Rules of the Game: It's Always Been Rigged

 | Apr 01, 2014 | 12:30 PM EDT  | Comments
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The financial services industry was abuzz Monday with chatter about Michael Lewis's Flash Boys: A Wall Street Revolt. I got e-mails from clients, asking for our view on the effects of high-frequency trading on the small investor. We were even asked what role our custodian, TD Ameritrade (AMTD), played in Lewis' allegations.

Whoa, Nelly! First, TD Ameritrade plays no role. Think about it. The person asking the question is a long-term investor who doesn't trade. What role could the brokerage possibly play in that case? Sorry, but the question doesn't even make sense. This is what happens when media-generated hysteria grips people.

That's out of the way, so let's examine what this means for the small investor. Notice I said investor not trader. If you are invested with a long-term time horizon and with a portfolio tailored to meet your financial plan, then what in the world are you worried about? Might you take a smidgen of a haircut here and there, say, when your portfolio is rebalanced? Sure. Will it make any difference to achieving your financial goals? Absolutely not.

Now, if you have a quant hedge fund, well, maybe you have a problem. But that's a small number of people, and I doubt that many Real Money readers are included among them.

But the frenzy over high-frequency trading is ginned-up media manipulation at work. It's sad to see how many people are getting irate about how Wall Street is rigged against them, just based on Lewis's book promo tour.

Guess what? The game has always been rigged! As Jim Cramer said on CNBC Monday, this information is nothing new. He and others have devoted plenty of air time to discussing of high-frequency trading.

I'm not defending the actual practice, but as a defender of the individual investor (again, not trader), I'm not getting worked up over something that simply has no effect on meeting financial objectives.

You notice how Warren Buffett doesn't go on TV railing about high-frequency trading? It won't make him any poorer. The same can be said for any investor with a long-term time horizon.

This issue doesn't affect people on Main Street U.S.A. who have a solid plan and are disciplined about getting there. The guys who are mad are the ones daytrading. And you know why they're upset? Because they know that sitting at their home set-ups with a bevy of screens, using VectorVest or CAN SLIM or Gorilla Trades, the pros are going to edge them out on price. Something similar happened when markets went to decimalization, and it upset a lot of people.

What you have is: The old-school scalpers being trumped by scalpers with better, faster tools. The old-school traders are showing up at a gun fight with butter knives, and they don't want the new guys to have guns.

The one who's having a field day here is Michael Lewis. As Jim said on CNBC, Lewis is a terrific writer and storyteller, and I enjoy his books. But what a marketing coup! Getting yourself on "60 Minutes" with a dramatic story, designed to whip up the general public's anti-Wall Street sentiment!

I think I'll forego any weeping for the quant hedge fund traders. They don't need my sympathy.

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