RUTH SUNDERLAND: Flash boys are brewing up the next big scandal

By Ruth Sunderland for the Daily Mail

Updated: 17:21 EDT, 18 April 2014

American author Michael Lewis has a knack for translating complicated financial scandals into gripping books.

His first best-seller, Liar’s Poker, chronicled the birth of the securitisation industry on Wall Street, and his second blockbuster, The Big Short, told the extraordinary story of traders who made millions from the financial crisis.

The latest tome, Flash Boys, shines a light on the dark corner of the markets that is High Frequency Trading, or HFT.

Scandal: Flash Boys shines a light on the dark corner of the markets that is High Frequency Trading, or HFT

Flash Boys – there are not many girls – use superfast internet and clever algorithms to skim billions of pounds from pension funds and small investors. By getting their orders in nanoseconds ahead of conventional investors, they move prices marginally to their own advantage.

The difference each time may only be a tiny fraction of a penny, but on a high volume of trades, this adds up to a lot of money.

Cheerleaders for HFT claim it makes markets more efficient – the same defence that is trotted out by hedge funds when they come under fire.

But to Charles Schwab, founder of the US brokerage firm of the same name, it is ‘a growing cancer’ that allows the traders to make billions by ‘picking the pockets’ of other investors.

The US authorities have swung into action. The New York attorney general is investigating and one HFT firm, Virtu Financial, has had to delay its stock market float due to the scrutiny.

Our own FCA, working with the Americans, has fined one high frequency oil trader for market manipulation. Now the European Union is promising the ‘strictest set of regulations in the world’, which on past form may also be the silliest.

Whether all this regulatory activity will in any way reassure small investors is open to discussion. But after the Libor scandal and allegations of manipulation in foreign exchange markets, the suggestion that traders are rigging share prices is dynamite.

Rogue directors

It is genuinely laudable of Vince Cable to try to bring in tougher penalties for reckless directors. These, as he points out, could capture more rogue bosses engaged in fleecing elderly investors in scams involving bogus fine wine investments and carbon credits – something any right-thinking person would like to see.

But are these the biggest villains out there? The coalition is making great play of how it intends to come down hard on poorly-behaved bosses. As well as Cable’s latest measures, there are also moves to jail bad bankers.

The director disqualification regime currently catches around 1,200 people each year, so why, one might ask, are no prominent bank bosses included in the numbers, despite the incalculable harm caused to millions of taxpayers, employees and savers?

Director disqualifications have been meted out to failed bankers in the past, notably in the case of Barings. But the authorities are wary of pursuing wealthy and powerful former executives, because they do not want to let themselves in for long and expensive courtroom battles, with no guarantee of success.

Taxpayers may feel this results in bad bankers getting off too lightly. Wherever one stands in that debate there is little point bringing in stronger new regulations if authorities are reluctant to use the weapons they already possess.

Google power

Mathias Doepfner, the chief executive of Europe’s largest newspaper publisher, Axel Springer, does not mince his words when it comes to the growing – some would say sinister – power of Google, the Californian search engine giant.

He wrote an open letter to Google boss Eric Schmidt in the Frankfurter Allgemeine Zeitung this week, accusing the company of having a business model that works like a ‘protection racket’ and describing its attitude to privacy as one you might find in the ‘head of the Stasi’.

The Californian giant’s latest multi-million pound deal, to buy a company that makes unmanned planes, prompted Doepfner to wonder whether it is trying to build an online ‘superstate’.

Some will see Doepfner as an ‘old media’ dinosaur. Yet Google is marshalling an army of robots, some of them designed for the battlefield, and its fleet of drones could enhance its powers to spy on us from the skies.

Little wonder its activities provoke a twinge of fear.