Michael Lewis is right: Our trading system is broken

http://www.salon.com/2014/04/17/can_michael_lewis_save_our_broken_trading_system_partner/


Michael Lewis (Credit: Reuters/Lucas Jackson)




If you read one business book this year, make it “Flash Boys” by Michael Lewis. The journalist famous for “Moneyball” and “The Big Short” takes readers inside the parasitic world of high-frequency trading that is harming the broader economy.

The technical architecture of high-frequency trading is right out of a sci-fi movie: The schemes rely on algorithms that seem artificially intelligent, and the velocity of transaction signals approach light speed. As Lewis recounts, all that technological wizardry is marshaled to let insiders know information before everyone else, which consequently lets those insiders extract wealth from the market.

The good news is that a financial transaction tax can at once raise public resources and disincentivize the most predatory schemes. The even better news is that structural changes in the industry have made such a tax more economically viable than ever.

Before getting to that change, consider the basics of the tax proposal. The idea is that if a tiny fee is slapped on securities transactions — say, a cent — the tax will barely affect the average investor but will force high-frequency, high-volume traders to pay a lot. Consequently, those predators might see less of an upside from — or even abandon — their market-rigging schemes. And if they don’t, then at least the government will generate new resources to enforce laws protecting average investors.