What’s the Frequency Zenith?

By Grant Williams

April 14, 2014

“All of the expectations didn’t work,” recalls Serge. “They thought they controlled the market, but it was an illusion. Everyone would come into work and were blown away by the fact that they couldn’t control anything at all.... Finance is a gambling game for people who enjoy gambling.”

– Michael Lewis, Flash Boys: A Wall Street Revolt

“I’m shocked, shocked to find that gambling is going on in here!”

– Captain Renault, Casablanca

“If you want to do this, let’s do this.”

– Brad Katsuyama

“I thought I’d pegged you an idiot’s dream Tunnel vision from the outsider’s screen I never understood the frequency”

– R.E.M., “What’s The Frequency, Kenneth?”

WARNING: This week’s Things That Make You Go Hmmm... is going to run a little longer than usual, I’m afraid, so if you have some time to kill, strap yourself in for the ride.

Yes. I have read it.


For the last couple of weeks those have been the five words I have used the most — by a country mile.
The second most-used five-word combination during that time has been I know, what a tool.”

The subject to which the first group of words pertains is, of course, Michael Lewis’s new book, Flash Boys; and the second phrase refers to a certain president of a certain exchange, who made a complete fool of himself during the fierce media debate that has surrounded the book since it burst upon the public consciousness in the space of what ironically felt like a few nanoseconds. (The particular piece to which I refer has to be seen to be believed; but if you somehow missed it, you’ll have your chance. Stick around.)
Now, before we get started, let’s get a few things straight right off the BAT(s).

Firstly, I am an enormous fan of Michael Lewis’s work. I think he is an incredible storyteller with a gift for narrative worthy of a place alongside many modern greats. I have read each of his books and enjoyed them all tremendously. Michael has an ability to weave complex subject matter into a tapestry that can be understood and enjoyed by many who might otherwise find such material utterly incomprehensible.

Secondly, I am no expert in high-frequency trading, but I have had some experience of it in recent years; and I have spent some considerable time analyzing it from a business perspective, which has given me a reasonable understanding of its mechanics.

Thirdly, whilst I have limited direct experience of HFT, I DO have almost thirty years’ hands-on experience of equity, bond, and commodity markets in the US, UK, Singapore, Hong Kong, Australia, and Japan, as well as in another dozen or so countries across Asia Pacific; and having watched markets of all types move in strange ways for seemingly no reason until, a few moments later, the cause of the move revealed itself, I feel I have developed enough of an understanding about how the markets work and, perhaps more importantly, about the people who MAKE them work, to venture an opinion or two about the subjects raised by Michael Lewis in Flash Boys.

But before we get to the book that is on everybody’s Kindle, we’re going to turn to sport for a little lesson. Let’s go back in time to Game 6 of the American League Championship Series between the Boston Red Sox and the New York Yankees in 2004, and recall the actions of anotherFlash Boy,” Alex Rodriguez, the Yankees’ star third baseman.

Now, at this point, I’m sure the thousands of non-baseball fans amongst you are tuning out in your droves; but in order to try to keep you engaged, let me also tell you a parallel story from the football (or “soccer,” if you must) 2002 World Cup in South Korea, a tale that features one of its brightest stars of that era, the Brazilian midfielder Rivaldo ... and some decidedly unsavory antics.

Let’s see how we get on with this whole parallel story thing, shall we? I know Michael Lewis would do a phenomenal job of weaving the two stories together. Me? I’m not so sure...

Deep breath.

In 2002, Rivaldo Vitor Borba Ferreira was a footballer at the very top of the world game. He had helped Brazil reach the final of the 1998 World Cup (where they lost to France), and four years later he was one-third of the renowned Three Rs,” alongside Ronaldo and Ronaldinho (sadly NOT referred to as “the Two Ronnies”), who spearheaded the dynamic Brazilian team that was rightly installed as the prohibitive favourite to win the trophy that year.


In Brazil’s opening game against Turkey on June 3rd, Rivaldo scored a goal in the 87th minute to give Brazil a 2-1 lead with only three minutes to play, and was on his way to earning the Man of the Match award (thinkMVP,” baseball fans). With seconds of added time left, Brazil won a corner, which Rivaldo wandered across the pitch to take at a pace which could, at best, be described as “lacking a degree of urgency.” The ball was at the feet of Turkish defender Hakan Ünsal, who most certainly WAS in a hurry...

