In a 60 Minutes report that aired recently, Moneyball author Michael Lewis explained how he believes high-frequency traders profit from other investors, while discussing his new book about the topic, Flash Boys.
It allegedly works something like this: you place an order to buy a stock. That order travels through underground wires called the internet or something similar. Your order arrives at a location where stock can be bought. If your stock can’t be bought there, it moves through wires to other locations. And if high frequency traders find out, they will buy the stock at the next location, and try to sell it to you, making you pay more, costing investors potentially billions of dollars.
And so, according to the story, millions of dollars have been spent on faster underground wires to try to find out what you are buying before you can complete an order. Fortunately, other smart people may have figured out complex ways to neutralize this kind of high frequency trading.
3 Questions That Arise From This Story
1. “They can find out what stocks I am going to buy in fractions of seconds using cable, but I can’t watch House Of Cards on a Sunday night without slight delays due to my slow internet service?” Are you sure you want to publicly ask this question – they might use it to conclude you are selling your shares of your internet service provider before you even know it. Don’t worry, maybe your modem will crash and the trade won’t go through when they think.
2. “Is there going to be a movie based on this, just like Moneyball?” We don’t know, but if it’s ever on Netflix, we hope your internet service provider picks up the pace if you want to watch it on a Sunday night, when all your neighbors are watching reruns of the 60 Minutes segment featuring Michael Lewis.
3. “Hey, I want to buy a used copy of Flash Boys on eBay. Does this mean someone is going to find out about my purchase a millisecond in advance and raise the bid?” We don’t know the answer to that, but suspect they would require a copy of the book to get that idea, so you might be okay.