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What is worth $100 million per millisecond?

April 1, 2014

No, not the writer of this blog, but thanks for the compliment! Three hundred million dollars was spent to lay a high-speed fiber optic cable from the futures market in Chicago to the exchanges in New Jersey to improve the speed of stock trading (particularly high- frequency trading — HFT) by 3 milliseconds. When I hear things like this, my instinct is to imagine how peculiar this fact would have sounded a decade or two ago. “Why would anyone pay that kind of money for 3 milliseconds?” would likely have been the response just a few years ago. But it highlights how fast things have, and are, changing on Wall Street.

To understand what three milliseconds looks like, a quick blink of your eye is 100 milliseconds. Just to understand that HFTs are willing to pay tens of millions of dollars for a couple of milliseconds shows you how crazy and warped our equity markets really are. It truly is difficult to trust your life savings in such a system, but Wall Street is a monopoly.

One of my favorite writers, Michael Lewis (Money Ball, The Big Short, The Blindside, Liars Poker…) is coming out with a new book, Flash Boys. In essence, Lewis is publicly saying the stock market is “predatory and rigged;” his words not mine. Lewis has identified that high-frequency traders are using speed to legally front-run all other traders— including the big Wall Street firms. It is an insiders’ game that takes advantage of even the “insiders.”

I have argued that many things make Wall Street a rigged game, but complexity is how the insiders are able to disguise it. There is an interesting irony that the former scammers — stock brokers and traders at large Wall Street firms or hedge funds — are now the scammees (click on the link below to see how).

Here is a 60 Minutes feature on Michael Lewis and the high-frequency trading scam that allows yet another inside game, within the inside game, within the inside game. “If it wasn’t complicated,” Michael Lewis says, “it wouldn’t be allowed to happen. The complexity disguises what is happening. If it’s so complicated you can’t understand it, then you can’t question it.”

I picture someone asking, “Wow Jon, are you feeling sorry for the Wall Street boys?” No, don’t get crazy on me; you know me better than that. But I do know that way down the list of those being front-run (those being used as pawns in this rigged game) are pension funds, trust funds, individual investors and other institutional investors trying to eke out ever-decreasing returns and many realizing the risk is higher than ever because of the massive predatory nature of Wall Street. “The insiders are able to move faster than you,” Lewis explains. “They’re able to see your order and play it against other orders in ways that you don’t understand. They’re able to front-run your order.”

Here is how I equate today’s financial (free) markets: You have spent a lifetime saving and scraping for your retirement. To have enough to retire on you must put your money to work and get some sort of return. That makes you an investor, whether you want to be or not. As an investor you are ushered into this massive casino where you are told you have to place your bet — your entire financial future as you grow too old to work. This is the only place you can gamble and if you don’t get a return on your life savings, you will not have enough to retire on. As they escort you into the inner casino, you pass by rooms where dice are being loaded, cards are being shoved up sleeves and slot machines are being ‘maintenanced’ so that the casino will never pay. You see that you do not have a remote chance of winning — ever. You complain to the casino owner, “But all the games are rigged! I don’t want to bet my life savings here!” The casino owner retorts, “Too bad, we are the only game in town. You either play here or watch your scrimpy little savings be eaten up by inflation! Now quit wasting time and go place your bet!!”

You might even resort to groveling, “But if I lose this money, Mr. Casino owner, my family and I will have nothing to live on; can’t you at least even out the odds just a little bit?”

“No!” responds the casino owner, “I have dealers that need their bonuses and I haven’t yet finished my 300-foot-long custom yacht and 10th vacation home in Dubai. Now get busy and stop your whining!


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