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Good writers know all the tricks necessary to make a story great. Especially Michael Lewis.
At its most basic, the formula works something like this: start with an important topic, throw in some humour, and lean on some archetypes. Dark versus light, black versus white.
Then you push the boundaries as far as you can, without telling a lie – something Mr. Lewis himself admits to doing.
It's pretty clear he's using this playbook for his latest book about high-frequency traders. To make his new tale pop, he's found a cuddly Canadian – how cute are we! – who spotted something wrong with a new pack of wolves in the trading landscape, setting up a battle of good versus bad.
This time Mr. Lewis is going so far as to adopt a savvy press strategy when talking about the book, telling 60 Minutes that "the most iconic market in global capitalism is rigged." Talk about a great quote.
The problem is that the story he's telling isn't so clear-cut. Although the trading revolution that has unfolded certainly represents a seismic shift and many investors are undoubtedly getting screwed, HFTs aren't the root of all evil, as they are made out to be.
To make his point, Mr. Lewis likens high-frequency trading, which is dependent on speed, to front-running stocks – a old strategy in which institutional traders would see where their own bank's internal orders were going and then get in front of them to make money for themselves.
The difference here is that HFTs don't have orders themselves. They shop for the same orders as everyone else – it's just that they've built their own fibre-optic cables that let them see the order first.
And it's not like the market wasn't rigged before HFTs emerged. Banks are notorious for making money off their retail order flow, and sell-side traders still have boatloads more knowledge about what is happening in the market than retail investors.
That doesn't mean everything HFTs do is right. As with any business that grows too quickly, the cart got ahead of the horse – especially in the U.S. where regulation was incredibly lax and HFTs would proliferate in dark pools far from the light of oversight. Here in Canada the regulators have been much more cautious, and the concentrated market dominated by the Big Six banks have been better able to keep the HFTs at bay.
So yes, U.S. regulators have every reason to investigate. But they need to know the issue isn't so black and white.
Follow Tim Kiladze on Twitter at @TimKiladze.
Tim Kiladze