(Cue Michael Lewis-like change of scene to increase the dramatic tension.)

Game 6 of the 2004 ALCS, played at Yankee Stadium on October 19, 2004, had urgency to spare, as the Boston Red Sox, having lost the first three games of the series to their hated rivals from New York, needed a win to tie the series at 3 games each and force a Game 7 decider, which would be played at The Stadium the following night. One more loss and their season was over. (No team had ever come from 3 games down to take a Championship Series.)

The Yankees were led by their talismanic third baseman, Alex Rodriguez, who had almost joined the Red Sox earlier that year after the team had suffered a heart-breaking Game 7 loss in the 2003 ALCS — to whom else but the Yankeesonly to have the deal voided at the last minute by the players’ union, a move which opened the door for the Yankees to steal the highest-paid and, at the time, most prolific player in the game from under the noses of the seemingly cursed Red Sox. (You can see how that whole situation played out in the excellent ESPN short documentary The Deal).


Rodriguez had been on a tear in 2004 and would end the season with 36 home runs, 106 RBIs, 112 runs scored, and 28 stolen bases. (Soccer fans, I’d give you a comparison, but there isn’t one. Think: doing everything. Really well.) This made Rodriguez only the third player in the 100+ years of baseball history to compile at least 35 home runs, 100 RBIs, and 100 runs scored in seven consecutive seasons (joining two other players with names that even soccer fans would know [kinda]: Babe Ruth and Jimmie Foxx). (No, NOT the actor who won an Oscar for Ray, soccer fans.)

During the playoffs, Rodriguez had dominated the Minnesota Twins, batting .421 with a slugging percentage of .737. (Soccer fans, let’s face it, baseball owns statistics. You got nuthin’.

Nuthin’. Take it from me, Rodriguez was Messi with a bat.) He had also equaled the single-game post-season record by scoring five runs in Game 3 as the Yankees seized a 3-0 lead.

But in Game 6, Messi with a bat was about to get messy with at-bats as his form deserted him and he found himself at the plate in the 8th inning, facing Red Sox relief pitcher Bronson Arroyo, in the game for starting pitcher Curt Schilling, who had battled heroically through seven innings with a torn tendon sheath in his right ankle.

With the Yankees down 4-2 and team captain Derek Jeter on first base, Rodriguez represented the tying run...

On that steamy night two years prior, in a purpose-built stadium in Korea, Rivaldo stood by the corner flag, hands on his knees, waiting oh so patiently for the clock to run down Ünsal to pass the ball to him. The fans whistled their derision at the Brazilian’s delaying tactics. Sadly, time wasting in such situations is commonplace in football, and though the referees are obliged to add additional seconds to negate these tactics, they seldom do so effectively.

Rivaldo flinched and tried to turn away from the incoming ball, which struck him roughly two inches above his right knee.

With the linesman (baseball fans, think: third base umpire) standing no more than two or three feet from the Brazilian, Rivaldo collapsed to the ground, clutching his face as if he had pole-axed by the incoming projectile, and writhing around as if every bone in his face had been shattered by the evil Turk.

To the astonishment of everybody in the stands, commentators from over a hundred countries, hundreds of millions of fans around the world, and, above all, Ünsal himself, the Turkish player was shown a red card and sent off (baseball fans, think: ejected) for his crime.”

Rivaldo, having made a miraculous recovery, took the resulting corner, and Brazil held on against the ten men of Turkey for the victory.

Back in the Bronx, with the count at 2-2 (soccer fans, that’s two balls and two strikes, which means... oh, to hell with it. Baseball is so much trickier to explain. From here on in, you’re on your own), Alex Rodriguez swung his bat, made contact with Arroyo’s pitch, and sent it bobbling down the first-base line. As soon as he hit it, Rodriguez set off in a furious foot race that he had absolutely no chance of winning as he tried to beat the ball to first base. He knew it. We knew it.

Sure enough, Arroyo, with a head start, got to the ball first and took the two or three steps necessary to tag the Yankee with the ball (before he reached first base, which would render himout” and send him back to the dugout, bringing the Yankee inning closer to an end).

