Article SNL Blogs
Tuesday, April 01, 2014 9:24 AM ET
Another tall tale from Michael Lewis By Ada Lee Ada Lee is a senior analyst for Indaba Global Research. The views and opinions expressed in this piece represent only those of the author and not necessarily those of SNL. Michael Lewis' new book on high frequency trading seems to follow in the pattern of several of his past books, in which he identifies an interesting dynamic and proceeds to blow it wildly out of proportion in order to create a narrative of sufficient scope for a book. It is telling that the book's release was preceded by a 60 Minutes segment that accepted at face value Lewis' claim that the U.S. stock market is rigged. How better to manufacture a scandal, at least for 60 Minutes' octogenarian audience. In his best-known book, "Moneyball," he credits the Oakland Athletics with using statistical analysis to identify undervalued players, thereby enabling the team to be competitive despite very low payrolls. But as I
noted in writing about Lewis' "The Big Short":
In fact, the relative success of the Oakland Athletics in the years preceding "Moneyball" had relatively little to do with sabermetrics; the 2002 Oakland Athletics posted a team on-base percentage of .339, just 6% above the league average. The thing that really differentiated those Oakland teams from wealthier contemporaries and more recent iterations of the Athletics was the pure dumb luck to have drafted successive Cy Young-caliber pitchers in 1997 (Tim Hudson), 1998 (Barry Zito), and 1999 (Mark Mulder). Once that freak accident had run its course, so had Mr. Beane's aberrant low-budget success. Michael Lewis didn't allow mere facts to get in the way of a compelling (and highly salable) narrative then. Which makes one wonder what inconvenient facts his narrative of high frequency trading omits today. Tellingly, enough to make New York Attorney General Eric Schneiderman sound circumspect: I probably would not be quite as hyperbolic as that. But we have started, actually over a year ago, looking at the use of information that didn't fit into traditional categories of insider trading. … There are some things here that may be illegal. There are some things that may now be legal that should be illegal or that the markets have to be changed. So part of what we're doing here in addition to looking for illegality is shining a light on this area. A sitting New York attorney general passing up the chance to paint himself as a populist crusader against Wall Street insiders suggests that the underlying reality of Lewis' charge is very weak tea indeed. The demonization of electronic trading has a rich history, dating back at least to the 1987 crash, for which "program trading" came in for a good deal of blame. While we should be alert to the potential for abuse — and there very well may be unjustifiable abuses in some corners of the HFT world — there seems to be a lot of technophobia here, as well as a willingness to blame the new actors upsetting the highly profitable apple cart, and, as ever, an underappreciation of the value of incremental liquidity. At best, even if everything Lewis claims were true, the level of market "rigging" he describes is dwarfed by a) the overall decline in retail trading costs in the Internet era, and b) other asymmetries that put the retail investor on an unequal footing vis-à-vis professional investors. Perhaps the best thing about Mr. Lewis' new book is that it is finally engendering some skepticism about Mr. Lewis himself. He is a gifted storyteller, but with a track record that cautions against taking his stories at face value for non-entertainment purposes.
Source: S&P Global Market Intelligence | Page 1 of 1