Did Someone Front Run Michael Lewis? Unusual trading in shares of the Nasdaq suggests investors foresaw “Flash Boys” controversy

April 16, 2014 Leave a comment

TUESDAY, APRIL 1, 2014

Did Someone Front Run Michael Lewis?

By STEVEN M. SEARS | MORE ARTICLES BY AUTHOR

Unusual trading in shares of the Nasdaq suggests investors foresaw “Flash Boys” controversy.

The new Michael Lewis book, Flash Boys, focuses on high-frequency trading, which, Lewis contends, amounts to high-tech front running. Unusual action in the options market late last week suggests a bit of trading ahead of the 60 Minutes segment that effectively launched Lewis’ book.

Nasdaq OMX (ticker: NDAQ) operates some of the biggest stock and options exchanges in America, but its own shares rarely attract much attention in either market. So heavy trading in bearish options on the stock seems peculiar, especially now that high-frequency trading is under review by federal authorities.

Some investors bought about 6,000 puts in anticipation the stock would decline. Trade Alert, an options analytical service, said the volume was five-times greater than normal trading volume. The trading seemed to make little sense — until Monday’s announcement that the Federal Bureau of Investigation was investigating high-frequency trading.

Nasdaq benefits from high-frequency trading. The exchange, like others, sells “co-location” services that allow HFT firms close access to exchange computers. This gives HFT firms faster access to price information, ahead of other investors. The millisecond advantage can be enough to give those traders a profitable edge.

In recent trading, Nasdaq’s stock was down 3% at $35.85 on heavy volume. The puts bought last week — April $36 and $37 puts when the stock was trading around those strike prices — are now more valuable.

A dealer who sold some of the Nasdaq puts to the mystery buyers said the action now looks very suspicious. He opined that someone knew about the 60 Minutes interview with Lewis, and perhaps even about the FBI investigation. “This stuff is very rarely coincidental,” the dealer said, requesting anonymity.

The options trading, and stock price action, suggests Nasdaq’s stock and options are now viewed by investors as the way to trade the HFT investigations. Other exchange stocks are also lower today, reflecting a mixed session for financial stocks, but only Nasdaq’s stock trading volume is heavier than normal. Other exchanges, like theInterContinental Exchange (ICE), which owns the New York Stock Exchange, also offer technology services to benefit HFT traders. But ICE owns so many different businesses that the purest-play on HFT news appears to be Nasdaq. Indeed, Nasdaq’s stock reacted sharply when New York State Attorney General Eric Schneiderman made a recent speech that alleged that stock exchanges give HFT firms unfair advantages over other investors.

Regulatory authorities should question the Nasdaq put buyers just to make sure no one had inside information about the FBI investigation. A Nasdaq spokesman did not respond to two requests for comment.

A spokeswoman for the Chicago Board Options Exchange, which is in charge of reviewing unusual trading for the entire options market, said unusual trading activity is reviewed on a regular basis. The exchange does not comment, however, on specific reviews, the spokeswoman said.

 

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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