If you are reading this, it is very likely that you have already read about the Michael Lewis' new book Flash Boys: A Wall Street Revolt, which has raised disturbing questions about high frequency trading and trading infrastructure such as co-located servers and fibre optic networks, used to gain crucial milliseconds. These extra milliseconds were used to peek into orders of other investors, front run them and pocket millions of dollars.
The book, released in the US on March 31, has already reined in the IPO parade of a high frequency trader. A reading of several articles that are hyping up this potential best-seller, including an adaptation titled The Wolf Hunters of Wall Street published in The New York Times, gives a sense that the book is going to be controversial. Particularly on the way it has depicted some Wall Street biggies as 'reformed' and holier than others. Are they kicking the ladder off after climbing up?
It also sounded like too much of an endorsement for Brad Katsyuma, the Canadian founder of IEX, the hero of the book. It would be interesting to know how the villains of the book would react. Soon, we might see an account from the 'other side'.
Algorithmic trading and co-location servers have been contentious in India since they entered public debate nearly five years ago. In 2009, James Shapiro, a lanky BSE official had taken the fight to National Stock Exchange (NSE) by publicly criticising its policies in order routing. Shapiro, one of the Americans that then BSE chief Madhu Kannan brought along to Mumbai to help revive the bourse, famously said the rules made him feel like Alice in Wonderland. NSE tried to defend its rules and policies by saying these were necessary to protect market integrity.
In March 2012, Securities and Exchange Board of India (Sebi) came up with formal guidelines for algo trading. This circular defined algorithmic trading for the first time and the framework it put in place was basic and made the exchange itself responsible for regulating such trades. The exchanges followed with detailed circulars. On co-location of servers, though the bourses have been allowing it since 2011, a concept paper was floated by Sebi in 2013. Its concerns that this could create information asymmetry seem vindicated. But, not much has moved as some market voices criticised it in early days. Flash Boys promises to provide great insights, if not an excuse for regulators to move ahead in this direction.
Meanwhile, information asymmetry continues to be created in conventional, low-frequency trading, too. The White collar crime division of Singapore police last week took over the investigation of alleged trading irregularities in three SGX-listed firms, Asiasons, Blumont and Liongold. The commercial affairs department has raided some offices of these firms and issued notices to several other firms connected with the trio through shareholdings or directorships. The three stocks had wiped off $6.5 billion of investor wealth in the October 2013 crash. Directors and executives of several companies have been asked to assist the probe.
Greedy insiders and wealthy traders across the globe continue to explore ways to milk the last cent and the last millisecond. No prizes for guessing who the real Alice in Wonderland is.
