It was that fatal and perfidious bark
Built in the eclipse, and rigged with curses dark,
That sunk so low that sacred head of thine
Lycidas
-Milton

John Milton's 'Lycidas' spends time looking for those that looked the other way, or did not sound the alarm as 'Lycidas' drowned. Calling, and maybe even accusing nymphs and muses, there was still no answer. Phoebus (Apollo) enters the conversation asking all to focus on the positives of the afterlife, which indeed is where the poem turns, but not before making clear that the source of its ire is the Church of England, which has led its flock astray.

When it comes to the investing flock, several events and parties have played a role in its retreat from the stock market.

People have long memories, and the Internet Bubble continues to haunt them more than anything else does.

That difficult period coupled with the crash of 2008, created an everlasting fatal and perfidious bark.

Consequently, the percentage of America who thinks investing $1,000 in the stock market is a good idea remains well below the peak of 2000, although up significantly from that March 2009, low point. How could this co-exist with a five-year rally where the Dow is up almost 10,000 points? The fear mongers have a great perch to block out the sunshine of hope, or even opportunity; and at the same time line their own pockets.

Enter Michael Lewis.

Not the New Thing

The famous author was on 60 Minutes this past weekend, and unleashed the most amazing blanket statements about the entire market, and the role of high-frequency trading (HFT). His comments were beyond reckless and self-serving. I understand the need to be sensational when selling a book, but for a guy with so many bestsellers and movies, his indictment of the entire stock market is inexcusable. What is nuts is this is not even news...not even close to being news. Check out these headlines:

"High-Frequency Trading Jumps Ahead in Line" WSJ, September 19, 2012

"Who's Afraid of High-Frequency Trading"? Reuters, December 2, 2009

Using buzzwords like 'rigged' and 'victims,' Lewis explained how all relevant parties have colluded against the individual investor who does not have a shot at investing. Forget that he is comparing big boys racing back and forth in front of each other to scalp a penny off trades, like 10,000 shares of Google. Their weapons of choice are rows of servers, and even super computers that measure algorithms coupled with faster pipes, allowing them to get in front of trades. I think it sucks, but it is not illegal, and it should not stop private individuals from investing.

High-frequency trading takes on several forms, and the one featured in Lewis' book points to information traveling from Weehawken, New Jersey, carrying trades from the New York Stock Exchange and making its way to Mahwah, New Jersey. That trip uses public communication lines, while the Flash Boys jump ahead using fiber-optic pipes.

The system seems unfair, however it does not change the fundamentals of stocks, and the extra penny that it might cost the late-arriving trade is nowhere near the analogy used during the 60 Minutes piece, where Lewis said the system is akin to buying $20 tickets on Stub Hub, only to find the price has leaped to $25.

If someone thinks General Mills (GIS) will be higher in five years, they should buy the stock and on dips add to their position. If you think Apple (AAPL) is undervalued, then you should own the stock and only worry about getting beat by the HFT crowd if you are looking to sell your position five minutes after you purchase it. From Lewis' perspective, one should only invest (or trade; he interchanges the words so often to blur the decisive difference) through a firm called IEX, run by the hero of his new book, "Flash Boys," by Brad Katsuyama.

Same-Sex Love and Fair Trading

The book suggests that Katsuyama had an epiphany about his trades coming back fractionally filled and discovered the injustice of HFT. To remedy this he decided to open his own firm where trades had stalled by 350 microseconds and in effect, leveling the playing field. Everyone has shtick, so I get IEX.com wanting to be the champion of the little investor, even though one is not in the crosshairs of the high-frequency crowd, and do not do enough trading where their focus should be on saving a penny here or there.

What I do not get from watching the video on http://www.iextrading.com/ is what does HFT have to do with...?

* Skinny black kid in front of a dilapidated school
* Same-sex couple
* Multiracial family
* Soldier
* Farmer
* Fireman

Are these the "victims" of high-frequency trading? Why does it stop people from loving who they want, when they want? When I watched the video, it is like a leftwing crusade against all that is wrong with free markets and capitalism, for which they aim to "rise above." There is an agenda here with demonizing the stock market and making everyone a victim, taking away "equal opportunity" and "deserved rights," which includes success, and economic opportunity.

