Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

David Einhorn takes stake in HFT-antidote IEX

David Einhorn
Scott Eells | Bloomberg | Getty Images

Count David Einhorn on team Michael Lewis.

"Michael Lewis's new book 'Flash Boys,' like all his books, is a fun read and is based on a true story. It brings attention to some areas of the market that can improve further, and a few areas of possible abuse," Greenlight Capital, which Einhorn heads, said in an investor letter Tuesday.

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"There are many legitimate and even beneficial aspects to computerized trading, including market making and statistical arbitrage, yet there are also some areas that are ripe for reform. Most glaring is the latency arbitrage that is used to identify the presence of large institutional orders for the sole purposed of legally front-running them."

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In the case of high-frequency trading, computers that can execute trades in microseconds detect orders from other, slower computers and are able to trade ahead of them. That drives future trades higher, and HFTs then sell and pocket the difference between the lower price they paid and the higher future trades. The entire process can take place in less than a second. Lewis' book alleges that HFT firms make billions off front-running.

Greenlight said it believes that those issues "don't significantly impact us." But, as a countermeasure, the firm said it supports new alternative trading platform IEX. Greenlight said it holds a small stake in the exchange, which has styled itself as a safer place to trade for investors worried about HFT front-running.

"We believe that the best response for any investors that are worried about fast computers taking advantage of them is to ask that their orders be routed to IEX," the letter said.

A spokesman for Greenlight declined to comment.