“Rigged” Markets

Michael Lewis has been making the press rounds pitching his new book Flash Boys, a narrative centered around the advent of high frequency trading (HFT). I’m sure it will be an excellent book (I have it on order) as Lewis is a great writer.

I don’t however, have a ton of respect for how he is pitching the book.  This week Lewis went on 60 Minutes and led the show with the line “The stock market is rigged.” Well, that’s a pretty easy way to grab your attention. Personally, I am pretty tired of this kind of rhetoric, but I am sure it will sell copies of his book. There are still plenty of people who think that the market was fixed against them because we had a bear market 5 years ago and the value of their portfolios declined temporarily.

Is HFT an issue?  Yes.  Yes, HFT funds are spending hundreds of millions of dollars to buy up real estate and put down fiber optic cable to shave milliseconds off of trade order times. Yes, the number of orders entered and cancelled has skyrocketed in the past several years. Yes, HFT is skimming fractions of pennies off of trades. Yes, it is unethical at best.

All of this, I suppose, makes it a pretty crummy time to be a day trader. If you’re sitting at home (or at a trading desk), and trying to make 1% on a position you’re holding for a day, you don’t want to be in the game with these people.  They’re going to get a piece of your trade whether you are right or wrong.

But is the market rigged? Are people stealing your hard-earned 401(k) dollars? Siphoning off the assets in your index fund? (You aren’t so foolish to own an actively managed fund, right?)

No.  In fact I’ll still contend that we are the luckiest investors in history. We have tremendous access to information, investment costs have plummeted to nearly zero, decimalization has reduced trading frictions and we have finally begun to accept decades of research that proves that active management does not work. So should intelligent, long-term investors who own index funds and ETFs be worried about high frequency trading?


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