We are living in a post-Flash Boys world and the capital markets had better wake up to that fact.
Five days after 60 Minutes profiled Michael Lewis and his new book, the general public now thinks that the words “Wall Street” and “rigged” belong together in the same sentence. High-frequency trading was a topic left to B-to-B magazines like Traders with occasional pieces in the New York Times and USA Today but it has now entered the mainstream. Thanks to a tsunami of coverage on morning news shows, two back-to-back segments on The Daily Show (where host Jon Stewart asked Lewis to stick around so he can bash the business news channels) and a brutal confrontation between Lewis, his hand-picked hero Brad Katsuyama of IEX, and a livid William O’Brien of BATS on CNBC high-frequency trading is now an open secret.
And the Feds are coming.
U.S. Attorney General Eric Holder has announced a probe into HFT today. The SEC’s Mary Jo White is promising a data-driven investigation into the practices of HFT and the FBI is calling for volunteers in the high-speed dealing world to come forward and help with them with their investigation. (In exchange for plea deals, perhaps?) New York Attorney general Eric Schneiderman lead the change with a probe of collocation services and the data they provide last week and the chief securities officer of Massachusetts is surveying HFT firms for their practices.
More will surely follow. Given the fact that plenty of hedge funds are located in Connecticut and Florida, we won’t have to wait too long for probes from those states. In fact, any state with a pension fund might inspire its AGs to look further into these allegedly “rigged” markets and “unfair” practices.
This could be a replay of the anti-tobacco lawsuits that flooded the headlines and inspired hearings in early 1990s. Plus, it’s a no-brainer for law enforcement: the victims are your Mom and Dad trying to invest in their retirement and the villains are far from sympathetic. Remember: AG doesn’t just stand for attorney general, it also stands for “aspiring governor.”
The capital markets realize that it has an image problem and over-the-top responses like BATS’ O’Brien will not help matters. Traders has reported on the formation of two lobbying firms to represent high-frequency trading firms to educate lawmakers and defend the practices of their industry. While the phrase “Mom and Pop” investors is fairly ludicrous – people who buy stocks usually pick a broker with fast connections – it does stick. Just think back to the “Wall Street vs. Main Street” in the days of the bank bailouts and the excessive bonus lavished on the people who created the financial crisis in the first place.
While there are legitimate concerns with Lewis’s book — I have just received a copy and will read it this weekend — it has the power for some real change. Real reforms might take place in the wake of Flash Boys but there is also the chance that bad laws will be enacted hastily to calm a roiled public. Look no further that Sarbanes-Oxley, a law that even its namesakes no longer stand behind.
We are getting past the outrage and disgust phase and we’ll hear calls for calm heads and rational actions that could strengthen a system that many people perceive as out of control, unfair and in danger of collapse.
Stay tuned.
