(Editor’s note: I like Michael Lewis and have enjoyed his books and the movies based on them. I like Jon Stewart and greatly respect his wit, though he sometimes goes too low-brow for my tastes.)
I have watched Michael Lewis’ appearance on cable television show The Daily Show with Jon Stewart over and over again. As I watched the show, I was not amused as I would normally be by Mr. Stewart’s wit, but discomfited by the conspiracy theories, misleading representations and contradictions.
At one point near the beginning when Lewis was describing IEX founder Bradley Katsuyama, he said Katsuyama “runs the stock market department for the Royal Bank of Canada.” He said, “he is not much of a Wall Street guy.” It would seem like Mr. Katsuyama is part of Wall Street, but when you are demonizing one group and making heroes of another, you need to be able make up your own descriptions.
Mr. Lewis said of the new non-displayed alternative trading system, IEX, “it is the one stock exchange that is not run by intermediaries, not run by Wall Street people.”
“It is for investors.”
So Mr. Katsuyama, who ran the “stock market department” for RBC, is not part of Wall Street.
For the record, IEX is not a “stock exchange,” it is a “non-displayed alternative trading system,” or ATS, which in other words is a dark pool. To be a dark pool, you must be registered as a broker-dealer with FINRA, which of course regulates Wall Street. A broker-dealer is an intermediary.
IEX may be a seemingly fairer dark pool, but it is still a dark pool.
Stewart does not seem to appreciate the differences between a lit exchange and a non-lit one.
“They get together and they start their own stock exchange that runs things right,” Stewart said.
Mr. Katsuyama is not a Wall Street guy because he is a Canadian, which according to Mr. Lewis makes him more decent. For some reason this was funny, but I did not get the joke.
Lewis painted everyone on Wall Street, except for decent Canadians of course, as part of a grand conspiracy. He at first talked about it in theoretical terms, but then stated “the conspiracy is preventing the change” to the system.
With his broad brush, SEC staffers, Wall Street banks, HFT traders, exchanges and others were all in on this “conspiracy.” Lewis did say RBC did a study and found 280 people who went from the SEC to HFT employers. Where did the press miss that story? We have had the stories about the revolving door, but they are more anecdotal than data driven.
Stewart at least had the decency to say there were good actors on Wall Street. Of course Mr. Stewart’s brother Larry Leibowitz is one of them.
Lewis and Stewart both said there was no need for intermediaries. “There is no need for these middlemen, they are unnecessary to the system,” Stewart said.”
I have one question, though. If there is no need for middlemen, then why when one of the big orders comes to the markets does the price move? Why are there not buyside firms who want to sell with their orders in the book at those prices at the same time? There must be a buyside trader wanting to sell the same stock in the same size at that exact moment, right? Except it is not true and that is why we have marketmakers and those evil “scalpers.”
Stewart’s and Lewis’ intentions sounded good. However, on the one hand Lewis and Stewart are praising Katsuyama for bringing competition to the markets instead of a government solution. On the other hand, Lewis called for just one stock market to exist. You can’t have it both ways.
“We should all be in the same place,” Lewis said. “We should not be in 13 different public markets and some 40 different dark pools.”
Lewis was all for competition some 30 seconds later when describing what Silicon Valley does in bringing competition and displacing existing competitors.
“This is the kind of thing that happens in Silicon Valley every day. Something new comes in that is better, fairer, more honest and people want it and the old business goes and dies, he said.”
While discussing the integrity of the system, Lewis claims regulators designed the system to benefit high frequency traders.
“This instability that is in the system, you get flash crashes and all this, because the technology is rigged. It is designed not for stability, but to allow for high frequency traders to make money,” Lewis said.
Lewis went on to describe the price of the mistrust of the markets is huge because the companies that actually need capital, pay much for for because investors are wary.
I am not sure I get the connection between the initial and secondary offering prices and microsecond secondary trading.
The reason I am upset is because so many people were misled by Lewis’s simplification of a very complex ecosystem, even if it needs improvement, and Stewart’s lack of humor. After all, HFT is really funny.