Michael Lewis: Nobody Understands the Stock Market

you are the author when it comes to Wall Street culture there's no one else out there but in terms of reaction you have never gotten such a visceral reaction in such a short time what do you make of all this it does I've had one experience kind of like this and it was when I published Moneyball but it but in that case they weren't threatening to throw old baseball scouts in jail for what they did but the disruption to the industry that that cause feels a lot like this and the instigator that is a character kind of who is taking a different view of the industry and isn't kind of investigated in one way or another the main character of this book Brad Katsuyama is I got a similar feel to me to Billy Beane so I fit I'm the reaction feels it reminds me of that all that that everybody has to have an opinion about the book right away no matter if they read the book or not or it so that's that's similar what is the opinion about the book or about the claim the markets rigged that's a big claim yeah well it is rigged so it's not that big you reading the book I don't think you can put it down and say the markets not rigged yeah I really don't think you I don't I mean the less you we get we can we can we can parse the word rigged maybe we should so let me give you an analogy I think is a very close analogy to the way the stock market structured it's a casino analogy ah so I have a casino mm-hmm and I want to I want to start a poker game in the casino so I tell I get three card sharks and I tell them go sit there and start the game make it look like a good games going on there no four is there no nines there are no queens and the deck only you will know that and we will pay some tour group operators to bring like a bunch of dumb tourists in to play with you they won't know you tourists David Einhorn's and dumb tourists yes in it come on in this analogy hold on and this now every every investor David Einhorn did not know he did not understand he understood that he understood that whenever he tried to do something in the market the market moved it like the like they knew like someone knew what he was up to in the same way that big pension fund managers and usual fund managers saw when they tried to execute big orders oh my god it's like someone knows I want to buy before I buy but he didn't know why he didn't know he didn't understand he didn't understand that high-frequency traders were putting machines in exchanges to be closer to the exchange so that they get it they could get pricing information to milliseconds before him and so and so forth let me put can I finish my absolutely so here's the analogy so uh so of course the the tourists get fleeced all the time in the poker game because they don't know that the deck is rigged right the poker players pay the casino cut of what they make the casino operators pivot or group the to a group company money to bring in the tourists so in this case casinos the exchange the poker players are the high-frequency traders and the tour group operators of the banks and the brokers that handle the stock market orders analogies pretty close so is that Rick is that a rigged game I think it is a rigged game well it's rigged only in as much as rigged so let's use your analogy why are you so invested in the idea this is fair why are you even arguing about this it's so clear yeah you seem to be so why you're actually very interesting no but you you seem to be you can see it's very clear that people are being front-runner in the market there's plenty of evidence in the book there people making their offices among their orders are being anticipated dissipated and run and run in front of that's right and while no no there's some people I mean in all fairness I don't have a stake in the proceedings here certainly not like you because you're the author of the book Michael but there are some people right you probably met some of them who would say in order to front run you have to have a client way I'm sorry in order to front run so you have a client so and the HIV students don't have a pliant they buy the order flow they buy they bought they pay they pay I mean on baby drive maybe they pay this evening they pay no they pay for they pay to execute the orders so they pay TD Ameritrade tens of millions of dollars a year Schwab they pay e-trade so they pay for the right to execute the orders at a delayed price so why would you I mean that asks that question why would it why would anybody pay for the right to execute someone else's stock market work that in itself is a little curious I mean I can understand why if I'm a stock market investor why I'd pay a commission to a broker handle my order but why on top of that is the broker turning around and selling my order to some high-frequency trader for the right to execute where's the value the value in that is is is quite clear it's that this the the that order for the high-frequency trader is an opportunity to exploit and it's an opportunity to exploit because he has advanced information about the pricing in the stock market is that fair he's also getting paid by the exchange to print right to print the trade it's it's I mean they're you're getting into a complicated discussion because the exchange pricing sometimes you pay and sometimes sometimes you get paid but but so that's a almost a separate issue it is true that the exchanges create incentives to be on one side of the trade or the other and I think that basically when you look at it at the bottom of this is a bit like the financial crisis at the bottom of this is that the system is riddled with really bad incentives I mean it doesn't make a lot of sense for brokers to be owning exchanges I think I mean in fact in the exchanges are for investors not brokers not for middlemen when the brokers on the exchanges the exchange is going to be essentially an instrument of the intermediary rather than me all right then are the exchanges sort of the eight you know like how the rating age what the rating agencies were in the big short is that what the exchanges are here in a similar sort if they weren't for profit right would they be a better for such force we could trust more it's a similar sort of role it's a that analogy is probably impotent but yes that it occurred to me that's actually sort of the role that they are they're thought to be their role it's a kind of utility role you need them to be an honest broker you need them to create a experience for a customer who walks onto them and if they because they are for profit they're incentivized and because the way the markets work the way they work they have to meet quarterly earnings and so on and so forth it's not a long term view they're taking it's a very short-term view they're taking that they're constantly subjected the temptation of taking money from one faction of their clientele at the Institute to to put the other faction in a bad place would we like these hfts more if they actually were putting money at risk if they had positions the fact that they are just taking a scrape here is that what we just like them so much the fact that they they're sort of setup not to take bookmark at risk yeah that's fine I want you to have skin in the game if you have skin in the game and you could lose I like if you could have you know four thousand trading days without a single day's loss something's a little weird right let me say anybody I think yes right but let's rewind the clock to