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Wall Street's Newest Scam To Skim Profits

Michael Lewis joins Chris Hayes to discuss his new book "Flash Boys", about Wall Street's latest profit-taking scheme.

I am shocked -- SHOCKED -- to discover that Wall Street has hatched yet another scheme to shave off some profits for themselves and their billionaires while leaving the rest of us with the dregs, aren't you?

This scam is called "high frequency trading" (HFT). As Chris Hayes explains, it benefits a few at the expense of many.

The best article I found on it is one from a year ago at Mother Jones. HFT is complex, and gleans profits from splitting seconds, which is why Wall Street would rather you just didn't know about it.

[N]ew technologies have changed Wall Street beyond recognition. Despite efforts at reform, today's markets are wilder, less transparent, and, most importantly, faster than ever before. Stock exchanges can now execute trades in less than a half a millionth of a second—more than a million times faster than the human mind can make a decision. Financial firms deploy sophisticated algorithms to battle for fractions of a cent. Designed by the physics nerds and math geniuses known as quants, these programs exploit minute movements and long-term patterns in the markets, buying a stock at $1.00 and selling it at $1.0001, for example. Do this 10,000 times a second and the proceeds add up. Constantly moving into and out of securities for those tiny slivers of profit—and ending the day owning nothing—is known as high-frequency trading.

This rapid churn has reduced the average holding period of a stock: Half a century ago it was eight years; today it is around five days. Most experts agree that high-speed trading algorithms are now responsible for more than half of US trading. Computer programs send and cancel orders tirelessly in a never-ending campaign to deceive and outrace each other, or sometimes just to slow each other down. They might also flood the market with bogus trade orders to throw off competitors, or stealthily liquidate a large stock position in a manner that doesn't provoke a price swing. It's a world where investing—if that's what you call buying and selling a company's stock within a matter of seconds—often comes down to how fast you can purchase or offload it, not how much the company is actually worth.

But high-frequency trading isn't for your eTrade account, and that's why Wall Street wins and we don't. This is what billionaires do, not what ordinary folks sitting at their computer do.

No millisecond left behind for these guys:

If you thought that stock traders made enough money, and wielded enough power over the global economy, think again: Financial traders are now turning to high-speed laser networks between stock exchanges, to decrease latency by a few milliseconds, to squeeze a few more trillion dollars per year out of high-frequency trading (HFT).

They're always on the hunt for more, too. MoJo:

Traders' need for speed has grown so voracious that two companies are currently building underwater cables (price tag: around $300 million each) across the Atlantic, in an attempt to join Wall Street and the London Stock Exchange by the shortest, fastest route possible. When completed in 2014, one of the cables is expected to shave five to six milliseconds off trans-Atlantic trades.

But why stop there? One trading engineer has proposed positioning a line of drones over the ocean, where they would flash microwave data from one to the next like the chain of mountaintop signal fires in The Lord of the Rings. "At what point do you say, 'This is fast enough'?" asks Brent Weisenborn, a former NASDAQ vice president.

Maybe all we need to know is who champions high frequency trading while offering a bite-size critique of Michael Lewis' book Flash Boys:

"Again, look to interests," said AQR Capital Management's Cliff Asness. "Making mountains out of molehills sells more books than a study of molehills."

Yeah, I suppose Asness' huge contributions to the RNC to buy up the 2010 midterms were just a molehill too.

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