Monday, March 31, 2014

Flash Boys: A Wall Street Revolt

No doubt you might have watched 60 minutes last night when author Michael Lewis said that Wall Street was rigged against the individual investor. No surprise to me what he had to say. However, individual investors really are not the ones getting hurt as bad as institutional investors.

If you are an individual investor and you want to buy 100 shares of a stock, then the electronic exchanges are not really making anything to speak of from your order. You as the investor are not going to be hurt by their order routing practices nearly as much as an institutional investor. For example, let's say that a big mutual fund company wanted to buy 20,000 shares of a stock at a limit price of $40 a share. According to Mr. Lewis, these electronic exchanges would have a millisecond of advance knowledge that the mutual fund company placed that order. If the electronic exchange has the opportunity, it will buy the same 20,000 shares at $39.95 and then turn around and sell it to the mutual fund at $40 a share, thus netting the 5 cents a share difference.

Is this really any different than the market maker on the floor of the NYSE? I don't think so. Every stock that trades has a bid (sell) and an ask (buy) price. The difference between the two is the spread. The market maker keeps the spread. He is a middle man in effect.

The electronic exchanges do the same thing. They jump in the middle of trades and attempt to make money from buyers and sellers of a stock. The companies are in business to make money. They are not in business to simply pass through orders without some compensation.

However, I want to give Mr. Lewis the benefit of the doubt and I have purchased his book and will read it for more details. I promise to report back to my readers the findings.


For a good read on what happens to clients when they sit down with financial advisors of banks, insurance companies and Wall Street firms, then look no further than my book, "Meet Wally Street. The Reason You're Stupid." My book is available for a limited time for $3.99 at Apple's iBooks, Amazon's Kindle and Barnes & Noble's Nook devices. This book is more relevant to individual investors.