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Michael Lewis: The Market is Rigged

BEGIN TRANSCRIPT

RUSH: Janet Yellen, Federal Reserve chairman, said that "considerable slack in the labor market is evidence that the Federal Reserve's unprecedented accommodation will still be needed for some time to put Americans back to work."  The headline:  "Yellen Says Extraordinary Support Needed for 'Some Time.'"  There's an alternate headline that could say and should say, "Yellen says extraordinary support for Obama needed for some time," because that's what this is. 

What Yellen is essentially saying is that job market still is in negative territory.  The career market may as well not exist.  The job market is in the dumps, and so we're going to have to continue with our quantitative easing.  We're going to have to continue priming the pump.  We're going to have to continue the stimulus.  And what she's doing by doing this is supporting Obama, not the economy.  She is supporting the Regime, not the economy.

It's fascinating.  We've made note of this.  While this economy has really been in the dumper, the stock market hasn't.  The stock market has been recording record highs.  The stock market has known no negatives to speak of on a consistent basis whatsoever.  Maybe some dips, but the stock market has basically been doing great, and there's one reason for it, and that is quantitative easing.  The Federal Reserve has basically been enabling the purchase of equities and bonds in the market, by pumping money into it, and it's a dangerous thing, too, because the stock market now is not a function -- well, not solely a function of market anticipation, market analysis.  The stock market is simply reacting to the Fed. 

If the Fed ever decides to tighten -- well, I'm not gonna use their language.  If the Fed ever decides to stop printing money and giving it to the stock market, the people in the stock market are going to have a panic.  It's no different than creating dependents with anybody.  Well, Snerdley just asked, "Why does Wall Street deserve this handout and nobody else does?"  There are a number of answers I could provide that would in many cases be guesses, but I think if you took a look at who the people in the market are, they are considered the masters of the universe. They're not permitted to fail.

I'm gonna take a break, but in answering that question, why the stock market, why is the Fed priming only the stock market, not everybody else? Michael Lewis is back.  He's got a new book called Flash Boys.  It's either going to be released soon or just was.  And his point is, in answer to your question specifically, that it's rigged, the stock market's rigged,  he was on 60 Minutes last night explaining how, and I will have those bites for you when we get back.

BREAK TRANSCRIPT

RUSH: Let me get to these sound bites from Michael Lewis.  He's a noted author.  He wrote the book Moneyball that they made the movie out of with Brad Pitt.  That's how you might remember it, Brad Pitt was in it. He's written on the stock market before.  This is his latest installment and his basic claim is the stock market's rigged for anybody that doesn't work there.  If you're not an investment bank, if you're not a Wall Street bank, if you're not a stock brokerage firm, if you're not part of an analyst agency, if all you are is Joe Q. Public investing and buying stock, you are screwed.  The game is rigged for the insiders.  He was on with Steve Kroft last night, new book out called Flash Boys about computerized high-frequency stock trading.  Kroft says, "So what's the headline here, how would you headline your book?"

LEWIS:  Stock market's rigged.  The United States stock market, the most iconic market in global capitalism is rigged.

KROFT:  By whom?

LEWIS:  By a combination of the stock exchanges, the big Wall Street banks, and high-frequency traders.

KROFT:  Who are the victims?

LEWIS:  Everybody who has an investment in the stock market.

RUSH:  Now, that doesn't leave much room for doubt.  That's a pretty big bomb there that's been dropped.  Well, who are the victims?  Everybody who has an investment in the stock market.  It's rigged by the stock exchanges, the big Wall Street banks and high-frequency traders.  And he explains how in the next bite. 

Steve Kroft says, well, machines with secret programs are now trading stocks in tiny fractions of a second, way too fast to be seen or even recorded on a stock ticker or computer screen, faster than the market itself.  High-frequency traders, big Wall Street firms, stock exchanges, have spent billions to gain an advantage of a millisecond for themselves and their customers just to get a peak at stock market prices and orders a flash before everybody else, along with the opportunity to act on it.  Now, nobody ever sees this because it's happening too fast.  All of these computer programs will go out and see futures prices and volume in split seconds, and act on it, buy or sell, before anybody knows really what's happened, even the people that wrote the program.  The beauty of the program is it acts faster than the market can record what's happening.  And that makes it an insider game.  Here's Lewis explaining it.

LEWIS:  The insiders are able to move faster than you, they're able to see your order and play it against other orders in ways you don't understand.  They're able to front run your order.  They're able to identify your desire to buy shares in Microsoft and buy 'em in front of you and sell 'em back to you at a higher price.  It all happens in infinitesimally small periods of time.  The speed advantage that the faster traders have is milliseconds, sometimes fractions of milliseconds, but it's enough for them to identify what you're gonna do and do it before you do it at your expense.  That drives the price up, and in turn you pay a higher prices.

RUSH:  Now, I need to ask, were you able to follow that?  You are?  Seriously? Okay, good.  Good.  Good.  Good.  If that makes sense to you, fine, I don't need to translate that.  (interruption)  I should translate for people not familiar with -- (interruption)  Well, yeah, but it's the computer making it happen, it's not explaining how computers work.  The computers work so fast you can't see it.  What's happening here in a case-by-case basis, let's say you, he used Microsoft, you want to buy Microsoft, and you've got a price for it. Somehow these people are able to know that you're gonna buy Microsoft at X price and a bunch of other people are gonna buy it at X price, which then they know is gonna raise the price. 

So they get in and they buy Microsoft before your order is placed, a split second before, and then the price goes up and they benefit from the accrual before you do.  They end up buying shares, they get their order in before you.  It's not that you're aced out per se, it's that they are able to take advantage of the price fluctuation they are creating that you don't even see in the price of a stock.  And the same thing would work on the sell side as well.  They're able to find out who's gonna sell, how much of what and when, and able to determine if there's a trend in this, I mean, if the price will fall so they can get out of it before you do, is what his point is.  In that sense, there's no way that you can compete with these guys.  You're always gonna lose to 'em.  

BREAK TRANSCRIPT

RUSH:  Okay, a miniature firestorm here because of Michael Lewis on 60 Minutes last night claiming that the stock market is rigged by a combination of the stock exchanges, the big Wall Street banks, and high-frequency traders.  High-frequency traders are what he focused on in an explanation, answering a question. Steve Kroft said, "How does high-speed trading, high-frequency traders...? What's that all about?" 

This is what Lewis said, and this is what I am gonna translate for you.

(replaying of sound bite) 

RUSH: Okay, now, that sounds like, "Okay, they're able to learn because of computer programs what you're gonna do milliseconds before you do it and act on it," and many people say, "Okay, so, big deal.  I mean, I'm gonna buy in at X. What difference does it make if they know that or not?"  I consulted a financial expert that I rely on oftentimes to help make sense some of this stuff, Lord Rosow of Cross Harbor.

Essentially what this is is the high-frequency traders are buying a stock before you do because they're able to know you're going to buy it.  This did not used to be the case.  The SEC... It used to be that every order on Wall Street was published.  Everybody was equally aware, or was able to be equally aware of what buy and sell orders were, what prices were.

And the SEC came along and said, "You guys, you're a monopoly," and they busted it up. So this has led to, for lack of a better explanation, a much more unique competitive market, 'cause it wasn't a monopoly. But the SEC said it was, so the bottom line here is that the high-frequency traders with their computer programs are able to know what you want to buy and the price you're willing to pay for it before you do. 

They buy it before you do, and they're selling it back to you.  You don't know this, and they may be making pennies on these transactions. But there are billions of them every day, is the point.  Maybe fractions of a penny.  But they're doing it so often that they make billions of dollars.  Since they see your orders, a computer program allows them to see that. They know what you want to buy and what price you're going to pay for it.

So they're able to see yours and everybody else's orders, and they also have access to the futures markets this way.  They have an advantage that no individual trader does, and they do this on both sides.  They do it on the buy and the sell side.  So they're ahead of you by milliseconds, and they're making fractions of a penny on each of these transactions, but there are so many of them that it adds up. 

The profit per trade is minuscule. 

It's so small that nobody is even willing to point it out because if you tell somebody, "Yeah, you know what? They're beating you to the punch and they're buying it first and selling it. You're actually buying it from them. You're buying it from other buyers that you're in competition with, but you don't know that; they do.  You're buying it from them, the high-frequency traders." 

Who are the high frequency traders?  The Wall Street banks, the exchanges, and so forth.  They're the ones that have the in.  They have access to data that you don't, essentially is what this is.  They're able to know in advance whether a stock is in demand or not and to capitalize on it on the buy or sell side.  This is what Lewis claims, Michael Lewis claims is a rigged market, that you do not have access to this data. 

And even if it were to be pointed out, as I am, the profit per trade is minuscule.  It's not enough for anybody to get upset about.  You're not losing out on the deal; it's just you're being used.  Your desires, your intentions to buy or sell are being used for other people to profit.  Think about it this way.  How many of you have brokers that tell you, "Hey, I've got a sure bet here.  It's the XYZ Widget company. 

"If you come in now, six months from now, it's gonna be," blah, blah, blah. Imagine if somebody could actually do that but not on a six-month time frame but a second or two-second time frame?  They're able to know the direction a stock is gonna go before it gets there, and they put themselves in the stream to take advantage of where it's going on both on the buy and the sell side. 

And they're using data their computer programs produce for them that you don't have, that the individual trader does not have.  It's competitive. They're not gonna give the stuff away. They're not gonna share it. It's not gonna be equal.  They're not gonna make sure every other trader has this.  Now, that's even before you get to quantitative easing.  That's before the Federal Reserve deciding to prop up the Obama Regime. 

This is just an explanation of what Michael Lewis means by the stock market being rigged.  Some people call it "front running." It's been around for a while.  And you might say, "Well, is somebody gonna crack down on this?" Well, the SEC might crack down on it, but the last I heard the SEC was too busy watching porn.  Remember those stories from a couple of years ago? 

They were watching porn on their computer terminals at the SEC.  But look, here's another way of explaining this.  These traders with this inside data might not just depend on orders.  They could figure out what you're gonna do from metadata.  Ahem, does that sound familiar to you?  The metadata that's in all of your phone calls... Do you know there's metadata whenever you take a picture? There's metadata? 

I'm sure many of you do.  You snap a picture on vacation. If you take it on a cell phone or a late-model, point-and-shoot or SLR, everything about that picture -- where it was taken, the time of day, the various aspects of the exposure itself -- is saved. You can take a picture of just aimless, blank dessert landscape and that picture will tell somebody where it was, latitude, longitude, all of that. 

The metadata in all these transactions is profound, but it's basically just people know what you're gonna do before you do it, and are able to put themselves in the way, up or down.  They're able to do it on so many transactions each day that by the time it's all over they're up billions of dollars, and that's what he means be by the stock market being rigged.  

BREAK TRANSCRIPT

RUSH: Chris in Memphis.  Welcome to the EIB Network.  Hello.

CALLER:  Hi, Rush.  I wanted to clarify something you were talking about on the CBS 60 Minutes segment last night.  For a number of years the high-frequency trading firms were completely under the radar.  The big institutional firms didn't even know what they were doing, that they existed.  I have a relative that works in -- still works in Chicago for one of those firms that --

RUSH:  Wait just a second 'cause I want to follow. You said the big institutional firms didn't even know what they -- who is "they"?

CALLER:  The high-frequency trading firms, when they first started.

RUSH:  Yeah?

CALLER:  It was all under the radar.

RUSH:  They didn't know what they were doing themselves or what other people --

CALLER:  No.  The big institutional firms really didn't understand what was happening with high-frequency trading.

RUSH:  Okay.  Gotcha now.

