"Rigged Markets" Accusations Fly as Author and Exchange CEO Clash on CNBC
Author Michael Lewis, known for his best-selling book "Flash Boys," and the CEO of Direct Edge, a major stock exchange, Brad Katsuyama, engaged in a heated exchange on CNBC, accusing each other of distorting the truth and perpetuating false narratives about the stock market.
The verbal sparring match ignited when Lewis, who has been a vocal critic of high-frequency trading (HFT), questioned Katsuyama’s claims of transparency and fair practices in the market. Lewis pointed to a statement in Katsuyama’s book, where he allegedly admits the market is rigged, and challenged the CEO to explain his seemingly contradictory statements on CNBC.
"You said it in the book, okay? That’s when I knew the markets were rigged, and it’s disgusting that you’re trying to parse your words now," Lewis said, referring to Katsuyama’s book, "The Invisible Hands."
Katsuyama vehemently denied Lewis’s accusation, stating that his book was meant to address the complex realities of the stock market, including the role of high-frequency traders, and not to claim the market is inherently rigged. He pointed to his exchange’s use of direct feeds and the Securities Industry Processor (SIP) to price trades, emphasizing that Direct Edge doesn’t operate as fast as the fastest HFT firms.
"We use direct feeds to price trades. We are not as fast as the fastest HFTs. What we’ve done is we’ve slowed down HFT’s ability to react on our exchange," Katsuyama asserted.
The debate intensified when Lewis challenged Katsuyama’s claim of being a "honest broker," questioning his motivations and suggesting that his business model is driven by profit rather than a genuine desire to improve the market. Katsuyama responded by defending his company’s record, pointing to their customer base and value proposition, and accusing Lewis of spreading fear instead of presenting a true picture of the market.
The tension reached its peak when Lewis questioned Katsuyama’s investor base, implying that their financial backing could be a sign of corruption. Katsuyama countered by asserting that his investors are not traders on Direct Edge and that Lewis’s accusations are simply baseless and inflammatory.
"This is insane," Katsuyama exclaimed, accusing Lewis of distorting the facts and misrepresenting his company’s operations.
Lewis, in turn, claimed to have visited Direct Edge in Kansas City on February 5th, 2013, to conduct research for his book. Katsuyama refuted his claim, providing evidence that he was in New York on that date. The exchange ended with Lewis refusing to acknowledge his misinformation and continuing to challenge Katsuyama’s credibility.
The heated exchange, captured on live television, demonstrates the deep division of opinions regarding the role of HFT in the stock market and highlights the ongoing debate about transparency and fairness in the financial industry.
High-Frequency Trading: Accusations Fly as Michael Lewis and Bill Graff Confront Each other on CNBC
The high-stakes world of high-frequency trading (HFT) took center stage on a recent CNBC segment, as best-selling author Michael Lewis squared off against Bill Graff, CEO of Direct Edge, one of the largest stock exchanges in the US. The heated exchange centered around Lewis’ latest book, Flash Boys, which alleges that HFT firms are essentially "ripping off" the market by using sophisticated algorithms and advanced technology to gain an unfair advantage over traditional investors.
Key Takeaways
- Lewis Accuses HFT Firms of Market Manipulation: Lewis, known for his captivating insider accounts of the financial world, has painted a picture of HFT as a system rigged against ordinary investors. He argues that these firms, with their lightning-fast execution speeds, are profiting from tiny fractions of a penny, at the expense of institutional and retail investors alike.
- Graff Counters with a Defense of HFT: Graff, meanwhile, passionately defends the role of HFT firms, arguing they are providing a valuable service to the market, increasing liquidity and bringing down trading costs. He claims that HFT firms are merely responding to market opportunities and that Lewis is trying to "scare people" for the sake of selling books.
- The Debate Sparks a Wider Conversation: The clash between Lewis and Graff highlights a crucial question in modern finance: is HFT fair and beneficial to the market? While some argue its benefits outweigh its drawbacks, others see it as a form of market manipulation that needs regulation.
