One simple phrase electrified the financial world this past week: high-frequency trading.
With the publication of his new book, Flash Boys, author Michael Lewis almost singlehandedly transformed the growing practice of high-frequency trading from an obscure form of financial wizardry cooked up in Wall Street’s mad laboratories into a fledgling scandal. What’s high-frequency trading? It’s when lightning-quick computers running complex algorithms race ahead of ordinary human investors — you know, those guys with the funny jackets waving and yelling on the floor of the New York Stock Exchange — to gain the slightest advantage in the trading of stocks. For high-frequency traders, speed means getting valuable market information a few hundredths or millionths of a second early, which in turn can mean millions in profit simply by beating the regular guys to the trade. If it sounds complicated, well, that’s the point. “The insiders are able to move faster than you,” Lewis said on 60 Minutes. “They’re able to see your order and play it against other orders in ways that you don’t understand. They’re able to front run your order.”
Lewis’s Flash Boys tells the story of a Canadian banker and do-gooder named Brad Katsuyama who, outraged over this “rigged” market, did something about it. Judging by the reaction in some corners of the financial world, you’d think Lewis had declared war on Wall Street itself. (See, for instance, this verbal slug-fest on CNBC involving Lewis, Katsuyama, and the CEO of one of the exchanges Lewis takes to task in his book.)
The opprobrium greeting Flash Boys wouldn’t be quite as ridiculous if we didn’t already know how dangerous high-frequency trading can be. As Nick Baumann wrote in Mother Jones magazine, high-frequency trading gone haywire can inflict huge damage, as was the case in the so-called flash crash of 2010, which wiped out almost $1 trillion in shareholder value in a few hours. If several flash crashes occur at the same time, former bank regulator Bill Black told Baumann, “financial institutions can begin to fail, even very large ones.”
If Wall Street’s need for speed doesn’t cause the next Great Crash, TomDispatch regular Laura Gottesdiener knows what might. As she wrote in November, massive investment firms are building a “rental empire,” buying up foreclosed properties by the thousands, renting them back to working people, and bundling up those properties to sell to Wall Street. It’s an ingenious scheme reminiscent of the subprime mortgage machine — and this scheme, too, has the potential to plunge us back into a crisis. Today, Gottesidener turns her sights to New York City, where the rental racket has been underway for years and the results have been instructively grim.
- When Predatory Equity Hit the Big Apple
How Private Equity Came to New York’s Rental Market — and What That Tells Us About the Future
Laura Gottesdiener • April 8, 2014 • 2,900 Words