However, as he reached out to tag Rodriguez, the ball spun loose from Arroyo’s glove and bobbled into right field, keeping the play alive and letting Jeter score from second and throw the Yankees a lifeline.

Rodriguez continued to second base, where he stopped, called time out, clapped his hands, and whooped.

Cue pandemonium.

Everybody in the stadiumexcept the first-base umpire ... and presumably the millions at homehad seen Rodriguez intentionally slap the ball from Arroyo’s glove, a move which in baseball parlance is known as “cheating.” (Soccer fans, think: cheating.)

After a strong protest from Red Sox manager Terry Francona and a lengthy consultation among the various umpires, justice was done. Rodriguez was called out,” Jeter was returned to second base, and the score remained 4-2.

The Red Sox would go on to win the game and, the following night, become the first team in baseball history to win a series after losing the first three games. They would go on to defeat the St. Louis Cardinals 4-0 in the 100th World Series (soccer fans, think: national championship with noworldconnotation whatsoever) and to vanquish a famouscurse” that had persisted for 86 years.

Now, armed with that background, watch these two defining moments HERE and HERE.

In the aftermath, both players were defiant. Rivaldo, amazingly, tried to paint himself as the victim:

(BBC): Rivaldo had admitted fooling the referee by clutching his face after Ünsal kicked the ball at his leg while he was waiting to take a corner in the closing moments of the Group C match.

But he shrugged off the fine and defended his faking as part and parcel of the game.

The 30-year-old said: “I’m calm about the punishment.

“I am not sorry about anything.

“I was both the victim and the person who got fined.

Obviously the ball didn’t hit me in the face, but I was still the victim. I did not hit anyone in the face.”

... whilst Rodriguez was, for some reason, “perplexed”:

(NY Times): Alex Rodriguez was standing on second base when the umpires decided that he did not belong there. He folded his hands atop his helmet and screamed, “What?’’

He was, to use his word, perplexed.

After the game, Yankees Manager Joe Torre demonstrated that, when it comes to seeing important plays that go against your team, there is one thing common to both soccer AND baseball: the unreliability of a manager’s eyesight. These guys see EVERYTHING that goes against their team perfectly but somehow always seem to be curiously oblivious when the shoe is on the other foot:

(NY Times): Randy Marsh was closer than anyone else, and it looked like there were bodies all over the place,’’ Torre said, referring to the fact that first baseman Doug Mientkiewicz was near the play. “There were a lot of bodies in front of me, so I can’t tell you what I saw. I was upset it turned out the way it did for a couple of reasons.”

Presumably neither of those reasons involved the fact that the call was right.

Anyway, the point of these two stories as they pertain to Flash Boys is this:

Both Rodriguez and Rivaldo knew there were dozens of TV cameras on them. They knew there were millions of pairs of eyes on them around the world, and they knew that they were being watched by officials charged with monitoring the games to ensure fairness and punish malfeasance — and yet, knowing all that to be true, they both instinctively cheated to try to gain an edge.

That is how they, as competitors, are wired. Whether it’s right or wrong is irrelevant. (It’s wrong, in case you were wondering.) They were both given a set of rules within which to play, and both chose to step outside those rules in the hope that they would get away with it.

Rivaldo did, Rodriguez didn’t.

It’s a fine line, but the reward for successeven if it does involve bending the rules — is considerable.

Lewis’s media blitz began on Sunday night with an appearance on 60 Minutes, and in answering a simple opening question with a typically florid response, he sparked a media storm the likes of which I haven’t seen in a long, long time.

Steve Kroft: What’s the headline here?

Michael Lewis: Stock market’s rigged. The United States stock market, the most iconic market in global capitalism, is rigged.

Those words sent financial anchors on CNBC and Bloomberg TV into a state of apoplexy at the mere suggestion that the playing field in financial markets is anything but scrupulously fair.

As I watched the circus unpack its tents, erect them, and send a parade of clowns careening into the ring, I was genuinely baffled at what I was seeing.

The first act was Bill O’Brien, the president of BATS (one of the exchanges which, according to Lewis’s book, offers an unfair advantage to high-frequency traders), going toe-to-toe on CNBC with the hero of the book, Brad Katsuyama, once of RBC and now the founder of IEX, an exchange dedicated to leveling the playing field for the average investor.

Until last Sunday, I had never heard of either man, nor had I ever seen them in action.

