According to Flash Boys, a new book by Michael Lewis, the U. S. stock market is legally-yet-unfairly rigged by “front running” high-frequency trading. According to Lewis and others, insiders using high-speed networks are able to intercept a regular stock trader’s order to buy or sell, and then buy or sell mere milliseconds before the intercepted order, thereby raising the stock price before the intercepted order can be completed. High-speed traders (“predators”) make only pennies per trade over the investors who are not high-speed traders (“prey”) but the sheer volume of shares traded, numbering in the hundreds of billions, results in hundreds of millions of dollars. The huge dollars to be made by high-speed front running is evidenced by the amounts predators are willing to pay for the technology: “Spread Networks” reportedly laid high-speed fiber optic cable from futures markets in Chicago to trade exchanges in New Jersey, shaving 3 milliseconds off the fastest route and leasing access to that technology for $10 million per lessee. Furthermore, the prey is not merely composed of bottom-feeder individual investors (such as Yours Truly) but also includes traditionally huge investors, such as hedge funds and banks. One hedge fund manager estimated that his hedge fund, alone, lost $300 million/year through high-speed front running.
Countering this technology became a high priority for large investors stung by front running. The apparent solution is “The Investors Exchange” (IEX), launched in October 2013 and funded solely by large traditional investors. IEX uses 60 km of fiber optic cable coiled between themselves and the predators in a “Magic Shoe Box” that forces high-speed traders to travel the 60 km, causing their trades to reach the exchanges at the same time as everyone else’s trade. Compelling the same arrival time cancels out the advantages of high-speed traders. EIX now trades approximately 38 ½ million shares and, though it has potent foes trying to discourage traders from using the exchange, IEX is also being touted as a model for a less complicated, more stable stock market.
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