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The links sum up the actual situation pretty well, but let me summarize for the lazy: as a medium-sized investor (not a trader), in the 1970s I would pay $150 for a trade of 300 shares. The bid/asked spread of a blue-chip company like Royal Dutch Petroleum (one of the parents of Shell) would typically be an eighth of a point ($0.125) . By the late 1980s my fee was down to $40, but when I wanted to buy a company in the “pink sheets” I would have to rely on records as much as two weeks old, with a bid/ask spread of as much of $5 on a stock I bought at $37 — had I immediately sold back the 300 shares of Allen Organ class B shares, I would have lost $1130 on an $11,000 investment.

Today I pay $6 a trade at my broker on trades of one thousand shares. The spread on a blue-chip company like Exxon-Mobil is two cents ($0.02) and I get a trade at a better price about a third of the time. Infrequently traded stocks show up with a 30-cents bid/ask range and when I buy or sell, the trade is usually executed inside that range.

What do the high speed traders do? They clip as much as two or three hundreds of a penny a share from me — much smaller than the old specialists did with their ‘steenths ($0.0625). If I buy a thousand shares of a blue chip, they may take a nickel.

Where they make substantial money is from the institutional traders: the hedge fund managers and, yes, the mutual funds. When you’re trading a thousand shares, you slip through the high speed traders’ nets. It’s the people who are trying to buy hundreds of thousands, sometimes millions of shares who get caught. Well, you expect some one trying to trade that many shares to affect the price.

Sorry for the lack of snarky jokes in this post.

Bob

Back in the 70’s there will still typewriters at desks. Women were secretaries. And, the prices you saw when you went to buy and sell stocks were in REAL TIME.

Now, with computers? Things should be better. Less lost paperwork back at the vaults. And, instead? You don’t get a true picture of the market at any time. Because “FLASH BOYS” know the speeds it takes for your order going “in.” And, they “front run” ya. So by the time your offering price is there … they’ve absconded with all the shares. And, you’re paying them “extra.”

What they understood is that the computers work on cables. Underground. And, overhead. Where you can both maximize your front-running speed … As well as slow down the order, itself, because it’s going on a “local train.” While the HFT (high frequency trader) grabbed the screen with your order on it … And, plowed ahead of it.

Yes, it’s a form of cutting line.

Michael Lewis’ story points out that the average guy on Wall Street didn’t know a thing about fiber optic cables. The few who knew made loads of money. And, it was risk free. Since they didn’t own what they were selling … until seconds before your trade got executed.

The speed? Faster than the blink of an eye! And, Lewis’ story is great for another reason. People who worked underground with the cables had no idea what traders did all day.

Oh, yeah. Back in the old days when commissions could be a $140 charge? Those traders kept calling their customers up just to churn them. My mom was one of those people who hated those phone calls. When she heard of Charles Schwab she switched out her accounts, elsewhere, to them.

I remain perplexed as to why true investors, as opposed to traders and speculators, should care about this issue. Buy and hold, especially as to index fund investing, means whatever the traders are doing has little effect on you.

I recommend Lewis’ book. It’s a quick read, and he is a talented storyteller.

From the perspective of this JD, the regulatory problems are that the “dark pool” exchanges aren’t required to publish their rules, trades don’t require documentation of which exchanges are used and the costs in fees/kickbacks (which would expose traders’ breach of fiduciary duties), and the proliferation of trade types (almost always to facilitate HFT front-running/rent-seeking).

Rather than thousands of new pages of opaque rules and further obfuscation, transparency would prove the best disinfectant.

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