What followed was extraordinary.

If you haven’t seen the clip, you can (and should) watch it HERE, because excerpts from a transcript cannot do justice to either the defensiveness of O’Brien or the cool confidence of Katsuyama; but from the off, had it been a fight, it would have been stopped before one of the participants embarrassed himself any further:


(CNBC):O’Brien: I have been shaking my head a lot the last 36 hours. First thing I would say, Michael and Brad, shame on both of you for falsely accusing literally thousands of people and possibly scaring millions of investors in an effort to promote a business model.

Bob Pisani (to Katsuyama): You are very respected on the street. I have known you a little while. You are thought very highly of. Do you think the markets are rigged?

Katsuyama (calmly): I think it’s very hard to put a word on it...

O’Brien (animatedly): He said it in the book. You said it in the book. “That’s when I knew the markets were rigged.” It’s disgusting that you are trying to parse your words now. Okay?

Katsuyama (calmly): Let me walk you through an example...

O’Brien: It’s a yes or no question. Do you believe it or not?

Katsuyama (calmly): I believe the markets are rigged.

O’Brien (somewhat triumphantly): Okay. There you go.

Katsuyama (calmly): I also think that you are part of the rigging. If you want to do this, let’s do this.

From there, Katsuyama proceeded to ask O’Brien how his own exchange (the one he, O’Brien, is president of) prices trades:

O’Brien: We use the direct feeds and the SIP (Securities Information Processor) in combination.

Katsuyama: I asked a question. Not what you use to route. What do you use to price trades in your matching engine on Direct Edge?

O’Brien: We use direct feeds.

Katsuyama: No.

O’Brien: Yes, we do...

Katsuyama: You use the SIP.

O’Brien: That is not true.

From there, O’Brien made the most successful attempt to make himself look a fool that I think I have ever seen (and on CNBC, that’s saying something). It was, I thought, painfully embarrassing to watch.

In my head, all I could hear was Sir Winston Churchill’s booming voice:

Never engage in a battle of wits with an unarmed man.”

Less than 24 hours later...

(Wall Street Journal): BATS Global Markets Inc., under pressure from the New York Attorney General’s office, corrected statements made by a senior executive during a televised interview this week about how its exchanges work.

BATS President William O’Brien, during a CNBC interview Tuesday, said BATS’s Direct Edge exchanges use high-speed data feeds to price stock trades. Thursday, the exchange operator said two of its exchanges, EDGA and EGX, use a slower feed, known as the Securities Information Processor, to price trades.

Viva El Presidente!

Anywayast the sheer insanity of, the interesting thing to me, once I got pass it all, was the level of amazement shown by the CNBC journalists that the market could possibly berigged” in any way, shape, or form.

That amazement was shared by the two anchors on Bloomberg’s Market Makers show, Stephanie Ruhle and Eric Schatzker, when their turn came to take a tilt at Lewis the following day:

Ruhle (bewildered): The market is rigged? That’s a big claim!

Lewis (even more bewildered): Well it IS rigged. If you read the book, I don’t think you’d put it down and say the market’s not rigged.

Then, after a pretty good casino analogy that was interrupted by the anchors a few times, Lewis got to the crux of the issue that had been bothering me as I watched:

Lewis: Why are you so invested in the idea this is fair? Why are you even arguing about this? It’s so clear... people are front-running the market. There’s plenty of evidence in the book.

Schatzker: Their orders are beinganticipated.”

Lewis (laughing at the escalating absurdity): Anticipated and run in front of.... [The HFTs] PAY to execute the orders. Tens of millions of dollars a year. Ask yourself THAT question. Why would ANYONE pay for the right to execute someone else’s stock market order?... It’s quite obvious. That order is an opportunity to exploit, because he has advance information about the pricing in the stock market. Is thatfair”?

Ruhle: Today, when I go to execute a stock, I feel like, man, how did that get jacked right in front of me, every time? I do feel that way. But fifteen years ago when I did a trade, I was paying significantly more to do it through a specialist because of what the fees were.... Is it a different situation than when specialists were on the floor?

Lewis (with a somewhat confused look on his face): I never said THAT.

Ruhle: So has the system ALWAYS been rigged?

Lewis: Yes.


