Is the Stock Market Really Rigged?
Everyone seems to be jumping into the debate about high-frequency trading, now that Michael Lewis is peddling his new book, Flash Boys.
Lewis contends that the stock market is rigged, and that the culprit is high-frequency traders. But not everyone agrees that they are to blame, or that the stock market is even rigged to begin with.
Cliff Asness, founder of AQR capital, suggests that high-frequency traders have in fact made trading cheaper for hedge funds. And this, in turn, benefits clients, such as pension funds or university endowments:
What is good for us is lower trading costs because it translates into better investment performance and happier clients, which makes our business slightly more valuable. How do we feel about high-frequency trading? We think it helps us … we devote a lot of effort to understanding our trading costs, and our opinion, derived through quantitative and qualitative analysis, is that on the whole high-frequency traders have lowered costs.
So the hedge funds that benefit from these lower transaction costs are able to pass those savings along to their investors. And their investors are made up largely of pension funds and university endowments.
In short, the savings that high-frequency traders generate get passed on to a very broad base of consumers, including those who only participate in the market indirectly — via a pension plan or as the beneficiary of a university endowment.
There is undoubtedly lots of room for innovation in market microstructures. And new exchanges may be one solution to what some people perceive as a problem. But competition among market participants and exchanges is the way to bring about that innovation — not increased regulatory scrutiny.
I wonder if the same Luddites who whine about HFT would have complained to Thomas Edison that his Universal Stock Ticker gave some investors an unfair advantage over those who relied on newspapers to get their price information.