Jack Bogle: Michael Lewis is wrong about rigged markets

Vanguard founder Jack Bogle is the latest Wall Street luminary to criticize the assertion of best-selling author Michael Lewis that the growth of high-frequency trading (HFT) rigs the stock market to the detriment of individual investors.

In an interview with CBS MoneyWatch, the 84-year-old Bogle argued that the claims Lewis makes in his new book, "Flash Boys," which he described as "the talk of the town" are "too extreme." Bogle says Lewis also fails to note how investors gain from HFT in the form of lower transaction costs.

"Main Street is the great beneficiary," said Bogle, while acknowledging that he hasn't read Lewis's latest book. "We are better off with high-frequency trading than we are without it."

Bogle, a frequent critic of Wall Street, agrees that front-running is a concern, but he doesn't think it's as bad a problem as Lewis suggests. In 1975, Bogle founded the Vanguard 500 Index Fund, the first index mutual fund and has repeatedly argued that this approach is the best for investors. Bogle, who was named by Fortune magazine in 1999 as one of the investment industry's four "Giants of the 20th Century, has repeatedly likened the stock market to a casino.

Lewis -- whose other books include "Moneyball," which details the growth of statistical analysis in Major League Baseball, and "The Big Short," an expose of the housing crisis -- claims that high-frequency traders are able to buy stocks ahead of individual investors and effectively sell the shares to them at a profit. That practice, known as front-running, is illegal.

Lewis didn't respond to a request for comment left with the publicity department of his publisher W.R. Horton. He has defended his book on CNBC, claiming that its critics were unfairly trying to impugn his motivation and those of Brad Katsuyama, the creator of an exchange featured in the book that's trying to compete against HFT firms, "I was just trying to figure out what hell was going on in the stock market," Lewis said.

Maureen O'Hara, a professor of finance at Cornell University's Johnson School of Management, also takes issue with Lewis's claims, saying in an interview she was bothered by his remarks. She noted that talk of stock market "rigging" will needlessly scare investors.

"He implies that individual investors are being taken advantage of," O'Hara said. "I don't believe that it's true."

"We really can't say that the market is rigged without convincing evidence," said Haoxiang Zhu, an assistant professor of finance at MIT's Sloan School of Business, adding that Lewis hasn't made that case.

Most individuals trade in such small increments that their orders wouldn't be transacted on the exchange where high-frequency trades occur in any case. They're executed through brokers.

The industry-backed Consolidated Tape Association and the Consolidated Quote Association disseminate all stock prices. This practice is designed to give all investors pricing information in a timely manner, which makes day trading even more difficult.

"There is no place for day traders in the modern market," O'Hara said. "They're just too slow."

What concerns Bogle about high-frequency trading is its fragility, as evidenced by the so-called Flash Crash in 2010 when the Dow Jones Industrials suddenly plummeted 1,000 points without explanation only to recover those losses shortly thereafter. A year later, Knight Capital lost $440 million dollars from what was described as a computer trading glitch.

Referring to the Flash Crash," Bogle said, "all this technology is fragile ... and can break down at a moment's notice. There is a lot of stuff that's going on behind the scenes that shouldn't be going on."

For instance, Bogle notes that high-frequency traders can benefit from getting an early peek at data on trading volume. So, he said, regulators need to push for more market transparency. Bogle added: "They're called dark pools for a reason."

  • Jonathan Berr

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