After watching these exchanges, I was so astounded that so many people could STILL live in a complete fantasy world under the illusion assumption that the markets couldn’t possibly be rigged that I turned to my friends in the Twittersphere:

That was the 2,567th tweet I have sent out and, in contrast to the nearly pathological indifference shown by the rest of the world to the previous 2,566, this one was retweeted 96 times. (Button it, Bieber! That’s an impressive number for me, OK?)

But who are these people who believe in unicorns and rainbows fair markets?

Well, of course, the anchors on CNBC and Bloomberg (and the corporations that employ them) need people to believe that the markets are free and fair, because if they don’t they may turn off in their droves; so I understand why they feel a need verging on desperation to take the other side to ANY claims that there is manipulation at play in the equity markets.

Unfortunately, those viewers HAVE been turning off in their droves, as CNBC’s ratings demonstrate:

Source: Nielson/Zerohedge

Not only that, but investors have been shunning the stock market since the nadir of 2009:


And as the humans have packed up their tents and gone home, we have witnessed the Rise of the Machines.

As far back as 2012, Morgan Stanley noted just how stunning that rise had been:

(FT): Trading by “realinvestors is taking up the smallest share of US stock market volumes [since Morgan Stanley started keeping track 10 years ago].

The findings highlight how US trading activity is increasingly being fueled by fast turnover of shares by independent firms and the market-making desks of brokerages, many using high-frequency trading engines.... [Actually, all of the market-making desks are using it.]

The proportion of US trading activity represented by buy and sell orders from mutual funds, hedge funds, pensions and brokerages, referred to as “real money” or institutional investors, accounted for just 16 per cent of total market volume in the form of buying, and 13 per cent via selling in the final quarter of last year, according to analysis by Morgan Stanley’s Quantitative and Derivative Strategies group.

Further back still, in January 2011 to be precise, a Tabb Group report showed the phenomenon wasn’t exclusive to the US:

(Bloomberg): High-frequency trading accounts for 77 percent of transactions in U.K. markets, according to a study by research firm Tabb Group LLC.

Orders from long-only funds that bet stocks will rise, hedge funds and retail investors account for 23 percent of activity in continuous markets, the group said in a report today. High-frequency trading, in which firms may transact thousands of times a second, accounts for the rest. The practice makes up 35 percent of the 3.9 trillion-euro ($5.3 trillion) U.K. turnover when over-the-counter transactions and other non-continuous trading is included, Tabb said.

Tabb’s data covers what it calls continuous markets where trades occur electronically, including venues where prices are publicly displayed and dark pools, where they aren’t. Over-the-counter trading, conducted away from exchanges and alternative systems, isn’t included, Tabb said....

What the study shows is that so little of the continuous market is natural order flow,” Will Rhode, co-author of the report with Miranda Mizen, said in a phone interview. “It’s critical for pension funds to have alternative strategies to achieve best execution and alternative sources of liquidity which they trust.

But, amazingly enough, many inside the financial industry also seem to have drunk the Kool-Aid (either that or they just can’t bring themselves to admit what they see before them on a daily basis), and so there has been a furious debate in the media and across financial websites and blogs in the days since Flash Boys hit the street.

I can’t speak for anybody else, but having spent those nearly thirty years immersed in equity, bond, and commodity markets all around the world, I have seen enough to absolutely confirm in my own mind that the markets are rigged.

Not just some of them. All of them. In different ways, to be sure, but they’re all rigged.

Not only are they rigged, but they are rigged in ways that beggar belief; and in many places they are rigged by the very people who ought to be responsible for STOPPING any rigging.

So... as Brad Katsuyama said:

“If you wanna do this, let’s do this.”

How do I rig thee? Let me count the ways:

1) Equities

I have lost count of how many times I have seen a stock jammed several percent at the close (either up or down), only for news to come out immediately afterwards that, quite coincidentally, would have dictated such a movement in the stock. It happens EVERY DAY.

It happens in Asia, the US, Australia, EuropeEVERYWHERE. This would be amongst the easiest rigging to prove. Is anything ever done about it? No.

Last year, after one particularly egregious and completely inexplicable move shortly prior to a big placement was made, I sent detailed evidence along with an explanatory chart (below) to the regulators of the market involved and was thanked for my trouble and told that they would take it from there. In addition, I was specifically informed that I would never hear from them as to whether any action had been, or would be, taken.

