Blog : High Frequency Trading With the Stars

by Ed Zwirn on April 5th, 2014

I'll bet that many of you thought I was being facetious when I concluded a January penny stock blog about Jordan Belfort, the "Wolf of Wall Street," by suggesting that Belfort's road to riches ought to supply a role model for youth desperately weighing career options in these tough times.

Now it turns out that this view has actually gone mainstream.

Valerie Bogard, blogging for TABB Forum, a website catering to the trading industry, shared industry angst in an April 1 blog over the possible impact of "Flash Boys: A Wall Street Revolt," a Michael Lewis book released last week that has already set of a firestorm of criticism (and threats of prosecution) of the latest developments in high frequency trading.

Coming up with the possible bad news, at least from an industry point of view, was easy enough. The blog cited a strong belief among people they surveyed that the book will intensify investigations by New York Attorney General Eric Schneiderman (which in fact happened later in the week) and increase the likelihood of SEC regulatory action.

The "one glimmer of hope in all of this," she writes, "is that the book could invite the curiosity of new grads and recruits. Nearly one-quarter believe that just as Jordan Belfort's coverage in Forbes increased the demand for jobs at Stratton Oakmont, the bad publicity surrounding [high frequency trading] will actually glorify the job."

"At a time when Silicon Valley has become increasingly attractive to a younger generation of tech talent, boosting the appeal of Wall Street is all the more important," she concludes.

This is not as far fetched as maybe we ought to like it to be. If you want to look for yet another example of a scandalous book which actually boosted the desirability of a  career choice, you need only look to Lewis's Liar's a delightful tome that dished the dirt on Goldman Sachs bond traders and left a generation wanting to be nothing less than Masters of the Universe.  

There was a time, back when Fred Flintstone was a teenager, when investors would put money into shares of companies and hold onto them for years in the hopes of getting dividends. Much like the foot-powered cars that Fred and his friends used to drag race, modern times has eliminated this anachronism, and investors these days buy and sell stocks to make money on share price increases.

Just over a year ago, I blogged about a study in Demos, a public interest website, which estimated that 73% of total stock market volume was being conducted using algorithm-driven high-frequency automated systems, causing stocks to turn over at an alarmingly increasing rate.

Taking the historical view, Wallace Turbeville, writing in Demos, estimated that at the end of the Second World War, the average holding period for stocks was four years. By 2000, it was eight months. By 2008, the average holding period declined to two months. By 2011 it had shortened to 22 seconds.

This much faster trading pace has obviously fostered market volatility. This is at once a blessing and a curse. On the blessing side is the chance that playing in this fast lane can lead to big investment scores. On the other hand, there have been minuses, with the most frightening example of this to date occurring on May 6, 2010, when computer-driven trades caused the Dow Jones Industrial Average to plunge over 1,000 points in a matter of minutes. 

In fairness, the stock market managed to put itself back together in short order after this debacle, so it is possible to argue that there was no harm done then, and probably won't be the next time algorithms take on a life of their own. Denounce fraud all you like, but the technology is out there and getting faster, meaning that no way is this genie ever heading back into the bottle. In this context, the moral outrage generated by the TABB Group and throughout the industry in reaction to the Lewis book is understandable

That being said, the TABB Group, and probably the Masters of the Universe themselves, like at least one of Lewis' other books quite a bit, to judge from the following concluding note to the Bogard blog: 

Bonus - For all the movie buffs:

Look out for the upcoming film, "Speed Dealers," coming soon to a theater near you. The film features an all-star cast, including Seth MacFarlane as Josh Levine, Woody Harrelson as Haim Bodek, Liam Neeson as Dave Cummings and Christian Slater as Brad Katsuyama. In a similar vein as the Oscar-nominated "Wolf of Wall Street" (2013), "Speed Dealers" opens the curtains on the current fast-paced markets and the black boxes in which they operate. Based on Michael Lewis's book of the same name, "Speed Dealers" promises a world of financial fun and even more f-bombs.