Is the stock market a rigged game
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So says Michael Lewis. The attention and scrutiny given to Flash Boys has resulted in the definitive answer to one question: On other questions, there is unlikely to be a definitive answer, in part because of what is the most fascinating revelation of the debate so far: No one really knows how the stock market actually works.
To me the question is whether HFT is a malevolent force -- and I believe that it is. Further, I believe that the actions of the players are much more important than what they say. It is basic and also certain to be wrong in parts see "no one really knows," above. The markets are, and have always been, about speed. Electronic trading has made the buying and selling of stocks and other financial instruments more efficient, lowering spreads, and trading costs for everyone. HFT is a kind of electronic trading, but the two are not the same thing.
Market participants have always accessed the market at different speeds. Some people traded by telegram while others went to telegraph.
Others had phone access, then dial-up modem access, then broadband, then direct fiber collocated at the exchange. No competent argument should posit that access speeds to the markets should be identical for all participants because this is impossible. Market participants have similarly always used these speed differentials to their advantage.
In our business of running mutual fund portfolios, we have certain algorithms that we use to trade to maximize efficiency. In a pari-mutuel system, maximized efficiency has always and will always come at the cost of the inefficient. But a few years ago something changed, and to me it is at the center of the argument. The exchanges themselves NYSE, Nasdaq, etc.
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Those who insist that HFT is no big deal and actually adds efficiency and liquidity to the market have a hard time describing why this is cool. The fastest traders could simply make money by being the fastest, by having preferential access at the exchanges themselves.
Is The Stock Market Rigged?
They take advantage of their latency advantage to jump in front of other market participants -- and that latency is provided by the exchanges themselves. The exchanges have sold certain participants privileged access and in turn pay those same participants to create volume, creating a situation in which HFT firms can pretty much make a guaranteed profit on every trade.
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A super-tiny profit, yes, which is why the HFT firms must make millions of trades a day. The HFT guys are not stupid. The algorithms they create are mind-bendingly complex.
And if they are going to invest such huge sums for preferential speed and access, they will demand as they should a satisfactory return on their investments. The real villains, in my mind, are the exchanges themselves.
The question isn't whether the market is rigged, but how much - MarketWatch
In my mind, having a quarterly number to hit to satisfy stockholders has given exchanges an almost irresistible incentive to compete with one another to maximize profits. Self-interest does a strange thing to people. The HFT algorithms essentially attempt to influence the price of the market through tactics like "quote stuffing," which is about like it sounds.
The second question is much more important. Systemically, things that cause market participants to lose faith in that market are probably bad. But there are lots of things that manipulate stock markets.
Federal Reserve policy is all about influencing investor behavior. So is capital-gains tax policy. There is an obvious solution to combat this: Be a long-term holder of businesses. Focusing on HFT as a reason to be in or out of the market is absurd. Some lose, yes, but ultimately your investment returns are overwhelmingly going to be driven by what investments you hold.
The only winning move is not to play. Yes, they might be bad for you, but not nearly as unhealthy as your three-chalupa lunch was.
Frankly, out-of-control management compensation is a far, far bigger drag on your long-term investment returns than HFT could ever dream of being. Trading has both overt and hidden expenses to it, and those expenses can add up over time. Speaking of "over time," in aggregate, stocks go up in value, over time.
Whether it has wrongness built into it and it does , it will give you an idea why our stock exchanges are threatening to surpass both Congress and the NCAA on the cravenness scale. Bill Mann has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy. Skip to main content The Motley Fool Fool.
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