A Duel of Words: Lewis vs. Graff
The CNBC segment witnessed a fierce back-and-forth between Lewis and Graff, each defending their respective positions with conviction. Lewis, armed with specific allegations and quotes from his book, insisted that the HFT industry operates in a way that’s fundamentally unfair.
" I think it’s really hard to put a word you said it in the book, okay you said it in the book, that’s when I knew the markets were rigged, and it’s disgusting that you’re trying to parse your words now. Do you, you are quoted that way in the book."
Graff, in turn, countered that Lewis’ claims are exaggerated and misleading. He asserted that Direct Edge, the exchange he leads, actively works to level the playing field, slowing down the speed of HFT in order to protect retail investors.
"We use direct feeds to price trades, we are not as fast as the fastest HFTs. What we’ve done is we’ve slowed down HFT’s ability to react on our exchange, which means that if anyone in this room, if anyone at home, if a mutual fund or hedge fund gives an order to us, it’s our responsibility to price it, HFT cannot. They have the same HFT customers that we do, only we say they’re providing a valuable service to the market, and they say they’re ripping off the market."
The conversation escalated with Lewis accusing Graff of hypocrisy, pointing out that Direct Edge relies on HFT firms as clients. Graff, however, remained adamant that his firm is committed to fair and transparent markets.
The "Rigged" Market: Examining the Allegations
Lewis’ book, Flash Boys, has garnered a lot of attention, with the author claiming that HFT firms employ sophisticated algorithms to identify and exploit tiny market discrepancies, often ahead of ordinary investors.
One of the key accusations is that HFT firms gain information about trades before they are publicly available, allowing them to execute orders moments before the market understands the true direction.
- Inside Information? Lewis highlights the practice of "latency arbitrage," where HFT firms are situated geographically closer to stock exchanges, granting them a slight but crucial advantage in terms of speed. This advantage allows them to gain a "peek" at the market before others, enabling them to profit from minute changes in stock prices.
- The Impact on Ordinary Investors: Lewis argues that this fast-paced world of HFT is largely invisible to the average investor. He contends that while HFT firms may benefit from the system, they are ultimately profiting at the expense of institutional and retail investors who lack the same technological resources.
The Defense: "HFT is a Net Positive"
Graff, however, contends that HFT firms are not manipulating the market but rather simply responding to opportunities. He argues that HFT firms increase liquidity and provide a necessary service, lowering transaction costs for everyone.
- Increasing Liquidity and Efficiency: Graff emphasizes that HFT firms play a vital role in providing a crucial service, keeping markets efficient and liquid. He argues that the inherent competitive nature of HFT leads to a more balanced market for everyone, lowering the cost of trades for both institutional and retail investors.
- HFT Firms are Just "Playing the Game" He views the focus on HFT’s speed and technology as a distraction. Graff maintains that HFT firms are simply leveraging the same tools and information available to other market participants.
Beyond the Debate: A Wider Discussion
The Lewis-Graff debate is more than just an academic exercise. It reflects a growing concern among many about the role of technology and its impact on financial markets.
- The Need for Transparency and Regulation: The debate has sparked a discussion about the need for greater transparency and regulation in the HFT space. There are increasing calls for stricter regulations around the use of algorithms and advanced technology in trading, ensuring fairness and transparency for all market participants.
- The Future of Finance: The debate also highlights the evolving nature of finance. As technology continues to reshape financial markets, it’s crucial to navigate the delicate balance between innovation, efficiency, and market integrity.
Final Thoughts
The intense exchange between Michael Lewis and Bill Graff highlights the complexities of HFT and its role in the modern financial world. While Lewis paints a picture of unfair manipulation, Graff argues for the benefits of HFT, seeing it as a force for efficiency and liquidity.
The debate, however, is far from settled. The future of HFT, and its impact on the market and investors alike, will continue to be a topic of discussion, raising questions about regulation, transparency, and the role of technology in the evolving financial landscape.
