Tuesday, April 1, 2014

Much Ado About Nothing

Michael Lewis is a great writer and a man with remarkable insights.  That said, Lewis seems to have gone off the rails with his charge that the stock market is "rigged" by high frequency traders.  What is wrong with seeing the order entered on exchange one, then buying on exchange two?  If that happened in real estate or the auto market, no one would care?  Why are stocks so different.

All market participants have the right to see that order entered on exchange one -- not just high frequency traders.  Their effort to provide arbitrage should be applauded not condemned.  Is this just one more example of sour grapes because some one used publicly available information to make a buck?

My mother bought the Vanguard S&P 500 in the early 1990s and her account at Vanguard has yet to sell anything.  She has earned the S&P 500 return over the years.  The Dow Jones was in the 2000s when she made her purchase and is the 16000s now -- an eight-fold increase.  If the market is rigged, it seems, in retrospect, like it was rigged in her favor.  Note that she was not a high frequency trader.

So how, exactly, are long term investors injured anyway by the practices outlined by Lewis in his book.  I can see how some insane day trader might get wacked now and then, but it isn't clear to me that the SEC's role is to protect short term traders -- whose goal and methods, by the way, are exactly the same goals and (slightly slower) methods used by high frequency traders.  What difference is there (other than speed)?

This is just one more effort to destroy the one source of investment returns that has produced over ten percent annually for the last 86 years for the average investor who has no inside track.  Why would Lewis want to take that away by encouraging excessive regulation that could be brought on by the bogeyman of high frequency trading.  Is ten percent per year over the past 80 years proof that the market is rigged?

No comments: