As we approach the one-year anniversary of one of the most controversial books ever written about the financial industry – a book that resulted in four congressional hearings, enjoyed several weeks on the New York Times best-seller list and sparked countless debates – key questions still linger concerning the very issues that Michael Lewis claims to have exposed in Michael Lewis' "Flash Boys."
The top of this list is obvious: How can Lewis' sensationalistic market-rigging allegation be possible? Why has no one – from regulators, to top money managers, to mom-and-pop investors – stumbled upon any evidence that backs up this charge? And how did a best-selling author who spent more than a year researching the topic of high-frequency trading find a smoking gun that the rest of the investing community who make a living buying and selling stocks was so oblivious to?
Twelve months, a soon-to-be-published Afterword, and a Vanity Fair article later, we are no closer to any sort of clear-cut explanation to these queries or to how Lewis' alleged front-running scheme works in our current market structure. We've also received no credible information from other informed market participants, who, with their vast knowledge and experience, should be able back up his assertion that one of the greatest crimes of our time is being committed right under our very noses.
We know that Lewis' protagonists, Brad Katsuyama and IEX, the "dark pool" trading platform which he first brought to prominence in "Flash Boys," - are his proposed solution to the problems he believes exist in our markets. But doesn't IEX also rely on high-frequency trading for a substantial chunk of its liquidity?
And beyond the existence of that venue, have we learned anything from Lewis that can help us either understand what he says is wrong with our markets or how we can fix these proposed problems?
Actually, in the absence of answers to these and other questions we have for Mr. Lewis, we've learned a great deal about the efficiency of our markets — on our own.
First, many parties, including Peter Kovac — a former trader who wrote a 165-page book, which factually dissects and refutes "Flash Boys" — have stepped forward to help educate those who are unfamiliar with the process of how stock orders are executed. These orders are handled by the exchanges and are untouched by human hands. Even the person you ultimately trade with never learns your order's original price, quantity or even who you are. It's impossible for anyone who might want to front-run your order to get the information required to do so.
Second, Barron's, using data-driven analysis, just told its readers last month what many of us already know: The little guys (i.e. retail investors) are enjoying some of Wall Street's best prices on their stock orders, and their advantage is growing.
The publication went a step further and told us the notion that "high-frequency traders use their technology edge to pick off the little guys….that part of [Flash Boys] was just wrong."
To put it another way, Mary Jo White, the chairman of the Securities & Exchange Commission, told an industry conference last summer, "… the equity markets are strong and generally continue to serve well the interests of both retail and institutional investors."
But perhaps most importantly, we've learned that the notion of a rigged stock market simply doesn't make any sense. And we've been told this truth by John Bogle, the 85-year-old founder of the Vanguard Group, who is widely regarded as the father of low-cost index investing.
Commenting on Lewis' charge, Bogle called it a "stupid expression," adding "that's what you do to sell books. I don't know how it's rigged. The real point is, it doesn't make one bit of difference to an investor who is in an index fund for a lifetime."
So with these answers in hand, we're left with a single question for Lewis: Now that he has decided to return to the world of "Flash Boys," penning new articles and booking himself on television again, is he prepared to answer the tough questions? We're more than happy to help him do so in a frank and open, public discussion about market structure where we can explore ways to make the investing experience better for all market participants.
We are always open to having this dialogue with him at any moment. All he has to do is pick up the phone.
Commentary by Bill Harts, the CEO of the Modern Markets Initiative (MMI), an advocacy organization for electronic markets and high frequency trading. Follow MMI on Twitter @ModernMarkets.