Investors everywhere are panicking and fearful after a very interesting topic on 60 minutes this past Sunday. The headlines read, “The Stock Market is Rigged, and you are the victim”. So I am going to break down exactly why they are saying that the stock market is rigged, and whether you should panic or not. Here is a short summary from an article I read.
1″Lewis, discussing his new book about computer-driven stock trading titled Flash Boys, said the U.S. stock market is rigged by a combination of insiders — stock exchanges, big Wall Street banks and high-frequency traders — who can move faster than other investors.”
So what they are saying is these HFT’s (High-Frequency Traders) are building computer and network connections that are faster than yours so that when you say you want to buy a stock, they hurry and buy it before you and sell it back to you at a 1 cent increase. As they do this thousands of times each day it adds up quickly for them.
The question that we need to focus on is, “is this effecting my long term investments?”
These high frequency traders are hurting the actively managed investors. Investors that want to stock pick and market time are being eaten up by these HFT’s. Long term prudent investors that are not actively buying and selling are not losing much in this deal.
Another thing to think about is the affect HFT’s have had on lowering the bid ask spread cost that is involved in every trade. The bid ask spread is the difference between what you could buy the stock for and what you could sell it for. It is how Wall Street makes its money. The bid ask spread price as a whole in the market has dropped by quite a bit over the last few years. It has dropped by more than the price you pay to the HFT’s, and is partly due to the HFT’s and the efficiency that they bring to the market.
Whether or not these HFT’s get regulated and eliminated or not, your safe as long as you are prudently investing for the long term.
-by Jimmy Hancock
References
1. Snider, Mike. “Traders Dispute Lewis’ Rigged Markets Claim.” USA Today. Gannett, 01 Apr. 2014. Web. 02 Apr. 2014. <http://www.usatoday.com/story/money/markets/2014/04/01/high-frequency-trading-responses/7154347/>.
2. “Stock Market Not A Scam EP 245 04012014.” Matson Money Live. 01 Apr. 2014. Livestream. Web. 02 Apr. 2014. <http://www.livestream.com/markmatson/video?clipId=pla_2a0df638-8b31-49ff-9ae9-dfe47a74822c&utm_source=lslibrary&utm_medium=ui-thumb>.