why are you so invested in the idea this is fair? Why are you even arguing about this? It’s so clear.
Michael Lewis: Yes, you seem to be.
RUHLE: He’s barely even spoken.
Michael Lewis: No, no, no, I mean, it’s very interesting. But you seem to be – you can see, it’s very clear that people are being front run in the market. There’s plenty of evidence in the book. People making –
SCHATZKER: Their orders are being anticipated (inaudible).
Michael Lewis: Anticipated and run in front of, that’s right. And —
SCHATZKER: Well, no, there’s some people – in all fairness, I don’t have a stake in the proceedings here, certainly not like you because you’re the author of the book, Michael, but there are some people – you’ve probably met some of them — who would say in order to front run, you have to have a client. In order to front run, you have to have a client. And the HTF firms don’t have clients.
Michael Lewis: They buy the order flow. They buy – they pay –
SCHATZKER: They pay to see things.
Michael Lewis: No, they pay to execute the orders. They pay TD Ameritrade tens of million dollars a year. Schwab, they pay eTrade. So they pay for the right to execute the orders at a delayed price.