“Be First, Be Smarter, or Cheat.” By: Gabriel PotterMBA, AIFA® 2014.04.09

"There are three ways to make a living in this business: be first, be smarter, or cheat. Well, I don't cheat. And although I like to think we have some pretty smart people here in this room, it sure is a hell of lot easier to just be first." -- Margin Call

There was a fight on CNBC a few days ago that made the rounds. It didn't escalate into a fistfight, but it definitely crossed over the line of civil discourse. You can see it online here.

This is about the most belligerent interview I’ve seen on CNBC.  The argument started because of Michael Lewis’ new book, “Flash Boys”, which peers into the contentious world of high frequency trading.  The heart of the debate is a simple question:  What is high frequency trading?  Is high frequency trading a legal version of arbitrage, in which traders find an identical asset in two separate markets trading at slightly different prices (usually just a penny) and make profits by buying it on the cheap market and selling it on the expensive market.  On the other hand, does the premium speed granted to high frequency traders constitute a type of front-running, an illegal practice where traders get to trade ahead of the public and with faster pricing information? 

I haven’t read the book yet and I’m sure the exchanges which offer high frequency trading access will issue a formal rebuttal, but this issue isn’t going away anytime soon. 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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