Source: Bloomberg

When “insider trading” is actually a euphemism, you’ve got problems. It’s a form of rigging.

2) Data releases

I have lost count of the number of times I have watched markets move dramatically in the seconds before important economic data releases.
It happens before the non-farm payroll numbers (to pick just one) all the damn time. Is it just folks taking a punt ahead of the figures? Maybe. But if it is, their success rate is truly staggering.

3) Gold

Oh boy! We don’t have time to go down this particular rabbit hole again just now, but regular readers know my thoughts on this.

Just for old time’s sake, though, I’ll throw in the two charts from my buddy Nick Laird of www.sharelynx.com which I think best demonstrate just how badly the goldfix” is rigged.

First up, a 44-year chart that depicts the outcome of buying gold at the AM fix every day in London and selling it back at the afternoon fix the same day, which equates to being long gold only during hours when the London market is open:

Source: www.sharelynx.com

Next, a chart on buying gold at the afternoon fix in London every day and selling it back at the following morning’s fixessentially, being long gold while the market is closed in London but trading in Asia, where there is nofix”:

Source: www.sharelynx.com

These kinds of examples of rigging occur every day in every market around the world, and everybody who spends any time seeing them happen learns to work around them and deal with the frustrations. There is no other option. Somebody always has more information and will always use it to their own advantage. Sadly, the realization comes only after the penny drops that market regulators are at best ineffectual and at worst asleep at the wheel.

The scales fell from my eyes years ago, and I could go on, but let’s get to the really important part of this whole market-rigging saga, shall we?

4) The risk-free rate

At the very root of every financial investment on earth and underpinning the valuation of every asset, lies something called the risk-free rate. Investopedia defines it thus:

The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.

In practice, however, the risk-free rate does not exist because even the safest investments carry a very small amount of risk. Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate.


See anything unusual there? In the rectangle on the right-hand side? Yeah, that five-year-long flatline — a pattern not seen at ANY point during the previous 6o years.

That, folks, is the market being “rigged.”

It’s beingrigged” by a combination of artificially low interest rates:


... and the printing of money by the Federal Reserve through their QE programs:


(Dictionary.com): rig: verb (used with object), rigged, rig·ging.

1. To put in proper order for working or use...

2. To manipulate fraudulently

Now, the Fed will argue that the first definition applies to their actions and that they are putting the market in “proper order for working or use.” I would assert, however, that (a) their manipulation of the market is utterly beyond contention and (b) it would be hard to find a more egregious example of fraud than the creation of money out of thin air.

Manipulation and fraud. To me, definition 2 is the correct one.

But IT DOESN’T MATTER which definition you choose. BOTH apply to the action of “rigging.”

The anomaly here is that the people rigging the market are essentially the same people in charge of policing it; so, of course, everybody simply looks the other way. It helps that the Fed’s particular form of manipulation is moving asset prices of all descriptions in predictable directions, which makes money for everybody who tags along for the ride. When manipulation leads to profit, investors are willingly complicit.

How bad is it? Think of this little scenario as it pertains to allegations of “rigging”:

(NY Times): The Federal Reserve financed most of the government’s deficit in 2013, in sharp contrast to the year before, when the Fed did not add to its holdings of Treasury securities. The American private sector appears to have been a net seller of Treasuries in 2013, but the foreign private sector was a substantial buyer, according to government estimates released this week...

The Fed bought a net $543 billion of Treasuries during 2013. That was not a record amount — in 2011 it had purchased $656 billion — but it enabled the Fed to finance 71 percent of the net Treasury borrowing during the year. That was the highest proportion since the government resumed running deficits in 2002. The 2011 purchases amounted to 61 percent of the money the government borrowed that year.

Source: NY Times ( To enlarge graph click here)

Yes, the US government is the largest buyer of its own debt. This is not something we didn’t know, but think of the practice in terms of whether it’s “rigging” a market.

Is the world’s largest market trading where it would be under normal conditions and with free-market forces allowed to exert themselves?

Of course not. It’s rigged.

Greek, Italian, and Spanish bonds? UK gilts? JGBs? Rigged, rigged, and rigged. Rigged. Rigged.

