Michael Lewis’s bestseller Flash Boys raised concerns about high frequency trading, provoking attitude readers to say there oughta be a law.” Regulators, in fact, had failed to see anything illegal until early copies of the book circulated among reviewers, at which point the U.S. Senate held hearings and regulatory agencies shifted into high gear. High frequency trading will be talked about anew with the nomination of Virtu Trading founder Vincent Viola as secretary of the army.

My takeaway from this story may be surprising: regulators not only failed to protect investors, but they cannot be counted on to protect investors. In contrast, market processes do move us toward fairer trading.

Used with permission from Stamen Design, created for Nasdaq to describe a day of financial transactions.

The main allegation in the book (which I will grossly simplify) is that stock brokers and high frequency traders (HFTs) colluded to take advantage of ordinary investors, including not only individuals but also institutional investors such as mutual funds, hedge funds, college endowments and pension funds. The investment banks set up systems and processes that enabled HFTs to see early signs of large orders; then the HFTs would purchase or sell for their own accounts before those large orders could be filled.

For example, suppose a mutual fund wants to buy 100,000 shares of Exxon Mobil at $90. The fund manager sees that shares are offered for sale at $90.00, with offers to buy at $89.98. (That two-cent difference is the bid-ask spread, and investors know they are most likely to buy high and sell low.) But it’s worse, in Lewis’s stories. When the mutual fund places its orders, it gets just 100 shares at the $90.00 price; then all other offers at are 90.02 or 90.03. The HFTs had seen the buyer’s interest. They immediately bought up all available shares for sale, marked them up, then offered them to the mutual fund at a higher price. All because the system, created by brokers for the benefit of HFTs, allowed them to see and act faster than the customer.

The brokers set up the system and received payment from the HFTs for access to the customer orders. The brokers set up “dark pools” inside their companies purportedly to match their own customers’ buy and sell orders, but often so that HFTs could “front run” the customers’ orders, according to Lewis.

So what should be done? The regulatory option looks like a failure. John Schwall, one of the book’s figures, stays up all night looking at the history of front running, the practice of a broker seeing a customer order and trading for his own account in front of the customer. Schwall wondered what had led to the current rule, and found stories about violations of the previous rule. Then he looked up the origin of the previous rule and found violations under an earlier rule. He traced the rules on front-running all the way back to the 1800s:

“The entire history of Wall Street was the story of scandals, it now seemed to him, linked together tail to trunk like circus elephants. Every systemic market injustice arose from some loophole in a regulation created to correct some prior injustice. ‘No matter what the regulators did, some other intermediary found a way to react, so there would be another form of front-running,’ he said.”

That’s not to say that rules about fraud and misrepresentation shouldn’t be enforced. Much of what Lewis describes strikes me as out and out illegal without any special financial regulations. When a broker accepts an order that the client wants sent to a particular exchange, and then collects a commission after sending it to a different exchange—knowingly violating the customer’s request because the broker is better compensated elsewhere—that’s a crime in my book. When a broker represents that his “dark pool” exists to match orders internally with an aim to lower the customer’s costs, but the dark pool is actually geared to exploit the customer’s order for the benefit of the broker and the HFTs, that’s fraud to any layman. But the Flash Boys story is that the routine law-and-order approach doesn’t work very well.

Here is what did work: a few people figured out the shady practices. When simply talking about them didn’t do much, they formed a for-profit company that would offer investors a better venue for trading. They marketed their own product as a fairer exchange and encouraged investors to route their orders to the new exchange. Some brokers, concerned about their long-term profits, figured out that serving customers well is better than screwing their customers. (Disclosure: I own stock in the broker most prominently mentioned as helping the good guys win, Goldman Sachs.)

The new exchange, IEX, has been successful at offering traders a safe haven from the abusive practices of brokers and HFTs. This calls to mind a saying attributed to H.L. Hunt: “If this country is worth saving, it’s worth saving at a profit.”

Here is a general rule about solutions to problems in business and economics: Rather than assume a regulatory solution is best, ask if there is a profitable solution. The profitable approach can usually be implemented faster, and it can adjust to change more rapidly than regulators can. Rigid rules are often gamed, whether the rules are laid out by regulators or by corporations setting the terms under which they will do business. But companies can adjust their rules quickly, without hearings or pressure from members of Congress trying to protect special interests.

And if there isn’t a profitable solution to the problem, it’s worth asking how well we know that there is, in fact, a problem. Maybe it’s not there.