Tuesday, April 15, 2014

HFT- A Scapegoat for Poor Asset Management

There is no shortage of money managers who would like to find someone to blame for their poor results.  Then along comes Michael Lewis with "Flash Boys."

Here it is -- an explanation for why hedge funds and money managers generally have such dismal results.  Naturally, this book is immediately popular with humbled hedge fund managers and money managers.  But, is there anything really going on here?

Lewis's book consists of interviews with a handful of Wall Street wannabies whose main contribution seems to be the use of the f-word in any and all contexts.  While this is entertaining to some, it is not clear what the point is.  So, High Frequency Trading (HFT) can be -- sometimes -- profitable.  Though, even here Lewis presents absolutely no evidence that HFT is profitable to anyone, ever, at any time.  Lewis provides anecdotal commentary from minor, disgruntled, Wall Street employees.  These employees, in virtually all cases, have lost their jobs in ways that Lewis does not tell us.  Do employees who lose their jobs grumble, use the f-word, and find someone to blame?  Well, yes, normally.

Where are the HFT winners?  If this is such a scam, where are the folks who benefitted from this scam?  They should be pretty obvious, but Lewis doesn't identify them other than innuendo and sidebar comments.  No real facts show up in this book.

According to Lewis, the stock market is rigged.  Really? Investors have made over ten percent per year on average over the past 80 years and they made that or more during time period dominated by HFT.  So, why is this bad?  Should investors really be encouraged to give up stock market returns and join Lewis in his crusade?

This book is much ado about nothing.  I am a big fan of Michael Lewis.  I consider Money Ball the best book written in my lifetime about market imperfections, even though the topic is baseball not finance.  But "Flash Boys" is an embarrassing, over-hyped book about nothing.

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