Tuesday, April 1, 2014

The Great HFT Debate?

Michael Lewis and Brad Katsuyama were on CNBC's Power Lunch today debating William O'Brien of BATS Global Markets in what was dubbed as "The Great HFT Debate." I will let you watch the entire debate but first read my thoughts in bullet form below:
  • First, this wasn't "the great HFT debate," it was more like a great shouting match between three stooges being interviewed by three CNBC dummies. These people know as much about high-frequency trading as I know about nuclear physics. O'Brien comes across as a total arrogant jerk and Brad Katsuyama didn't really impress me that much either but at least he and Lewis were cordial. Joe and Jane Stock Investor didn't learn anything watching this hopeless exchange, which was a notch above the moronic exchange between Carl Icahn and Bill Ackman (great for CNBC ratings but little in terms of providing valuable insights to investors).
  • All three participants talked up their book. Lewis was getting more promotional time for his new book, Katsuyama was talking up his IEX exchange and O'Brien was on the attack trying to defend the high-frequency industry (he should be muzzled, he's an embarrassment to the HFT industry!). 
  • In my last comment, I went over whether the U.S. stock market is rigged, explaining in detail why the market isn't rigged, but it's definitely broken, and high-frequency traders are wreaking more havoc than the benefits they claim to provide. 
  • The 60 Minutes report on Sunday was very sloppy. In fact, Michael Lewis' book is sloppy and I doubt I'll read it. Why? Because Brad Katsuyama isn't the hero who exposed the inner workings of high-frequency trading. The real hero is Haim Bodek, aka "The Algo Arms Dealer," and if you never heard of him it's because the lazy reporters at CBS and CNBC never bothered to do their homework on who exposed the Wall Street code. Go visit Haim Bodek's website and ask yourself why the media hasn't invited him to discuss high-frequency trading. Instead, we have to listen to Michael Lewis, Brad Katsuyama and this arrogant high-frequency douche, Bill O'Brien!
  • By the way, in my humble opinion, Michael Lewis' best book remains his first one, Liar's Poker. That was a real classic and it's a must read for anyone wanting to get into or understand the investment industry.  I liked his last book on the financial crisis, The Big Short, but found it somewhat sloppy too. He didn't bother interviewing my favorite hedge fund manager of all time, Andrew Lahde, who was smart enough to walk away from the industry after making a real killing shorting dumb Ivy League traders. Smart guy, I'm still waiting for him to come to Montreal so we can smoke some Quebec ice hash and gawk at Montreal beauties. -:)
  • I stick with what I wrote in my last comment on whether the U.S. stock market is rigged, and think we're making a much bigger stink about high-frequency trading than we need to. In fact, markets were much more rigged in the past. Is there a problem? Absolutely but the U.S. stock market isn't "rigged." The Oracle of Omaha is heavily invested in U.S stocks and he couldn't care less about high-frequency trading. Why? Because Warren Buffett knows market timing is a loser's proposition. He also knows U.S. public pensions funds are screwed.
  • Bloomberg rightly notes, forget the equity market. For high-frequency traders, the place to be is foreign exchange. As brokers get better at cloaking orders and volume shrinks in stocks, speed trading remains a growth business in the $5.3 trillion foreign-exchange market, where authorities on three continents are examining the manipulation of benchmarks. Currency markets are indeed the Wild West and need a serious regulatory overhaul. Of course, hedge fund king George Soros doesn't care about HFTs in foreign exchange markets, he made a cool $1 billion in 2013 shorting the yen.
  • As I previously stated, the line between pension funds, mutual funds and high-frequency traders is blurred. For example, Ontario Teachers' Pension Plan and the Caisse invest in Citadel, a well known elite hedge fund that engages in high-frequency trading. Fidelity and other large mutual funds also use high-frequency traders to unload or buy stocks. In other words, it's not as clear cut as people think.
  • Having said this, there needs to be a congressional investigation into the nefarious practices at some high-frequency trading shops and I'm glad the FBI and New York's Attorney General have launched separate investigations (the SEC is asleep at the wheel, probably watching porn!). The FBI should also look into the pension fund that broke all rules.
  • One thing that Michael Lewis said that I do agree with is that high-frequency trading is a tax on investors. Being an economist by training, my mind immediately went to the famous Tobin tax on financial transactions. Maybe it's high time U.S. and British politicians stop shamelessly pandering their financial masters and introduce some form of Tobin tax to limit excessive trading in markets (at the very least, they should listen to Leon Cooperman and reintroduce the uptick rule to curb high-frequency trading activity).
Those are my thoughts on the "Great HFT Debate." As always, I welcome your feedback and will publicly post any intelligent comments you send me via email (LKolivakis@gmail.com).

Below, watch the great HFT debate that captivated everyone. If you ask me, it was a total dud and Michael Lewis and Brad Katsuyama should never have agreed to take part in it. Also, once again, please take the time to watch the fascinating and revealing documentary from VPRO about Haim Bodek, the genius algorithm builder who dared to stand up against Wall Street and expose its inner workings.