Stock Trades in Milliseconds: Question Marks about Architecture of US Stock Market

Many events are quickly forgotten, despite their magnitude. The Flash Crash on the New York Stock Exchange in May 2010 isn’t one of them. Within seconds the Dow Jones Industrial Average lost around 1,000 points or 9 percent of its value, only to recover it again in a matter of minutes. Investigations into the event subsequently focused on the so-called high frequency trader, who buys and sells enormous quantities of equities in fractions of seconds by utilizing massive computing power and sophisticated algorithms. These traders are now responsible for a large part of the trading volume on American stock markets. Their role in the Flash Crash, however, has never been properly explained, and so, apprehension lingers on Wall Street that high frequency trading destabilizes markets.

In his book “Flash Boys,” published on Monday, the former bond trader and best-selling author Michael Lewis (“Liar’s Poker,” “The Big Short”) pours salt on this open wound and describes how this sector works. He thereby shines light on an opaque branch of the economy, the methods and workings of which were hitherto scarcely accessible, even to Wall Street insiders.

On Monday, questions also were raised anew about the influence of these market players on the structural stability of the equity markets, and whether it’s fair that they gain an advantage in trading through fast connections to the stock markets. At any rate, considering the many statements made early this week in connection to the topic, trust in a reliably functioning — if increasingly fragmented — equities market is low. That alone is frightening and should jolt American regulators into action.