Pisani: Lost in all the 'Flash Boys' talk

Author Michael Lewis and Brad Katsuyama, president and CEO IEX Group Inc.
Adam Jeffery | CNBC

Michael Lewis and IEX's Brad Katsuyama came by "Power Lunch" to talk about the "Flash Boys" book one year later.

I've said several times that I do not believe the markets are "rigged" or that high-frequency trading is legalized front running. However, I have said that it would not surprise me that there are high-frequency traders who are engaging in abusive or manipulative behavior.

However, it's unfortunate that much of the debate around the book has centered on this subject.

Lewis, to his credit, acknowledged that on our air. He told my colleague Tyler Mathisen, "The only reason I regret the word [rigged] is that it's used in a way that overshadows everything else."

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He's right. The real focus should be on the strange relationships that have developed between brokers, dark pools, exchanges, and high-frequency traders that has led to the markets being excessively complex, fragmented, and confusing.

I'm talking about developments like paying traders to trade on an exchange, which has led to the proliferation of strange order types that route stocks in confusing directions.

I'm talking about dark pools that do not adequately disclose who is participating in their pools.

I'm talking about the obsession with getting as close to possible to exchange servers in order to have a microsecond speed advantage in trading.

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I'm talking about the development of trading strategies designed to exploit sub-second strategies, like the use of pattern recognition software to determine the location of large buyers or sellers.

This all raises legitimate questions about whether the system is needlessly complex and, if it is, how to reduce the complexity or reduce the number of ways the complexity can be exploited.

As for the buyside (the mutual funds and pension funds and other institutions that own the bulk of stock in the country), there has not been an enormous outcry about high-frequency trading, with a few notable exceptions. Many are clearly more concerned about long-term returns than the possibility that some firm may be scalping pennies or even sub-pennies.

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However, I do think the buyside has become more aware of how orders are routed, largely because of the book, and that's a good thing. Execution quality is a small part of the overall business of owning and selling stocks, but it's important. The money per trade is small, but not insignificant.

There's some evidence that the buyside feels constrained about how much it can complain. After all, if your clients were the investors of America, would you be interested in saying to them, "I might be paying more than I need to for my trades, but please give me your money so I can invest it!"

As proof, Convergex will be releasing a survey Tuesday of roughly 250 financial industry participants (buy- and sell-side). A majority of respondents, some 57 percent, say that markets are not fair for all participants, though this is down from 70 percent in April 2014.

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More importantly, only 42 percent report that they have made any changes in the way they interact with markets. You can read this two ways: 1) 42 percent is a fairly large number that have made changes, or 2) the majority don't think there is anything wrong or they are unsure of what, if any changes, they need to make.

As for IEX, it's been a very busy year. The company raised $75 million in financing from investors last year and is seeking to become an official stock exchange. It now has roughly 1 percent of the trading volume, which may seem small but that makes them fourth largest dark pool in the U.S., after Credit Suisse, UBS and Deutsche Bank.

By the way, SEC Chair Mary Jo White is testifying Tuesday in the House Financial Services Committee. It's all part of the chair's annual trip to Congress to justify the SEC's budget, which was $1.7 billion in 2015. But you can bet she will get questions about high-frequency trading in the Q & A.