FORTUNE -- Michael Lewis's book Flash Boys, which came out on Monday, is about how some traders are using supercomputers to game the market. Lewis said on 60 Minutes on Sunday that high-frequency traders are driving up the prices that all of us pay for stocks. Eric Hunsader, who runs trading information firm Nanex, has long been a critic of high-frequency trading and is in Lewis's book. Hunsader says he agrees with much of what's in the book, but has been surprised that there hasn't been more immediate criticism for the organization that Hunsader thinks is at the heart of giving high-frequency traders their unfair advantage: the Securities and Exchange Commission.
Fortune: Some people are already criticizing the Michael Lewis book for making the issues around high-frequency trading too simple.
Hunsader: I don't think so. It is pretty black and white what the high-frequency traders are doing. You don't build complex systems and spend billions of dollars if you don't know what is going on. Do you think they don't know where their profits are coming from?
Where are their profits coming from?
Everybody who is trading shares except that guy in a room who is just trading less than 100 shares. But for every large stock trade, high-frequency traders are stepping in and making some money off of it. And that includes the trades that mutual funds do. High-frequency trading has also driven way up the cost of market data, which makes it more expensive to trade and also more expensive for the Securities and Exchange Commission to monitor the market. So it's really costing all of us more.
If it is so black and white, why hasn't the SEC put a stop to high-frequency trading?
It's worse than that. The SEC is not only not putting a stop to high-frequency trading, they are allowing it and promoting it. When Brad Katsuyama [one of the main characters in Lewis's book] took all the information he had to the SEC, their response was that the changes Katsuyama was proposing would hurt high-frequency traders. They were most concerned about that. And that's been my experience as well.
But don't we need high-frequency traders? The more people you have trading in a market the better prices you should get. That adds liquidity and makes it easier and cheaper to trade, right?
No. High-frequency traders are not adding liquidity at all. They are actually pulling liquidity away from the market. That was Brad's experience that Lewis writes about in the book. Every time he hits the button to trade, the liquidity he thought was there disappeared and he had to pay a higher price. A decade ago, the average investor starting paying $8 a trade or whatever to online brokerage firms, and that was well before high-frequency trading. So how has it made things cheaper.
But commissions are just one part of the cost of trading, right?
Spreads [the price difference between buyers and sellers] have gone up too. Spreads were the lowest they have ever been in 2006. And Regulation NMS, which essentially gave the high-frequency traders their advantage, was not put into place until 2007.
What about payment for order flow? When exchanges and brokers pay people to trade rather than charge them. That seems upside down.
I am leaving payment for order flow alone. It allows the high-frequency trading arms of brokerage firms to get a risk-free ride on retail order flow. And that makes me mad, but I can only be made at so many things. And think there is one thing that we have to do first.
We have to get the SEC to stop protecting high-frequency trading. The SEC is allowing a system where high-frequency traders are allowed to get the information about trades before the rest of us.
But if they are spending billions to get that info faster, is there a solution?
Yes. Reg NMS was supposed to ensure that every trade no matter what exchange it was executed on always got the best prices. So everyone was just supposed to see the best quotes. Instead, high-frequency traders get to see all the quotes and trades people are entering in the system, and they see all those quotes before anyone else. And I have evidence of this. There is no question this is going on. So we already have the regulations, they just need to be enforced.
You would think that the trades that busted MF Global and Long-Term Capital Management would be barred under Volcker. Think again.
FORTUNE -- On Tuesday, regulators approved the long-awaited Volcker Rule. The final rule, which was also unveiled on Tuesday, was widely expected to be stricter than originally proposed. And in some ways it was. Bank CEOs will be required to certify that their firms are not violating the rule, which MOREStephen Gandel, senior editor - Dec 10, 2013 3:02 PM ET
Over the past 10 years or so, trading has become dizzyingly complex and frenetic. So how have investors fared? Surprisingly well.
By Lauren Silva Laughlin; graphics Nicolas Rapp
FORTUNE -- Once upon a time, an ordinary investor -- call him Joe -- would take some of his retirement savings and put it into a giant brand-name mutual fund that advertised in the Sunday paper. The fund would take that money and MOREDec 5, 2013 6:52 AM ET
The reason for stock market skittishness might be more mundane than high-frequency trading and computer algorithms gone amuck.
FORTUNE -- The TABB Group, a research firm that specializes in stock trading and technology, is out with what appears to be a concerning stat: Just 2% of professional investors completely trust the market.
It's become a common line to say that Knight Capital's recent trading glitch, the bungled Facebook IPO and the 2010 MOREStephen Gandel, senior editor - Aug 23, 2012 11:04 AM ET
Building error-free trading software is impossible, and that makes today's stock markets even more fragile.
FORTUNE -- One question keeps arising in the saga of Knight Capital and its $440 million software glitch: why did Knight, one of the premier U.S. market makers that handles more than 10% of total stock trading, introduce glitchy software into the market?
CEO Thomas Joyce explained in a television interview that the company's new software program MOREScott Cendrowski, writer - Aug 3, 2012 2:17 PM ET
Instead of making an enemy of the high frequency trading firms, the SEC might be better off teaming up with them to help police the markets and provide liquidity.
By Cyrus Sanati, contributor
FORTUNE -- The rise of the machines on Wall Street seems unstoppable. While regulators say they are concerned about possible market distortions brought about by computerized high frequency trading algorithms, they don't seem to have any idea what to do about it. In fact, MOREFeb 28, 2012 10:15 AM ET
Today's mini-flash crash victim is Progress Energy.
Trading in shares of Progress (PGN), a Raleigh, N.C., utility operator, were halted for five minutes Monday afternoon after the stock briefly plunged 90% for no apparent reason.
The stock dropped from around $44.50 to $4.57 just before 1 p.m. EDT before resuming trading above $44 a few minutes later. The New York Stock Exchange, where Progress shares are listed, said the troublesome trade took MOREColin Barr - Sep 27, 2010 2:07 PM ET
Regulators slapped a $1 million fine on a brokerage firm for manipulating stocks using a technique fingered in May's flash crash.
The Financial Industry Regulatory Authority, or Finra, said it censured and fined Trillium Brokerage Services of New York and 11 of its employees for improprieties tied to so-called high-frequency trading. The violations took place over a three-month period at the end of 2006 and the start of 2007.
All told, the MOREColin Barr - Sep 13, 2010 3:41 PM ET
Jeremy Frommer, a longtime Wall Streeter who now runs the TFG Investments hedge fund in Englewood, N.J., posted this video to give people an idea what Thursday's free fall looked like from the inside. The video is of the TFG trading floor, where the traders focus on publicly traded stocks, options and futures, Frommer said.
"In the middle of the worst drop we've seen since the 2008 crisis, we thought this MOREColin Barr - May 7, 2010 5:05 PM ET
The robo-stock market blew a fuse Thursday. Now is Washington's chance to rewire the joint for good.
The exact causes of Thursday's stock market short-circuit remain unclear, but the lesson is unmistakable. The regulators and the major exchanges have drifted from their original duty: to run a market that gives small companies a way to raise capital and mom-and-pop stock buyers a way to invest for the future on fair terms.
Instead, MOREColin Barr - May 7, 2010 12:53 PM ET
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