CALLER:  The firm that my relative works for in Chicago, for years they didn't even have a client, they were just doing this for themselves.  They hired guys out of MIT and Stanford who wrote the algorithms to do all of that millisecond stuff where they could sneak in on sales like they talked about last night.

RUSH:  Right.

CALLER:  Now they figured it out, that young man, you know, from Canada from the Bank of Canada has figured it out, but for years they were doing that all under the radar. The SEC wasn't doing anything about it, and I kept saying every time I'd talk to my relative, "When are they gonna understand what you guys are doing 'cause I can't imagine they're gonna think it's okay once they get it." And now they figured out a way to put the high-frequency traders, 'cause they don't have the advantage they had for probably at least a decade or close to it.

RUSH:  Okay, hang on just a second 'cause I have one more question for you.

BREAK TRANSCRIPT

RUSH:  Now we are back with Chris in Memphis, Tennessee.  You just said that the high-frequency guys were getting away with it long before anybody discovered it.  Now everybody's discovered it and they don't have the advantage they used to have for at least a decade, right?

CALLER:  If what the young guy from the Royal Bank of Canada said last night about the program they've developed is true, then, yes. The high-frequency traders have lost the big advantage they had.

RUSH:  Well, but not entirely, because individual investors, the only way they could access high-frequency trading as if they're in a mutual fund or something that's being run by people that do that, right?

CALLER:  That's true now.  It wasn't initially.  Initially those guys were doing it just for the benefit of everyone in their firm.  But it's like I said: They had no clients. There was a firm in Chicago and I believe one in --

originalRUSH:  The way this would work is it's all about eliminating fractions, folks. That's what this is.

CALLER:  Yes. Yeah.

RUSH:  And the way it would happen is, at the end of the day, if it was less than a penny in value, they just round it up and added it.  Nobody would ever see it. Like 0.6? would be credited as a full cent, just got rid of the fraction. So the SEC came along and said, "Okay, you can eliminate fractions. We can deal in pennies. We can go fractionless." Everybody did, and that gave birth to this. But your point now is that everybody's doing it so nobody has an advantage in it anymore?

CALLER:  No, no.  I'm saying now that it's understood, they've figured out... The one guy on the show figured out a way to slow the whole thing down so they can't step in in the middle of a big buy and run the price up.  They don't have that ability on those kinds of purchases anymore.

RUSH:  Okay, I didn't see the show last night.  You keep talking about this guy from Canada.  Did some guy in Canada figure out a way to slow it down?  Is that what you're saying?

CALLER:  Yes.  Yes.  A young man from the Royal Bank of Canada. I'm sure he was working with other people, but they figured out that if you slow the whole process down for the institutional firms, then the high-frequency traders don't have their advantage anymore, at least like they did.

RUSH:  And so after watching the show last night you are of the opinion that it's no longer an advantage for anybody?

CALLER:  No, not that it's not at all, but not like it was for those private firms. There were private firms who wanted to stay completely under the radar. They're not publicly traded or anything, and I think the person that was profiled in the Wall Street Journal was in about 2006 or '07 and they were already eight or nine years old then. So for a number of years, all they're doing is writing algorithms to make their trade go faster and faster.

RUSH:  Right.  Milliseconds.

CALLER:  Yes.

RUSH:  Getting themselves in the buy-and-sell stream long before an order was actually placed.

CALLER:  Yes.  But now they've been sort of found out and so there's an attempt to help the institutional firms get their advantage back.

RUSH:  Well, then why...?

CALLER: I do agree that --

RUSH:  Now, wait a second.  Why would Michael Lewis on this show last night say the game's rigged?

CALLER:  Well, he was talking about what had been happening, and the Royal Bank of Canada guy seems to be wanting to help the institutional firms get their advantage back. So he's still saying the game's rigged.  Now it's back more in that favor instead of the guys who are under the radar.

RUSH:  All right.  Okay.

CALLER:  Okay.

RUSH:  I appreciate that, Chris.  Thanks much for the call.  

END TRANSCRIPT

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