Local resident uses financial experience to write book

    Commerce City resident Michael Scanlon, author of “Confessions of a Mutual Fund Salesman,” wants to get the word out about a practice in the financial industry that many people aren’t aware of: high frequency trading.

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Michael Scanlon

    “I kind of want to make this my crusade,” Scanlon said. “I have nothing against using a computer to make a trade. But I think it’s insane at some point because if a computer today can make 10,000 trades per second, then we know how technology is, in five years it will be able to make 100,000 trades per second. And before long, it will be a billion trades per second. At some point, it will just get insane.”
    Scanlon self-published his book in 2011, which is available on Amazon.com, and he used his experience as a mutual fund wholesaler from 2008 to 2010. In May 2009, after numerous friends on the sales desk were laid off, Scanlon went home and began jotting down the things he did and didn’t like about mutual funds.
    The specific concern Scanlon has with the high frequency trading is the risk of “front running” the market.
    “If I was sitting at my desk and I hear another guy taking a huge order that he hasn’t yet put in, and he’s getting off the call and joking with a guy and being a regular human being talking about his kids and talking about getting around to putting in 10,000 shares of Google, then I know that 10,000 shares of Google are about to get purchased, the price will go up a little bit,” Scanlon said. “So if I slip in my order in advance of the new order, that’s called front running: I’m running in front of that order. It’s working on insider information essentially. So it’s illegal.”
    But with high-frequency trading operations, Scanlon said deals are set up with exchanges to allow the practice because the volume of sales benefits both sides.
    “The exchanges get paid because they charge these operations for each trade. So to get their business, they let them see the trades that are coming in down the wire,” Scanlon said. “So if I click a trade here in Denver, and it takes half a second for the light to go 2,000 miles down the wire, or across the satellite or whatever technology they’re using these days, they see that trade coming and they trade on that information.”
    Scanlon said that the high-frequency trading operations often only make a half of a penny on these transactions, but this money adds up as billions of trades are performed in a brief period of time.
    “They’re basically scraping money off the top of the market. They’re not bringing any value. They’re in and out of those trades. They rarely hold those stocks through the end of the day,” Scanlon said. “Their typical mode of operation is buy it, the trade comes in, sell it.”
    Scanlon, who was raised in Manassas, Va., and is a 1990 graduate of Virginia Tech., wrote his book to be an easy read for the average American who is concerned about today’s volatile investing climate.
    Scanlon said regulation can’t solve many of the problems, because a law can’t change the culture of Wall Street, which often leads to the invention of newer, exotic financial instruments. But he also thinks Wall Street could benefit from a more diverse work force.
    “I’ve never worked on Wall Street, so I’ve never been part of that culture directly. Since I got in the business eight years ago, I’ve always been in Denver. We’re on the outside looking in in this city,” Scanlon said. “But I know there are a number of people on Wall Street that realize that it’s too male-dominated, and they’re trying to bring women in.”
    He warns that there is often a misconception that the current downturn, which was fueled by the mortgage crisis, couldn’t happen again.
    “You know, you’d like to think it couldn’t happen again – you’d like to think the federal laws they put in place will protect us – but it’s so easy to sit there and pay people so much money to figure out ways to get around the regulations,” Scanlon said. “With the new laws, the first thing people are going to do is read the law and figure out the areas it covers and the areas it doesn’t.”

Contact Ben Wiebesiek at 303-659-2522, ext. 206, or email bwiebesiek@metrowestnewspapers.com.