His new book, Flash Boys: A Wall Street Revolt, instantly became the talk of Wall Street. It has led to reports of FBI investigations, SEC rulemaking, investor relief.
It's high time. Investors large and small have suspected for some time that, as Lewis put it Sunday on CBS' 60 Minutes, the stock market is "rigged."
Ever since the market changes in 2007 that shifted stock trading to a new slew of electronic platforms — and certainly since the "flash crash" in May 2010, when the market suddenly dipped 600 points before bouncing back — it's been obvious to many investors that something is seriously wrong.
The heart of the problem? We've got "computers entirely replacing the people," as Lewis writes. Algorithms flash stock orders milliseconds before slower-moving customer orders. That allows the high-frequency traders to skim off profits by making buyers pay a little bit more.
Our idea of how the stock market works, with its picture of men in colored coats matching buy and sell orders, is hopelessly obsolete. "The world clings to its old mental picture of the stock market because it is comforting," Lewis writes, "because it is so hard to draw a picture of what has replaced it."
Michael Lewis, author.(Photo: handout)
Accompanying all the buzz about the book were some audible sighs of relief.
"We want to see a spotlight shined on this area, so the SEC can finally look at it," Meridian Equity Partners' Jon Corpina told The Street. "So finally Washington can stand up and say, 'You know what, the market structure is broken, and we n! eed to do something about it.' "
It's not that abuse and fraud on Wall Street are entirely new. High-frequency trading, it turns out, is just a high-tech version of front-running, a classic form of insider trading in which a broker buys the stock you have just ordered, so you have to buy it at a markup. (One difference: The high-tech version is apparently legal.)
Over the decades, regulators have been able to identify abuses, make rules outlawing them, track down violators and punish them.
But since the market shifted to warp speed, regulators have been trying to catch up with the smart guys via horse and buggy.
The few people who understood what was going on used the new technology for their own profit, rather than illuminating the rest of us.
That is, until the "revolt" Lewis cites in his title, when a small team of Wall Street insiders, led by a transplanted Canadian, Brad Katsuyama, nailed down what was happening. Lewis chronicles their detective work and how they set up their own trading platform, IEX, last October, with built-in safeguards to stymie high-frequency traders.
He notes that it is up to the big Wall Street banks to support efforts to keep things fair.
The regulators may lag the market, but that doesn't mean they have no role to play. Unless they keep digging and trying to fix things, too many unscrupulous players will continue to exploit flaws in the system.
Darrell Delamaide(Photo: H. Darr Beiser, USA Today)
By opening up the black box Wall Street has become, Lewis' book has lit a fire under the regulators and brought public pressure to bear on a problem that has been neglected for far too long.
Darrell Delamaide has covered financial markets and economic po! licy from! New York, Paris, Berlin and Washington. He writes a weekly column for USATODAY.com.
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