pre nineteen seventy five when there weren't really market makers the way there are now they were you know trading was a largely an agency business this is before Gus levy and before the arbitrage desk at Goldman Sachs and Robert Rubin they didn't lose any money either you don't lose any money as an agency trader oh that's not it's not true that they didn't lose anyway when they when when you rewind the clock I mean it I mean I worked on Wall Street the Salomon Brothers the traders would have down days and then have up days and they just hope the up days were better than the down days they were putting money they were putting money wrist and they're putting money at risk the position they were taking I mean I'm not saying that was a pure and innocent and great either right I mean I there are different problems in different days but but the the the role they were playing was a buffer in the market they were they're playing the role of Brad Brad Cassie I'm a player at RBC that someone needs to sell a million shares of something and the market won't isn't ready you know I'll sit in them it actually I here's one I'll phrase it as a question instead of making a statement would you acknowledge that your critics perhaps are have eight one fair point which is that it's hard to generalize that much of what you're talking about much of the people whom you identify as the victims in the book are by and large institutional traders some of them are mutual fund managers like okay I'll be there can I stop you there I'm sorry but in the book there's a long interview with the guy who spent years selling the order flow for TD Ameritrade mhm I mean that is not running that's not in that's not institutional investors that's you and me that's mom-and-pop any any and he says he says what's the most valuable order for a high-frequency trailer to exploit it's a market from an individual investor because the individual investor has such such a slow feed basically so no it's true now what is true if the order is a hundred share order it's probably not the big deal it's not that big a deal that's true but well our retail orders our hundred shares but who manages the savings of most people in America it isn't people trade in hundred share lots on the andany trader Ameritrade that it is funds true and should be careful be careful who you defend here actively managed mutual funds right we could talk about the passive ones separately to actively managed mutual funds on the whole do a terrible job of overseeing Americans money right they they fail to beat the market more than fifty percent of the time and they charge a fee on top of that or they do I mean here we were gonna get down to this but let's do it it out it's amazing how how do you decide who to put the white hat on I didn't put on the white hat I didn't actually put a white hat on mutual fund Street I hope you don't think I just did that that but but it doesn't help that in addition to the ineptitude of the mutual fund managers they have paid as tax that it's all a cost to the ultimate investor so it's I mean I'm not I'm not apologize for the mutual fund industry that's not the point the point is the out the people whose money they're managing it's ultimately damaged by this are in lots of little individual investors and so it's to say that like this doesn't touch the individual Buster is crazy the second reason is crazy and this gets the Goldman Sachs's recent involvement is that is that the in order to preserve essentially the the stock market system that enables this sort of activity the level of complexity gone through the roof and basically nobody ends no the reason I write a book about this nobody understands the stock market this guy can walk in and describe a stock market that nobody understands and David Einhorn listens to and says oh my god I this I did not know the complexity is a source of instability the people at Goldman Sachs I talked to who have thrown their weight behind this exchange said the main reason they did it was that they you know the outages of these changes in the flash crash whatever is the various technical mishaps that no punctuate our life of the stock market these days they see it all a symptomatic of a much bigger problem there is going to they said there's going to be a massive flash crash times 10 and we're and Goldman's going to get blamed so we got to get out of this before it's before before that happens that's not good for the individual investor either but is this still material to the individual investors because today when I go to execute a stock I definitely feel like man how did that get jacked right in front of my face every time I do feel that way but 15 years ago when I did a trade I was paying significantly more to do it with a specialist because you would because because of what the fees were so yeah so you got to make a distinction here so it's a different problem at different days it really worse today than it was when specialists are on the floor I ever said that uh has the system always been raped yes I mean they need different ways in different ways no no hold on all hold on hold on in different ways the more the the problems then were different from the problems today and this is the problem that you're not making a distinction that think is really important to make yes technology has brought incredible benefits to the individual investor it's really good that trading is computerized I'm not against computerized trading it's that it does not have to be computerised scalping going on with computerized trading there the two are not they're not in it they're not inextricably linked they can they're separate things what really should happen is that you get you get to all the benefits of the computerized trading without someone running in front of you when you trade that's what should happen and that's there's no reason that can't happen there's no reason that can't happen and I think part of like this is the largest discussion about like the state of Wall Street but what's happened here is that technology has basically eliminated a role Wall Street used to play used to need a human being to bring together a buyer and a seller you couldn't do it yourself you couldn't now you hit your button on your computer and your stock market you're starving or go in no box with everybody else's stock market order you don't feel good about that that's good that's good the problem is I'm not completely but some guy is still jacking you and that's the problem is you've got traders who take all this unnecessary financial intermediation happening Wall Street's found a way to insert itself in the stock market where it's no longer necessary and there's all this trading happening between between intermediaries and you and me that just don't need to happen

Channel: Bloomberg Quicktake

Views: 747,884

Rating: 4.8101711 out of 5

Keywords: Bloomberg, Stock Market (Quotation Subject), Michael Lewis (Author), flash boys, high frequency trading, trading, investing

Id: I0Yx7RnHAcw

Length: 13min 19sec (799 seconds)

Published: Wed Apr 02 2014

Reddit Comments

[u/DakiniOctopi]

I think he’s talking about his book “Flash Boys” it’s about how HFT are fleecing retirement funds and pensions. Maybe we should get him in for an AMA! He also wrote the Big Short, do you think he would make time for some Apes?

[u/hughesfan101]

Get rid of computerized scalping. Boom baby.

[u/DakiniOctopi]

Wow that was great!

[u/ittles]

thanks for the share