Michael Lewis' new book on high frequency trading has thrown the issue into the spotlight, but there's a major argument against it that hardly anyone is adding to the conversation.
Since the Flash Crash in 2010, software experts, regulators and investors have been talking about whether or not the harrowing, instantaneous 9% decline in the stock market was caused by high-frequency trading firms overloading exchange software systems.
Think of it like driving so fast down the highway that your car spins out of control and takes a bunch of vehicles down with it.
"This is true across industries based on technology," said Lev Lesokhin of CAST, a company that visualizes inherent risks in financial software systems. "They don't really ... have good oversight of the structure of their systems ... Look under the hood of these companies ... there's not enough attention being paid to the programs they're using, and these programs are a large part of what's causing the problem."
In "Flash Boys: A Wall Street Revolt," Lewis tells the story of how a group of traders banded together to create an exchange safe from high-frequency trading robots that manipulate price and nickel and dime investors. To do that, those HFT firms have to send tons of messages to exchanges with their algorithms.
Some say that this communication overload is what caused the Flash Crash. Think of it like having tons and tons of browsers open on your computer streaming videos and music. Even if you're only looking at one, all that information could cause your computer to freeze up and crash.The faster the HFT firms get, the more complex the algorithms they send to exchanges become. Stock exchanges, in turn, have to evolve to deal with that speed, as well, and write their own programs.