Thus spake Michael Lewis, author and financial journalist (CBS 60 Minutes, 3/30/14). The investing (and media) world shuddered. This is big stuff, right? Not really. These types of charges have been being made since the beginning of stock market time…the only thing new is the methodology, High Frequency Trading (HFT)…trading done through a maze of high powered computers and fiber optic networks at very high speeds.
Should you care?
Maybe. If what Lewis is alleging is true, we are all being skimmed for maybe a penny or more per share on every trade we make. That adds up, especially if you are trading large volumes. The other worry is the potential for trading glitches at high speeds with big volumes that could trigger a flash crash (a la May 2010 & April 2013). Flash crashes, as we have seen, are scary but, nonetheless, NOISE.
Having said this, the potential for abuse back in the days before electronic trading was far greater, as the spreads between bids and offers on both the Exchanges and the Over-The-Counter (OTC) market were much larger ($0.25, $0.50, a $1.00 and sometimes even more). These spreads offered unscrupulous market makers opportunities to take more than just pennies.
What’s important here?
Well, there is probably good reason to believe what Lewis alleges has some basis in fact, and it should be pursued and corrected. But, it should not be a deterrent to investing or using the exchanges. Unless you are a very active, very large trader (an institution, perhaps), Lewis’ “Flash Boys” is noise and shouldn’t be considered as a deal-breaker to investing.
Let me give you a brief example: Say back in 2007 you bought 100 SPY (SPDR S & P 500 ETF) @ $155.00/share and the HFTs got you for an extra penny, or one dollar, on a $15,500.00 investment. Today, that investment is worth $187.00/share ($15,500.00 is now worth 18,700.00). No way would a rational investor forego that growth to avoid that $1.00. I mean, even if they had taken $1/ share ($100.00 on the trade), it still would have been a good investment to make (back in the day, $100.00 would have been considered a reasonable commission on a $15,500.00 trade)…bottom line, this should not deter you from investing.
Lewis’ charge that “the stock market is rigged” is the type of rhetoric that turns people off on the prospect of investing in the equity stock market, people who probably need to own stocks for their future security. He may be right about the rig; but, as we have shown in the above example, THIS IS NOISE! It is fodder for CBS, CNBC and Mr. Lewis’ book-selling machine.
What do you think?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.
I don’t have a major gripe with your post and agree that the market has always yielded riches to insiders far beyond their REAL contribution. That said I think a better position would be that insiders have a long history of looking for ways to use insider information (of all types) to take advantage of (steal from?) those of us without that information. That is not a reason not to invest but is a reason to be wary and to do everything possible to insure that the book (the whole library) is thrown at anyone participating in any way to make money from any scam, past, present or future.