Like the Fed, the forces at work in these supposedly free markets will point towards the first definition of rigging and suggest they are putting those markets in proper order; but the truth is, creating a marketplace whereby Greece can sell $4 billion of 5-year debt at a yield of only 4.95% (as they did this week in a triumphant return to the bond market) made possible an implicit backstop by the ECB is fraudulent. It ensures that the price does NOT accurately reflect the underlying risk.

Thankfully, the bond was priced on the basis of the ECB’s implicit backstop and NOT the strength of the Greek economy (which contracted 25% over the last four years and a whopping 2.3% in Q4 of LAST YEAR), nor the state of its workforce and their ability to contribute the necessary revenues to enable the government to pay back the latest loan. (Greek unemployment is 27%, and youth unemployment is 58%in case you’d lost count.)

Thank heavens the bond markets are rigged. If they weren’t, this could get ugly.

Want morerigging”?

How about the seemingly never-ending litany of investment banks being allowed to buy their way out of rigging allegations by paying huge fines but admitting no wrong? JP Morgan has paid about $20 billion in fines in the last year alone but has admitted no wrongdoing. If they get caught rigging a market, then the fine is merely the cost of doing business. Nothing is ever actually DONE about it.

It’s just rigging of another kind. Nothing more.

Mortgages, Libor, FX markets — the list goes on and on and on. So perhaps you can understand my astonishment that the media, who have been covering these stories of questionable practices for years now (I use the verb cover in the loosest possible way), can STILL bridle when Michael Lewis dares to use the “R word” and then sit there and defend the notion that the playing field is level.

To all of you in the mainstream financial media; it’s NOT journalism” to take the other side of accusations like those made by Michael Lewis, it’s cowardice.

But perhaps the most egregious and downright criminal act of them all has been the rigging of what is supposedly the only truly risk-free investment, the one that is relied upon by those whose working lives are at an end and who look to live out their days in relative comfort.


Let’s take an FDIC-insured savings account of $500,000, jointly owned by a retired married couple. The full amount is insured by the government ($250,000 per co-owner), so even if the bank goes bust, their $500,000 is safe. THAT is risk-free.

As you can see from the chart below, as a series of bailouts going back to LTCM in 1998 have pushed rates to all-time lows in a quest to keep the plates spinning, the interest income on that $500,000 (assuming it was all invested in a 1-year CD) has gone from roughly $27,500 per year to roughly $0.

Source: Bankrate.com

THAT, Dear Reader, is a rigged marketnot only that, it’s theft.

Whether Bill O’Brien likes it or not, Michael Lewis was speaking the truth when he said the market was rigged. He was talking about US equity markets, but rigging goes much, much deeper.

Whether Bob Pisani, Stephanie Ruhle, or any of the other talking heads who form the informational front lines between the public and the markets care to admit it or not is immaterial; the markets are rigged.

Arguing about whether the rigging is a “tax” on investors is so spurious as to be ridiculous.

Rivaldo and Rodriguez thought they could get away with gaming the system. Rodriguez was caught in the act by vigilant officials, but his only punishment was being called out on the play.

Amazingly, Rivaldo got away with his attempt at rigging the game; and when his crime came to light, he was fined a paltry amount and allowed to continue playing. Sound familiar?

In one of his interviews, Lewis denied that he wasanti-Wall Street.” He also denied that the high-frequency traders about whom he wrote are bad people or immoral:

I don’t regard high-frequency traders as villains, I really don’t. That really is like blaming the lion for eating the antelope. They’re just wired that way. The system is screwed up.

Stephanie Ruhle: Wired that way to do what?

To exploit opportunity, glitches in the system. They’re not wired to say this is moral or immoral. They’re not wired to sayIs this good for the world?

He’s right.

In order for market rigging to be stopped, the changes have to come from those entrusted with regulation, in the form of stern punishments for those caught rigging them, and there must be changes to the rules to close the loopholes that allowed this kind of activity to occur in the first place.

Instead, the bodies which supposedly oversee the markets are involved in the most serious rigging of all.

What chance is there that we will see any change?

Get used to it, folks. As anyone who looks at financial markets up close with their eyes open will tell you, they are all riggedit’s simply a question of degree.

The question is, do you adapt and work around the rigging, or do you simply decide not to play?
Central banks and governments seriously hope you choose the former option.