There is a firestorm on Wall Street, ignited by author Michael Lewis, with the release of
his new book Flash Boys. It is an explanation of how “high-frequency
traders” (HFT) have rigged the stock market by getting buy-and-sell information
literally nanoseconds before the stock exchanges, where trades actually take place.
Knowing a good number of BUYS are coming in,
which will drive up the price per share, they buy just ahead of those orders and
then sell at the higher price to those sending in the BUY orders. They might buy and then sell the same stocks
in nanoseconds.
It is estimated that 70% of
all trades are now by HFT. Are buyers
getting ripped off? Yes! Is it enough to matter? No! If
you are a long term investor, it should not matter if you pay an extra two cents
per share. Is it illegal? If it is not, it should be! Even Charles Schwab agrees it should be
illegal.
But,
the petty theft, albeit on a grand scale, is not my primary concern. Long time readers know I have cautioned about
high-frequency trading since the “Flash Crash” of May 6th, 2010,
when the Dow suddenly dropped a thousand points. That was due to a technology problem. HFT is steroids for technology problems on
Wall Street.
The only way to underwrite or minimize this risk is to avoid panic if/when it happens!. Just like the Dow recovered those thousand points, we will survive an HFT-Crash, but it will seem like a near-death experience at the time.
