“Flash Boys” Fallout: The Various Shades of Red
Michael Lewis’ list of enemies — many inspired by his new book, “Flash Boys” — just got longer.
That’s because of the stock market fallout in the wake of Lewis’ book, out last week, which peeled back the curtain on how high frequency trading 
(“HFT”) really works, and whose interests it serves.
Short explanations: a) it’s complicated (and brilliant — and incredibly lucrative, not to mention reprehensible and systemically dangerous); and b) HFT serves practically everyone’s interest(s) on Wall Street, except the investors and companies who the capital markets are supposed to be about.
Sound familiar?
Stock Market Fallout
The first, most direct stock market hits were on HFT companies in the chute for IPO’s.*
Not so fast, Virtu Financial (appropriate pun, huh?).
Collateral damage: the retail brokers who make money on an obscure-but lucrative practice called “payment for order flow.”
“Shares of E*Trade Financial Corp. ETFC -2.15% , Charles Schwab Corp.SCHW -1.23% and TD Ameritrade Holding Corp. AMTD -2.51% tumbled last week amid concerns that regulators would ban a practice that allows brokerages to collect hundreds of millions of dollars a year in revenue by selling orders to middlemen who use high-frequency strategies to trade with the brokers’ customers. The practice, called payment for order flow, has gained more attention since the release of “Flash Boys,” a book by Michael Lewis that argues the markets are “rigged” to benefit high-frequency traders, allegations that are stirring up long-running questions about the fairness of markets.”
–“Fallout From High-Frequency Trading Hits Brokerages”; The Wall Street Journal (4/6/2014)
The foregoing list is surprising on two counts: 1) straight arrow Charles Schwab is on it; and 2) Schwab apparently drove a very poor bargain relative to its retail broker peers (according to Lewis’ book, the company easily left more than $1 billion on the table — hmm . . . maybe that’s why the stock’s down).
Now, the dollars that retail brokers — or anyone else — are likely to reap from “payment for order flow” might well be zero, potentially making all these companies worth much less.
P.S.: Bonus question: did any of the sort-of-good guys (Einhorn, et al) in “Flash Boys” anticipate the foregoing fallout — and make money on it? (by shorting stock in the affected companies).
*According to the book, Goldman Sachs apparently realized what was in the offing way back, and considered reducing their and their clients’ equity exposure — presumably in that order — to publicly-traded stock exchanges (like Nasdaq).
