Repelling High-Frequency Fire

 | Aug 05, 2011 | 3:14 PM EDT  | Comments
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You can't stop the high-frequency traders, those who flit in and out stocks millions of times a day. You can't end the madness of machines playing with machines, driving stocks down or up with maddening velocity.

You can't stop them because the government has blessed them  and, as Doug Kass has made it clear today,  the government doesn't care that the playing field has, once again, become unleveled because of them.

A little more than a decade ago a different SEC worried that the individual investor felt disadvantaged, jammed through Regulation FD, which got rid of selective disclosure, a code term for "the big guys got a call about how business was, but you, retail investor, never get that kind of fancy information."

The result? All information is disseminated at the same time. You know as much as the other guy. If you know more, and it came from someone in the company, the government will nail you. That's what the Raj Rajaratnum trial was really all about. His hedge fund, defeated by Reg FD, tried to find multiple ways around it. Guilty as charged.

But now we have another group of investors that have a speed edge and weapons that are like machine guns in World War I and individual investors are foot soldiers, mowed down by a new technology they can't understand.

The individual investor is fodder in the face of these fields of fire. So she's choosing not to go over the top. She's not following in the Path of Glory, it's to bloody. Who can blame her?

So what can we do? Not much about the machine funds. They have been legalized and just like you couldn't take away the machine guns, the government will not outlaw the high-frequency traders or eliminate their recently blessed double- and triple-powered ETFs, even as they do nothing to help create investment capital -- the real purpose of an exchange -- or allow for solid longer-term investment. They aren't investment instruments. They are lethal trading grenades and individuals can't afford to catch them.

So what do we do? We find tanks that can withstand the machine guns. What's a tank? A company that pays a bountiful dividend with more than a 3.5% yield which is so much better than what you can make with cash or bonds. And I think much safer. Con Ed (ED), up almost two bucks today, is a tank because it yields more than 4%. Procter & Gamble (PG), which reported an okay number and then gave subpar guidance, is a tank.

It rallied today from that 3.5% level. Kimberly Clarke (KMB) and Altria (MO) and Kinder Morgan are tanks. When the machine guns shoot, you can hear them bounce off your machine.

Tanks aren't immune. Artillery can take them apart. That's why we don't ever want to be so complacent as to think that stocks are impervious. But unless the company's balance sheet is stretched, the tank will hold up during the shelling and if it gets dinged you just buy more.

You can't beat the darned high-frequency traders. But you can join their mechanization if you go into battle with good dividends. Everything else, as we saw these last ten days, is a trade that can be eviscerated by the machine's insanely interstitial fields of fire.

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