When Michael Lewis’s latest book Flash Boys: A Wall Street Revolt came out earlier this year, there was a flurry of media attention. It even prompted a Securities and Exchange Commission (SEC) investigation. His take is that because of high frequency trading (HFT) the, “market is rigged.” Naturally, this refueled the debate about market fairness and efficiency.
What is high frequency trading and does it put you and your investments at a disadvantage?
Investopedia offers this definition of high frequency trading, “A program trading platform that uses powerful computers to transact a large number of orders at very fast speeds. High-frequency trading uses complex algorithms to analyze multiple markets and execute orders based on market conditions. Typically, the traders with the fastest execution speeds will be more profitable than traders with slower execution speeds. As of 2009, it is estimated more than 50% of exchange volume comes from high-frequency trading orders.”
My take is this; yes, HFT gives people a disadvantage in some circumstances and others may not be affected or even benefit. If you are day trading and and trying to capitalize on perceived market inefficiencies then you are likely at a disadvantage. If you’re employing a long term strategy that involves low cost funds and periodic rebalancing of your portfolio then I don’t see high speed traders as competitors or a threat. The volume of trades may work to ones advantage because it creates liquidity in the market when you want to sell. However, these theories haven’t been proven and it will be interesting to see how this saga continues to play out.
My recommendation is to focus on what you can control when it comes to your financial well being. Even if HFT did have a negative effect on your investment portfolio it is likely small in comparison to the positive effect you can have by focusing on what you can control. These are things such as, establishing an emergency fund, as well as savings and long term investment choices within retirement accounts, also, making sure you have appropriate insurance coverage, just to name a few. HFT is interesting to understand, and something I’m curious to continue to follow, but ultimately we want to focus on other aspects of our personal finances so that we can SaveUp!
This post was written by SaveUp’s personal finance contributing writer, Catherine Hawley, CFP®.