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    Everybody Knows The Dice Are Loaded...

    By Michael Maiello on Tue, 04/01/2014 - 11:10am | Politics


    At Gawker, Hamilton Nolan takes on some of the backlash against Michael Lewis which is coming from industry insiders and financial journalists yawning that the issues surrounding high frequency trading are old hat at this point and hardly cutting edge enough to make a bestselling book from.

    In a sense, the critics are right.  In 2000 I visited a specialist firm on Wall Street and the CEO showed me a screen full of bids that included one of his traders trying to buy Microsoft at some insane price like $2 and change.  When I asked why that bid was even on the screen he told me that it was to capture the occasional typo.  If another firm wanted to sell Microsoft at $42.50 but type in $2.50, his firm would be there ot buy shares and pocket the huge difference.  Technically, an exchange could reverse an obviously mistaken trade of this nature but only if people took responsibility for the mistake.  I was rather shocked, in my early years as a financial reporter, to see such games being played in such a serious arena.  This was a result of decimalization of stock prices as such a typo might not be possible were stocks traded in fifths and thirds.

    High Frequency Trading is another outcome of decimalization.  How many ways can you cut into a penny?  The firm I had visited with its funny bids was, back then, one of the fastest specialist firms on the street.  It was quickly outpaced and it is now gone (subsumed by a boutique investment bank).

    Another consequence of decimalization and of High Frequency Trading was a breakdown in the Initial Public Offering market.  Spreads trading stocks have grown so thin that investment banks can no longer make money by supporting their offerings in the secondary markets.  This has made IPO shares more volatile, more likely to trade below their offering prices and harder to get done in general.

    All of these are known issues that would elicit yawns from people who have been covering them for years.  But, as Hamilton says, not of this has been addressed and, in fact, there is no plan to address any of it.

    Michael Lewis cannot make these things new but if he can make them important, he's done his job.

    Topics: 
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    Comments

    I'm afraid I'm somewhat ignorant of how the financial sector works, but why couldn't one accidently enter $2⅓ instead of $42⅓ just as easily as entering $2.50 instead of $42.50? I suppose the bigger factor is the switch from handwriting bids to keyboarding them.


    by Verified Atheist on Tue, 04/01/2014 - 11:35am

    They could, I suppose.  I think it's just less likely.  Also, doubt you had to type the fractions into anything... either handwrote them or hit a key since there were only so many fractions...


    by Michael Maiello on Tue, 04/01/2014 - 12:12pm

    Like VA, I do not see decimalization as the problem here. More likely that was itself a result of individual traders and stockbrokers beginning to enter their own orders as computer technology evolved so they do not have to cope with the traditional fractions or base 8.

    Old lady talking here: back in the day when stocks were traded in bits aka eighths and its multiples and divisors -- never in thirds -- buy and sell orders were entered by specific clerks in specific formats. Crucial information was always entered twice to reduce the likelihood of errors but it never eliminated them entirely. Yes, twice typing 2-1/2 instead of 42-1/2  was just as possible as 2.50 instead of 42.50. 

    I enjoy reading Michael Lewis. He is a great writer who captures the atmosphere of the industry I am most familiar with very well. That said, he has been out of the arena longer than I have so at best his current work is based on second-hand information about the technology involved. But the people involved and the incentives? Well, they never really change. That is what really makes his books fun to read.

     


    by EmmaZahn on Tue, 04/01/2014 - 2:42pm

    Forgive my errors, I started covering this stuff just as everything was decimalized...


    by Michael Maiello on Tue, 04/01/2014 - 2:49pm

    What error? 

    I would like to add that there were a couple of other aspects of order entry in the past that made it harder to take advantage of a mistake like you describe.

    Orders were sent to either an inhouse trading desk or to that house's floor broker at one of the exchanges where it was likely to be caught but if not it could be more easily reversed because the traders on both the buy and sell sides had to keep working together, often face-to-face, so anyone taking unfair advantage would have to reckon with payback sooner or later. That may well have changed now that trades are more computer-to-computer.

     


    by EmmaZahn on Tue, 04/01/2014 - 3:05pm

    C'mon MM. 

    Spreads get thin because of electronics... which basically means these guys, like so many of us, have one less way to make money... and so, they step in front of trades and rip us all off, serving absolutely NO useful function?

    Come on. This is thievery, plain, simple. 

    And there's lots more where it came from. We all know this. There is so astonishingly much insider work done that it almost doesn't bear repeating. 

    And all of these guys, even with 2007-08-09 in hand, avoided prison.

    Let's at least make sure the boot gets well and truly put into the groin of clowns like these HFT's, so we can at least be rid of them.

    It's the bare minimum. And has frack all to do with decimalization.


    by Qnonymous (not verified) on Fri, 04/04/2014 - 12:21am

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