No, Michael Lewis, the US equities market is not rigged

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NEW YORK & LONDON, March 31, 2014 – “No, Michael Lewis, the US equities market is not rigged,” says Larry Tabb, founder and CEO of TABB Group, the capital markets research firm and a Wall Street market structure analyst, reacting to the CBS 60 Minutes interview with Michael Lewis, discussing his newest book, Flash Boys.


Lewis, the Vanity Fair contributing editor and best-selling author of Moneyball, Liar’s Poker and The Blind Side, told 60 Minutes correspondent Steve Kroft, “The stock market is rigged.”


Tabb, a global market structure expert, disagrees and explains why in a detailed commentary that can be found online at


An abbreviated version focused on eight key issues follows:


On market fragmentation: “While the markets are complex, they are not rigged. Our fragmented equity execution framework is the definition of a competitive market, where competition has made trading much less expensive, faster and more open. The inexpensive cost of execution today allows retail brokers to support sub-$10 trades and institutions to pay under $0.008 a share for electronic execution. In addition, average effective spreads are down and investors are in much more control of their execution than ever before.


On price discovery: “While virtually everyone hates speculators, the fact is that they do form what is one of the most important functions of a market – determining price. Market makers, speculators, proprietary traders, HFT – no matter you call them – stand willing to buy and sell virtually 8,000 US equities across the trading day, providing quotes to the market, which forms the basis of price discovery.“


On IEX: “While Brad Katsuyama of IEX, featured in the 60 Minutes segment, is right that differing latencies and a fragmented market creates market leakage, this in no way means that the price of any given stock doesn’t reflect the current supply and demand. I might add that even this leakage is on the decline.”


On HFT earnings: “In 2009, TABB Group estimated that high-frequency firms generated approximately $7.3 billion from US equity trading; today, that number is approximately $1.3 billion. During this period, less volume, less volatility and better efforts from brokers as well as algorithms have helped investors protect their clients’ savings.”


On the SEC’s role: “As to the question of whether the SEC should restrict markets, we are on record at TABB Group inresearch reports, the financial media and Congressional testimony saying yes. We also have believed, and said so publicly, that there were too many exchanges, too many dark pools and too many internalizers. However, if the SEC had placed a limit on matching venues, would new markets have been developed? Would they have had enough funding to buy an ATS license? But one thing is certain: The ability to bring new ideas to the market is a hallmark of the US equities markets. If the SEC limited licenses, then new platforms would have a harder time coming to fruition.”


On transparency: “The most important aspect of our markets is transparency with each order tracked, archived and printed. The key to making our markets better is the ability able to analyze that information and make information-based judgments that represents accurately the truth for each investor, broker and market. Once this information is in the hands of investors, they can value it as they like. If they care about execution quality, then they should obtain, analyze and measure broker and venue execution quality and shift trading flow accordingly.”


On leakage: “If leakage is less important than other services that a broker provides, albeit online access, custodial services, research or corporate access, then it is essential that investors understand the true cost of those services and, again accordingly, make a value judgment.


On the power of investors:  “No, Mr. Lewis, the markets are not rigged. They are intermediated and possibly not effectively brokered. But information, analysis and choice are an investor’s most powerful weapons, which is why you should analyze your trading data. If your managers, brokers and/or trading venues are not doing their job, leverage your choice and send them a message – you’re fired.”


Editor’s NoteIn March 2012, the US Commodity Futures Trading Commission selected Larry TABB to assist their CFTC Technical Advisory Committee as a member of its Subcommittee of Automated and High Frequency Trading (HFT) to create a definition for high-frequency trading within the context of automating trading systems.  In September 2012, he was invited by the US Senate Committee on Banking, Housing, and Urban Affairs to testify at the Senate Subcommittee on Securities, Insurance and Investment session on “Computerized Trading: What Should the Rules of the Road be?”, chaired by Senator Jack Reed (D-RI).


About TABB Group

Based in New York and London, TABB is the research and consulting firm focused exclusively on capital markets, based on the interview-based, “first-person knowledge” research methodology developed by Larry Tabb. In 2010, TABB launched TabbFORUM, the online capital markets community for peer-to-peer contributed opinion and analysis covering current issues, tracked daily by 20,000-plus professionals; in October, 2013, QuantFORUM went live, an online channel for the global quantitative investing community.

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