As a Senate panel debates what to do about high frequency trading, the IEX trading venue, the featured hero in the Michael Lewis book Flash Boys that lit a torch on issues that would normally remain behind the scenes, is the target in a battle many is unaware exists.  This juxtaposition in attitudes towards Flash Boys could be the central theme in the debate around High Frequency Trading – the public is outraged and the industry is feigning ignorance while telling everyone who will listen to ignore the problem, it will go away.

High Frequency Trading

This highlights what could be the most vicious fight in Wall Street history – after a group of high frequency trading industry insiders spoke to a world-class journalist in Michael Lewis and a one-sided slug fest broke out both on and (mostly) off the record. The battle has been bruising with just the start of intimidation tactics being described in the book (with allusions to the Irish mob).  “We were aware of the potential benefits and the risks of participating in Flash Boys,” Ronan Ryan, IEX’s chief strategy officer said in an interview marked by its openness.  “Information is hoarded on Wall Street, so when you open yourself up, you’re exposing yourself to both supporters and detractors.”  That’s putting it mildly.  The mantra of success is often found in playing the game, keeping your head down and not talking about the real issues.

War room environment

The high frequency trading lobby is said to be operating in a “war room” like environment doing everything possible to quell real debate. IEX has been a clear target, yet few of the attackers go on the record which allows charges to go unquestioned. “We would love to see some of the criticisms backed up with actual fact – how exactly is IEX the same as high frequency trading?” Ryan said.  “It’s pretty easy to say that behind closed doors or behind an anonymous twitter handle – how about we see who is really saying this?”  When Ryan mentions “anonymous Twitter handle,” he’s scratching the surface of the campaign.  Indications are that a paid squadron of both anonymous and identified Twitter Inc (NYSE:TWTR) trolls attack anyone who dares speak against the high frequency trading contagion.

Come out from behind the shadows says IEX

“For those that question us or our practices or integrity, we would ask them to make their comments publicly and on record so we can address them,” Ryan said.  “Forget the rhetoric, let’s just get to the specifics of what we’re doing and speak out in the open.”

Most aggressive Wall Street street fight in history?

It’s hard to tell the real story behind the most aggressive behind the scenes fight in Wall Street history, but just like MF Global Holdings Ltd (OTCMKTS:MFGLQ), the best story is what hasn’t been written about.  Today we’ll consider it in total.

Consider first and foremost Brooksley Born’s rough ouster as CFTC Chairman in 1998 for merely requesting information on unregulated derivatives.  This one sided battle essentially between a well-funded Wall Street street gang named “The Working Group” and a do-gooder regulator.  This ugly fight ushered in the age of big bank unregulated derivatives.  Then, after gutting common sense derivatives legislation in early 2001, the derivatives industry became the unofficial name under which most big bank questionable activity occurred.  This led to the rough battle that was the Enron meat grinder, another product of derivatives de-regulation.  Then consider the 2008 derivatives crash and all the warnings given in both administrations.  The US Federal Reserve received a credible warning.  But perhaps the most significant came from the former Goldman Sachs president who was there from the birth of unregulated derivatives:  Hank Paulson.  In the film “Hank,” Paulson documents the highest economic official in the land warned of the derivatives implosion to the Bush Administration while he was Treasury Secretary.  This warning was said to have been passed to the next Treasury Secretary yet this didn’t make it into Timothy Geithner’s book somehow?  Then consider how the lack of punishment potentially emboldened MF Global executives to act with such apparent disregard after receiving multiple warnings from regulators yet still illegally transferring customer property in violation of the most sacred regulatory principle in existence.  Think about the bruising fight that ensued trying to protect the segregated account and stop a theft from occurring in broad daylight.  These are the battles that go unreported and they were aggressive and bruising.

Yet none of these marches into battle is as aggressive as the high frequency trading street fight.

The public display of vitriol has been nothing short of stunning.  The day after the book Flash Boys was launched, author Michael Lewis and the book’s hero, Brad engaged in highly visible debates on business television that were more reminiscent of a professional wrestling match than civil discourse.  Within days of the book’s launch, Lewis was accused of writing the book with a hidden profit motive, accused of causing a market selloff and had his manhood questioned on CNBC by a high frequency trading author and advocate.

The below the belt fighting has not deterred IEX.  “The response to Flash Boys tells us everything we need to know about the state of the industry, and gives us confidence we’re on the right path,” Ryan said. “This is a battle between those who are focused on moving the industry forward and those who are entrenched in the status quo.”

Nothing to see here, move along

The main barbs in the debate tend to come from HFT supporters.  The main message is “there is nothing to see here, no big deal” and “there’s not a lot of money in high frequency trading.”  This is what is said in public that is more than debatable. What is said in private is even more stunning and often goes without rebuttal.  The fact is most professional investors really don’t understand the plumbing of how markets work and don’t want to take the time.  Thus, when statements are made without a counterpoint it somehow becomes establishment gospel.

Among the primary targets are Lewis’s book and the IEX.  The charges being made behind the scenes is that the book is factually challenged and a friend of the book’s author suggested the topic and has investments that benefit from challenging the high frequency trading establishment.  Lewis could not be reached for comment. The charges against the IEX is hypocritical and engage in distasteful high frequency trading tactics just like other firms.  In other words, the old political technique of dragging the competition into the mud pit. For its part, IEX notes that the “broker priority” order treatment provided to Goldman Sachs is similar to that provided to other brokers and IEX denies that they provided Goldman the book Flash Boys before it was published.  Charges that a Netscape founder with ties to Lewis who could benefit from the downfall of HFT were also dismissed.  IEX, for its part, tends to focus on the larger picture.

Predatory High frequency trading: “That’s simply not right”

“We’d prefer to be

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