Sharks Swim in the Stock Markets, but They Are Not Rigged
Source Newsroom: Cornell University
Newswise — Maureen O’Hara, professor of finance at Cornell University’s Samuel Curtis Johnson Graduate School of Management, disputes allegations, made in a new book by Michael Lewis, that U.S. stock markets are rigged.
O’Hara is co-author of the book “High Frequency Trading: New Realities for Traders, Markets, and Regulators.” Her most recent research looks at the role of toxicity in affecting liquidity in high-frequency markets. She also publishes widely on a broad range of topics including banking and financial intermediaries, law and finance, and experimental economics.
“Are U.S. stock markets rigged? In his book, ‘Flash Boys: A Wall Street Revolt,’ Michael Lewis claims they are. But a great deal of recent research suggests that this is not the case. Virtually all academic research looking at transactions costs and volatility find that U.S. markets are better now than in the pre-high frequency era. Indeed, with almost half of all stocks trading at minimum spreads, high-frequency trading has brought particular benefits to retail traders who, because of best execution requirements for brokers, generally receive executions at the national best bid or offer.
“Are there problems in the market? Absolutely, but these generally affect large institutional traders who find it difficult to transact in size. This is the problem that Katsuyama confronted at the Royal Bank of Canada. Lewis seems to believe that the only solution is a new start-up exchange, but in fact there are a variety of ways that these issues are handled in current markets, including crossing networks and smart order routing.
“There is a dialogue to be had regarding high-frequency trading, and there are changes that could or should be made, but that is a long way from saying the market is rigged. Put another way, are there sharks in the ocean? Yes, but they are a long way from the beach!”