Just in case you haven’t watched the financial news lately, everyone is up in arms about High Frequency Trading. HFT is employed by financial firms with superfast computers, who can execute stock trades much faster than retail investors. With sophisticated HFT algorithms, they can predict orders and then buy and resell shares to the retail investor at a markup. Some people call this Front-Running and others call it a Skim. Either way, I call it ripping off investors.
The Cat is Finally out of the Bag
The book Flash Boys by Michael Lewis has created a big controversy this week and is currently the #1 Best Seller on Amazon. Lewis exposes the unfair practice of HFT and the firms who are preying on investors. He has been on a whirl wind media tour promoting the book and this has been a catalyst for many to finally call for an end to HFT. Even Jim Cramer, an unapologetic Wall Street insider, devoted a whole section of his show to rail against it.
Predictably, the financial firms profiting from HFT have viciously attacked Michael Lewis on TV and in the media. They are making easy millions and are not going to let a rogue author derail their gravy train. But, the cat is out of the bag and there is no conscionable way to defend HFT. In the past few days, I have heard and read all kinds of arguments to defend HFT, but how can they justify the outright skimming of investor’s trades? They can’t. These arguments are a merely a distraction from the real issues of an unfair playing field and the exploitation of investors.
Why You Should Care
You may be wondering why should you care? Maybe, you don’t even invest in stocks. You should care because your 401K, pension and mutual funds do and you are getting ripped off indirectly. As if the fees and MERs aren’t high enough, now there is a level of pure parasites, siphoning off your profits. Unlike the fund and 401K companies, they don’t create, manage or add value to your investments. They just take a cut from the transactions, because they can. Everyone has known about High Frequency Trading for years, but no one has lifted a finger to stop it.
Around 50% of all recent trades are HFT, so this is a very large problem. With this type of volume, there is a very real potential for future Flash Crashes and other volatility problems. A rogue algorithm could create all kinds of problems for the markets. At the very least, it may discourage investors from investing in the stock market, because they perceive it is rigged. In my opinion, it is rigged.
What Happens Next?
The Attorney General of the U.S. announced the Justice Department is investigating HFT to see if it violates insider trading laws. The F.B.I. also announced an investigation and so has the SEC. It appears as though Michael Lewis, his book and his interview on 60 Minutes have finally shamed regulators into action. The real question is how will this all play out?
I don’t believe anyone will get arrested or go to jail. HFT executives will likely be hauled in front of Congress, because it makes for good theater and we all know how Congress looks out for us on Main Street. The big investment banks and others on Wall Street have already distanced themselves from HFT. The HFT firms will likely be out of business soon and that’s a blessing for every investor.
The Bottom Line
The bottom line is that it’s one thing to have faster access to a trading network and quite another to be able to see, markup and resell a security, based on someone else’s order. If you aren’t outraged by this outright theft of your hard-earned investment deposits, you definitely should be.
“High-frequency trading is a growing cancer that needs to be addressed.”
Walt Bettinger – President and CEO, Charles Schwab