Here’s a roundup of comments made by executives at some of the world’s largest trading firms and asset managers about Flash Boys .
W.W. Norton
Michael Lewis's latest best-seller, Flash Boys, released on March 31, depicts what he describes as the latest financial outrage in a "story of scandals... linked together tail to trunk like circus elephants." This time it's high-frequency trading, the use of algorithms and super-fast computing that allows stock trades to be executed automatically in a matter of milliseconds.
Lewis argues that many high-frequency trading firms make money by essentially trading in front of large orders that they can see coming in before anyone else, thanks to super-fast data connections with stock exchanges.
While many of the high-speed trading firms themselves are small and have been around for less than a decade, Lewis implicates the rest of Wall Street too, from the exchanges that have transformed their business to serve their biggest customers (high-frequency trading makes up 50% to 55% of U.S. equity trading), to the brokerage firms and banks that route customer orders into their own private markets known as "dark pools."
The Justice Department and New York State Attorney General have both said they're investigating high-frequency trading firms for possible violation of insider trading laws, and the Securities and Exchange Commission is more broadly reviewing the current stock market structure.
On earnings conference calls with some of the world's largest banks and trading firms last week, analysts were curious to hear what banks had to say about Lewis' book and potential reform in the market for stock trading. And one brokerage CEO just decided to speak up on his own. The book has arguably spurred more public discussion of market structure by the biggest banks and asset managers in a few weeks than has occurred at any point since the 2010 "Flash Crash," when entire equity indices fell 10% in a day, half of that within just a few minutes.
Below is a roundup of their comments:
Goldman Sachs — "The market evolution... has just gotten ahead of the market infrastructure."
Brendan Mcdermid / Reuters / Reuters
Goldman Sachs is almost a hero of Lewis' book. It throws its support behind IEX, the new stock market started by Brad Katsuyama, the protagonist of Flash Boys.
In a memo released in March, Goldman said it wanted to see IEX reach "critical mass" even if it came at the expense of its own stock trading venue, Sigma X. The firm's president and chief operating officer, Gary Cohn, published an op-ed where he said that the current fragmented market structure requires a "regulatory response" and that "speed and complexity at which our markets operate aren't being matched with the operational and control environment to support them."
The Wall Street Journal reported this week that Goldman had been rethinking its stock trading business and that it was considering shutting down Sigma X, whose volume had fallen signfincatly over the past two years. Goldman reported that it had equity trading revenue of $1.6 billion in the first quarter, behind its chief investment banking rival Morgan Stanley's $1.755 billion.
On its earnings call Thursday, no one mentioned Lewis or his book specifically, but Christian Bolu, an analyst at Credit Suisse, asked Harvey Schwartz, Goldman's chief financial officer "given all the debate around... high-frequency trading, just curious to get your updated thoughts on transfer to electronic trading business, particularly the future of the Sigma X platform?"
Schwartz responded that Goldman had "no strategic plans for Sigma X at this stage" and that the bank's "focus on the equity market structure isn't specifically around high-frequency trading necessarily," instead it was that "the market evolution, speed of execution has just gotten ahead of the market infrastructure and the market plumbing."
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