Michael Lewis does not care about this issue that's lingered on for more than a decade, however he has found a new way to pounce on the 1%, and their favorite platform for generating wealth. The media missed this part of the story big time, but at some point, they will catch on as the next carnation of "Occupy" will have plenty of signs berating HFT. I am so annoyed with these false problems, or taking issues that should be addressed, turning them into something they are not.

Moreover, it is about division, anger, and fear. Milton saw the wisdom of making sure we know 'Lycidas' finds his way to heaven: "Tomorrow to fresh woods, and pastures new." Lewis makes sure investors dig a greater foxhole, and hope that mean, old Wall Street stops them from loving each other, and having the right to succeed.

HFT Facts

There are different types of high-frequency trading organizations and intentions. While apologists argue HFT provides liquidity, those looking to take liquidity and those with a mixed approach are far more profitable endeavors. Keep in mind, HFT thrives in chaotic scenarios with high volume and volatility, hence the wide swings in annual revenue.

2013 $2.2 billion
2012 $1.8 billion
2009 $7.2 billion

The average daily volume in 2009 was 9.8 billion shares versus 6.4 billion in 2012.Triggering a stock market panic would actually line the pockets of the HFT crowd immensely. Maybe they should cheer for another bestseller from Michael Lewis.

In Conclusion

I'm not a fan of high frequency trading but the hysteria is puzzling, and my sense there is a lot more to this as part of a larger anti-Wall Street story gnaws. On that note, people become spoiled. When I got into the business and switched from research to the brokerage side, a round trip (buying and selling) cost investors hundreds of dollars. Technology has played a large role in changing this to the point a dozen round trips can be made for the same cost and that more than covers the extra penny you may or may not pay.

In the meantime, I think there are greater problems for the market. I see leaked news, stock upgrades and other peculiar action in stocks all the time. Why did Lululemon (LULU) trade higher in down sessions leading to its earnings announcement last week, and even after laying an egg and offering lower guidance, the stock traded sharply higher? Today there are two stocks that will open higher, telegraphed big time yesterday. From a day-to-day basis there are shenanigans and other disturbing issues.

In the longer run (more than a day or week) Lululemon will find its right place - it could be higher - based on fundamentals and future potential. All stocks eventually do trade higher, which is why investing is different than trading.

Comments

Just finished reading Flash Boys and wholeheartedly disagree with your assessment Charles. I saw you comment on this on Varney the other day and was taken aback by how fired up you were about this. Immediately I went out and purchased the book. Even your own statements are contradictory. On the one hand you say it's "pennies" that are shaved off the trades, on the other you state that that "penny" that you speak of apparently added up to $2.2 BILLION in 2012. There are also unknown BILLIONS that are paid to other players in the market to route orders in a way that is advantageous to HFTs. The point is that those BILLIONs should somehow have found their way to the 401K accounts of ordinary Americans, not a bunch of guys who have figured out how to implement the master plan from Office Space on Wall Street. For those of us who use your service and self-direct our investing dollars this problem is not that big (unless some of your customers are investing hundreds of millions or billions), but for everyone who invests in large mutual funds it is. They are being cheated out of that money. Finally, there is the issue of fairness. When I see a trade in my Scottrade account for $32.49999/share when I am not allowed to enter bid or sell price of less than one penny increment I wonder WTF just happened. And when I inquire about it with Scottrade I am given some bullshit explanation about how it is an average because of how my order was spread across different orders, I know that there is something insidious going on and Scottrade is in on it. Then there are numerous situations where my limit orders, along with many of your other customers', were mysteriously "eaten up" by a "flash crash" in a stock's price. All these mysteries are explained in the book and the explanation makes a lot of sense. Bottom line is that this has probably been going on since the beginning of the stock market's existence, its just evolved as technology has evolved, but that doesn't make it ok. The fact that IEX is getting business confirms that they are not the only ones who believe that the market is unfair and that change is required. Tom on 4/3/2014 10:38:04 PM

Tweet

 

Home | Products & Services | Education | In The Media | Help | About Us | Disclaimer | Privacy Policy | Terms of Use | All Rights Reserved.