‘Rigged’ Discussion: Why High Frequency Trading Is Beside The Point
The current ‘big’ story is celebrity journalist Michael Lewis’ claim that financial ‘markets are rigged’. If it’s said on 60 Minutes, it’s a big story. If the nice gentlemen who is going door-to-door, who visited the Bowyers in our kitchen to talk about doing seismic testing on our property searching for Marcellus Shale, asks me about high frequency trading and the market’s rigging claim; if the talk radio show which I’ve been invited to today wants to talk about it; if the debate on CNBC becomes a viral video, then it is the ‘big’ story.
A principled approach to the topic would take a wider and longer view. Instead of focusing on whether the ultra-high frequency trading currently provides an advantage over high frequency trading (which parallels the earlier debate about whether high frequency trading gave an unfair advantage in comparison with regular electronic trading, or whether prior to that electronic trading gave an unfair advantage in comparison with fast-moving human trading pits), perhaps the focus should be on whether short-term trading in any form (whether in seconds, milliseconds or nanoseconds) is a wise way to preserve and build wealth. The overwhelming evidence is that a long-term approach, based on predictable principles and a focus on fundamentals in terms of valuation, is much more likely to build wealth than any short-term strategy.
Ultra-high frequency is just another step in an increasingly chaotic, shorter and shorter-term mindset. It is short-termism taken to its ultimate conclusion. Principled reasoning would tend to take the discussion away from a debate between milliseconds and nanoseconds and start to focus on years and decades, where principles tend to express themselves and where true investor time horizons actually lie.
To see the CNBC video, click here.
As of this writing, the discussion has been one which seems more likely to sell books, pave the way to the next trial lawyers’ pot of gold, and fatten the budgets of regulators, than to actually help any investors.
Article originally published on Forbes.com.
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