Full disclosure: I have owned the NASDAQ stock market’s
common stock for a number of years
First a short story … when I was much younger working for a
bank which did mutual fund clearing, the following gambit came to light.
Apparently a computer whiz who had written a program for resolving mutual fund
purchases had devised a scheme to divert fractions of cents (which would
normally be rounded down in such transactions) into a special account over
which he had control. What was
interesting was that this scheme did not violate the balancing audits for this
program … nor did any particular mutual-fund purchaser suffer as a consequence.
Over the months this whiz’s special account accumulated a sizable amount of
money that this programmer could then withdraw at will. (He was eventually
caught and prosecuted.)
I tell this story because it is analogous to the dust-up
that is now underway regarding the “rigging” of the stock market as a result of
the new book,
Flash Boys, written by Michael Lewis … see:
Reuters Article.
Basically, this book makes the valid claim that electronic stock trading has
enabled big investment banks to connect electronically to the stock exchanges
computers and take microsecond advantage of trading patterns ("front-ending") to pull fractions
of a cent per share profits on trades.
These small fractions when multiplied by the huge volumes of shares
involved can generate large profits for these investment banks. This Mr. Lewis claims is rigging the market …
and I agree.
This process is not currently illegal and, in truth, is
abetted by all the stock exchanges … which are now even allowing investment-bank
stock traders to move their arbitrage computers closer to their stock
exchanges’ trading computers so as to decrease even further the trading lags
due to communication transmission delays (even at close to the speed of light). All
this technology one-upmanship really doesn’t punish normal long-term stock
purchasers … but it does grab profits from investment banks whose computers
might be slightly slower or further away than their competitors. Yes, the
public might pay a very small fraction of a cent more per share on their
purchases … but not really noticeable given the small unit volumes involved.
This kerfuffle is causing consternation and lots of comment
by the talking heads on cable TV … and, yes, putting pressure on the stocks of
the stock exchanges. However, there is, I believe, an even bigger scandal
waiting to break some day. That is, that there is a growing “dark pool" market for
stocks. This means that bank A contacts
investment bank B and sells them a million shares of company Z at an agreed
upon price … without this transaction ever being printed on a public stock
exchange for all to see. This I contend gives these institutions much larger
information leverage than is available to the general public. I believe that
these transactions should be forced to be somehow disclosed to the smaller
investors … to put them on an equal footing with the big institutions.
So we see, it can pay to be on the in on Wall Street ... where such questionable practices are winked at ...
