“Best-selling author Michael Lewis says the stock market is rigged and even the richest, most sophisticated investors are getting “screwed” every day.” –60 Minutes
His Case: Legal Front Running- Speed Wins
Michael Lewis made headlines on 60 Minutes last night when he presented his case that the stock market is rigged by high frequency traders (HFT) –a.k.a Flash Boys (the name of his new book). Mr. Lewis is extremely talented. I strongly recommend everyone read all his books (at least once). I fell in love with his work when I first read Liar’s Poker years ago. The purpose of this article is to shed some light on this otherwise complicated subject. In short, his case is that HFT are taking advantage of speed. He went on to say that the HFT’s are legally front running your (institutional and retail) orders because their algorithms can access and react to buy and sell orders faster than you get filled.
His Solution: Slow Things Down or Use IEX
His solution is to slow things down a little and have all the information arrive at the same time. IEX, a new stock exchange, was born in 2012 that does just that. The good news is that if anyone is concerned that the market is “rigged’ there is a viable solution available to them right now- IEX. If not, it is business as usual. So what does this mean for you?
Is The Market “Rigged?” I Don’t Think So & Here’s Why:
When someone says the US stock market is rigged- That is a PROFOUND statement with enormous (negative) implications. It implies nefarious activities are taking place and that no one outside that small circle of super fast traders can make any money on Wall Street. I have a few problems with that argument. First, if the market was really rigged, no one would make any money or have very little chance against the HFT crowd. If that was true how do you explain the huge profits that successful traders, funds, and investors enjoy year after year?
It also implies that HFT’s are “bad” or do something “wrong” for using public information legally and faster than their competition. If that is the case, why not says that pit traders or short term day traders are rigging the market because they are scalping left and right. (Scalping is a term used to describe a very active day trader who wants to take a few cents out of every trade over and over again- all day everyday). Scalping is perfectly moral and legal. Come to think of it, for centuries, before the advent of the modern computer and instant 24/7 quotes, people used to wait for a very long time before they knew where a market was trading- and I’m sure there were a lot of people in between that had access to that information- and used it- before it was disseminated to the world.
When I was a kid, I remember people used to tell me to read the paper the next day to find out where stocks are trading.
Another problem with his logic is that (The following is Courtesy of Bob Pisani & CNBC here): “Proprietary feeds The odd thing about the interview is that they did not bring up the hottest topic around high-speed trading: that high-speed traders have access to a “proprietary feed” that allows them to have a trading advantage over those who rely on the “public feed.” There is indeed a “proprietary feed” which has been provided to anyone willing to pay for it, with the blessing of the SEC, for many years. The core argument is that those who access this proprietary feed can calculate the most current bids and offers (known as the National Best Bid and Offer, or NBBO) quicker than those who get the public feed (known as the Securities Information Processor, or SIP). That can indeed provide a trading advantage.”
How To Beat A Rigged Market:
1. Information Is the Most Valuable Commodity on Earth: Your Job; Use It Better Than Everyone Else
Time is the most valuable asset on earth and information is the most valuable commodity. We live in the age of information- here. Remember information is available for everyone to use. The most successful people on earth know how to use information better than others. That’s it- it is that simple. There is no Holy Grail or secret formula or hidden conspiracy. I don’t think it is fair to say the market is rigged because someone is scalping faster than they used to. If that is the case, every market (clothing, energy, agriculture, technology, hardware, groceries, etc.) in the world is rigged because someone, somewhere, is able to get a better price than the end user can on Main Street.
2. Define Your Timeframe- Longer than a few seconds, you can win.
Even if you disagree with everything I am saying and truly believe the market is “rigged.” You still can win. That is the beauty of capitalism. In order to win (in a rigged or unrigged market) you need to define your timeframe. What are your objectives? What is your edge? & How does time factor into your equation? On Wall Street, if your goal is to be extremely active and trade in milliseconds you will lose- not because of someone else’s fancy algorithm. It is because it is physically impossible for your brain to process information that fast. Meanwhile, if you have a longer time span, you can and (when you learn how to use information the right way), will do very, very, well.
Anyone Can Win on Wall Street & Achieve Their Wildest Dreams:
Capital markets are a fair and are level playing field. It is one of the only places in the world where: Anyone can win. It doesn’t matter where you came from, your education, income, socioeconomic background, IQ, who you know (or don’t know), how fast your computer is or isn’t (Warren Buffett, the most successful investor on the planet doesn’t even use email), or any other “excuse” that comes to mind. The key is to take responsibility for your actions and find an approach that works for you. We all have the ability to achieve our wildest dreams (and then some) on Wall Street. I hope you are able to achieve yours.
Full disclosure: I run Sarhan Capital, a boutique investment and advisory firm & parent to FindLeadingStocks.com. I am not an HFT, nor do I have any money invested in an HFT or an HFT strategy.