Michael Lewis’ new book “Flash Boys” is all about High Frequency Trading (HFT.) High Frequency Traders, he says, with advanced computers make tens of billions of dollars by jumping in front of investors. ”
The United States stock market, the most iconic market in global capitalism, is rigged.
I am not sure “rigged” is the right word. Traders have been trying to get ahead of the “flow” for ages. Its just that technology finally caught up recently and now allows firms to do what they used to do more efficiently. Barry Ritholtz of TBP points out that trading has always been a zero-sum game.
One trader’s gain is another trader’s loss. Only in the case of HFT, the losers are the investors — by way of their pension funds, retirement accounts and institutional funds. The HFT’s take — the “skim” — comes out of these large institution’s trade executions.
The defense came hard and fast. William O’Brien, president of BATs Global Markets: Its like GM writing a book saying it’s unfair for the automotive industry that Elon Musk created a new car.
We welcome anyone that is building a better mouse trap for our nation’s investors but I don’t think blind accusation is the right way. I know he has a business model that says everybody but him rips you off.
High-frequency traders account for 40 to 70% of all trading on every stock market in the US. The numbers for India are said to be similar. And since HFTs only intermediate trades, it is hard for them to lose money. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years.
How can individual/retail investors protect themselves from getting skimmed by HFTs? First, understand that you can’t avoid them. So stop trying to trade intra-day and lengthen your investment horizon to at least a couple of months. Second, know that the “skim” is a few pennies/paisas and affects you in a meaningful way only if you make a lot of trades.
Josh Brown of TRB:
The bottom line is this – there have always been insiders, unscrupulous dealers and some participants with unfair advantages over others. HFT is just the latest in a long line of shenanigans and the moment you outlaw it or modify it or babysit it out of existence, there’ll be a new broad-daylight robbery format waiting right behind it.
The stock market hasn’t become rigged, IT STARTED OUT RIGGED.
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