In his ongoing media blitz, Flash Boys author Michael Lewis told Bloomberg Surveillance that a big part of why Wall Street has evolved the way that it has in the last few years has been the inability of some established banks to appreciate the newfound importance of computer programmers.
Michael Lewis: HFT driven by IT, not traders
“The technologists are displacing traders,” said Michael Lewis. “The people who program the computer, their status has gone through the roof… It appears the big banks have a hard time getting their mind around the technologists, the IT guys, being the same stature as the traders.”
Ignoring the controversy around high-frequency trading for a moment, HFT is agnostic about the fundamentals that most traders think are important (PE multiples, EPS estimates, and so forth). It isn’t actually taking a position on any of the stocks that it buys and sells, so it largely boils down to fast connection speeds (physical distance being a major factor) and efficient code. The fact that many traders couldn’t accept a purely tech-driven strategy may be part of the reason HFT has flourished outside the main investment banks.
Michael Lewis argues that there is no need for HFT to act as a market-maker, and that individual traders can get all the benefits of electronic trading (tighter spreads and lower fees) without having to fight against frontrunning and other dirty tactics to execute their orders.
HFT has nothing to do with investment process: Katsuyama
IEX CEO and co-founder Brad Katsuyama, who is also one of the main characters in Flash Boys, also blames flash crashes and suspended trading on rising complexity that doesn’t benefit people who are actually trading in order to take a position on a company.
“What we are trying to do is highlight the inefficiencies and fix them at IEX. When the house has termites, you do not burn down the house and sleep on the streets, you get rid of the termites,” said Katsuyama. “The system becomes unstable when you are constantly introducing things that have nothing to do with the investment process or trading.”
The worst parts of HFT can probably be pushed out with better trading rules, but Michael Lewis and Katsuyama’s argument is even more damning. If HFT doesn’t actually serve a purpose, and price discovery has been improving in parallel with HFT simply because both are made possible by the same new technologies, then investors have no reason to put up with it. Fortunately, we won’t have to wait long to find out if he’s right. Once volumes on the IEX are high enough to compare with other exchanges we’ll be able to see if HFTs really do impact buy-ask spreads.