A furor has erupted over author Michael Lewis's new book
Flash Boys, which peels back the layers of secrecy
surrounding the practice of high frequency trading. Hedge fund
managers have been making noise about Lewis's contention that
financial markets are "rigged," coming down strongly on both
sides of the debate.
We've compiled their reactions here, and we'll update this
list as more people speak out. If you'd like to add a viewpoint
we're missing, please email firstname.lastname@example.org.
» Jaffray Woodriff, chief executive
at Quantitative Asset Management, told
Absolute Return he enjoyed Flash Boys, and
admires the founders of IEX, but disagrees with Lewis.
Read the Q&A.
» Rishi Narang, the founding
principal of quant-oriented fund of funds
T2AM, told Absolute Return, "There
are potentially unintended consequences of waging this
war…[particularly] a transaction tax…Before we
throw out all the advances our market has made, we should
remember that we're in the situation of having a computerized
market because humans have acted badly over and over
Read the Q&A.
Narang published a book on high-frequency trading,
Inside the Black Box: A Simple Guide to Quantitative and High
Frequency Trading, and a recent critique of
the anti-HFT argument at CNBC.com.
» Mike Hennessy, the managing
director of fund of funds Morgan Creek Capital
Management, tells Absolute Return that he's
more concerned about the prospect of a flash crash than he is
high-frequency traders making a few bucks.
» "It is true that in an effort to sell a book,
Michael Lewis and others have used language that undermines
confidence in the marketplace. The problem is that it's totally
justified. Without that level of outrage, it will not be
changed," said one executive at a multi-billion-dollar
event-driven fund manager. He declined to be named because he
was not authorized to speak on the record.
» GAM Alternative Investment
Solutions sent a letter to clients last week providing
color and background on high-frequency trading:
Much of the recent publicity has been focused on the
negatives of HFT and the potential costs to non-HFT market
participants. While some HFT approaches can impose costs on
traders who use less sophisticated techniques to execute
their trades, we believe that it would be unfair and
incorrect to apply this categorization to all high-frequency
traders…[A]n institutional trader who wants to
transact a very large number of shares at once could endure
greater costs from the market makers for this immediate
access to liquidity. However, small investors such as retail
investors who trade much smaller numbers of shares at once do
not face this hurdle and actually may benefit from the very
low bid-ask spreads brought about by HFT…[O]ur view is
that the role of HFT is much more nuanced than has been made
out in the media lately, and there are both benefits and
costs to be considered.
» AQR Capital Management founder
Cliff Asness and AQR portfolio manager
Michael Mendelson took to the
opinion page of the Wall Street Journal to voice
their discontent about Flash Boys, writing:
The recent fusillade of hyperbole about HFT practices
threatens to derail this effort and refocus attention where
the problem isn't…We doubt that these old-school
managers were truly better off in the pre-HFT world, but it's
hard to prove either way…
There has been one unambiguous winner [from electronic
trading], the retail investors who trade for themselves.
Their small orders are a perfect match for today's narrow
bid-offer spread, small average-trade-size market. For the
first time in history, Main Street might have it rigged
against Wall Street.
Capital, Pershing Square Capital
Management, Scoggin Capital
Management, Senator Investment
Group and Third Point
Partners are all mentioned in Lewis's book as
investors in IEX, the new trading venue designed to make
certain high-frequency trading strategies more difficult to
execute. All declined to comment for this piece.
» Greenlight Capital told investors in a
letter dated April 22 that it doesn't believe "the abuses
identified in Flash Boys...significantly impact" its
business. Nonetheless, its trading team is "vigilant about
minimizing their impact" on the firm's funds:
Michael Lewis's new book Flash Boys, like all
of his books, is a fun read and is based on a true story. It
brings attention to some areas of the market that can improve
further, and a few areas of possible abuse. There are many
legitimate and even beneficial aspects to computerized
trading, including market making and statistical arbitrage,
yet there are also some areas that are ripe for reform. Most
glaring is the latency arbitrage that is used to identify the
presence of large institutional orders for the sole purpose
of legally front-running them...
We believe that the best response for any investors that are
worried about fast computers taking advantage of them is to
ask that their orders be routed to IEX, a company in which we
hold a small stake.
Read the full letter
» Nicholas Colas, chief market strategist at ConvergEx
Group, a global brokerage company based in New York, recently
surveyed 357 ConvergEx customers about their feelings on U.S.
market structure. 65% of respondents said they worked on the
Respondents to the survey overwhelmingly believed that
markets were not fair. "Make no mistake: when 70% of market
professionals think the game is unfair, that game is going to
change," Colas wrote. A full half of respondents deemed HFT
harmful; only 20%said such trading was "helpful" or "very
helpful" to market participants. Then again, 71% of the people
surveyed said recent debates about HFT haven't changed the way
they interact with U.S. equity markets.
In short, our survey seems to tell a very clear story.
Most professional investors and institutional brokers do not
feel that markets treat all participants fairly. They
worry about how fragile markets might become during periods
of abnormally high volume. At the same time, they are
cautiously picking their way through the minefield in which
they find themselves and are unsure what role regulators
should play. How the landscape will change as a result
of their unease is still unclear. What is certain is
that change is coming.
See also: A
primer on IEX, the trading venue Lewis details
in the book.