'Flash Boys' and understanding HFT

I’m a big Michael Lewis fan, and have been looking forward to his latest book. While I still look forward to reading “Flash Boys,” his interview on 60 Minutes Sunday night left me quite disappointed. When describing the mechanics of high frequency trading, or HFT, he said it was “too complex for individual investors to understand.”

When someone opts not to describe something as too complex to understand, it makes me think they may not fully understand it themselves. Within the trading community high frequency trading encompasses a large universes of different strategies and tactics. I fully agree with Mr. Lewis that front running, the process of buying or selling in front of a similar order that is not yet seen by the public, to the detriment of that order, should be banned.

However there are a host of other practices that rely on public information, available to all, that are used by traders who look to makes ‘pennies’ on extraordinarily short time frames. Some of these practices, while purely speculative, add liquidity to the markets. I’ve always thought that liquidity, along with transparency, are the cornerstones of a healthy market. This makes intuitive sense..if you buy something, you’d like to know you’re making an informed decision, and one that you can extricate yourself from if need be. An illiquid market where certain people have privileged information is not one you want to be involved in. 

Without a good definition of what HFT really is though, it is impossible to regulate the practice to ensure that practices like front running are removed, while other potentially beneficial practices are allowed to continue.

Without a doubt the financial markets can be complex and arcane, but not so much as for anyone to throw up their hands in exhaustion after a 90 second google search and proclaim, “it’s just too complicated.”

The markets are too important to all us to be misunderstood in such fashion.