Predatory High Frequency Trading: A CALL TO ACTION SERIES-Conclusion

Vault Bar PicSorry for the delay in posting but there were some technical issues with my blog page that took some time to correct. This is the final entry of the series. Please visit my prior Predatory High Frequency Trading blogs for more information.

The Good News

As we discussed in my last series entry, more regulation and government antics are unlikely to bring about real change in an acceptable period of time. Red tape and politics have their place, but when it comes to real and lasting change in free market systems the only effective defense is usually a free market based solution. This is especially true with predatory HFT, since its very complexity makes it difficult to understand and mitigate.

Such a complex subject as high frequency trading could’ve made for a dry, boring book; but Michael Lewis’s Flash Boys was a great read! It had all the elements of any great story including villains and heroes locked in a battle against time to save the world (or something like that). It’s written with enough dramatic flair that it captures your imagination and informs with enough detail that most will be able to understand even the most complex parts of the story. I encourage you to pick up Flash Boys if you want to know the whole story.

Now let’s talk about the solutions as I see them and how you can become part of the solution with just a pen or a few key strokes.

We Need A Hero!

Although some of characterizations in the book may be a little over the top, Brad Katsuyama and team seem like the real deal. Mr. Katsuyama is the talented young Wall Street trader that discovers, then exposes predatory HFT for the world to see. He’s also the facilitator of the solution I want to talk about.

After years of exhaustive investigation and activism, personal and professional sacrifice and financial hardship, Brad and his small group of equally talented, somewhat ragtag partners seem to have come up with a great free market, technology driven answer to a free market, technology driven problem; in effect fighting fire with fire and not more red tape. They give us reason to believe that there are good, principle driven people in the financial industry that are more concerned with fairness than they are with their own pocket books. For me, their actions restore some much needed faith in humanity, especially in the industry I love.

Their journey to figure out how to combat the problem was long and difficult but the ultimate solution was fairly simple. Just take the predators’ timing advantage away. They did this by creating their own marketplace with its own routing algorithms that bypass HFT firms regardless of their co-location or technology. This new exchange is called the IEX (find out more at www.iextrading.com). It works around predatory HFT to restore fair pricing to the markets and many Wall Street firms, hedge funds and institutional traders are not only using it, but supporting it’s growth.

What Can You Do?

I will talk about what you can do to help, but first I want to emphasize that I believe one thing you cannot afford to do is give up on investing. Why? Because where else do you have an opportunity to exponentially increase your savings over time? In this ridiculously low interest rate market, it’s certainly not in savings accounts and money markets making less than 1% or CD’s making slightly more but tying up your money for 6 months to 5 years for slightly higher rates. As much as we may dislike the thought of trusting our money to a system that is obviously imperfect, over time it has proven to be among our best options available to grow our money. And WE NEED TO GROW OUR MONEY!

I tell my clients all the time that it takes more than they can imagine to support a long retirement and our financial planning calculations consistently prove it. Considering that most can no longer rely on a pension and according to the Government’s own calculations it currently takes 2 full-time workers to support one retiree on Social Security, I think it’s safe to say that we can no longer count on such benefits to be there in the future. Even if the Social Security system survives into the next few generations, I suspect it will be a much different and smaller benefits system than it has been in the past.

In other words, no one is going to take care of you. YOU must take care of yourself and that must be done through a combination of living well within your means, debt mitigation and adequate savings. Since many Americans no longer live within their means and have way too much debt, savings MUST be compounded to reach adequate amounts to support a decent lifestyle in retirement. I didn’t say a “luxurious” or even “nice” lifestyle. I’m talking “adequate”. Investing is still one of the only ways to accomplish this, so we can’t simply give up on it. We must fight to change the systems that facilitates investing if we want to trust in them again.

Call to Action

Although we need to invest to survive we don’t have to accept unethical practices in our market systems. I encourage all investors, and my Advisor peers, who are fed up with big Wall Street firms making us all look like jerks to make your voice heard on this subject. We give away much of our power as Americans by being complacent. I myself usually err on the side of caution and loath political wrangling; but on this subject I feel I must take sides because being complacent will get us all much the same result as we got after the Great Recession: little has changed and we’ve obtained almost no justice for all our pain.

Instead, in this case because the solution is available, we can cause real and major change by simply DEMANDING that our broker/dealers allow us to have access to the IEX trading platform. I suggest writing a letter to your Advisor asking for this access, you can use the template available on the IEX website which references all the applicable regulations associated with your request by clicking here.

This is your wake up call. Don’t ignore it this time!

Don’t be discouraged if the answer is “no” right off the bat. The exchange is new (less than a year old) so there’s limited availability of the platform and many firms are waiting to see what happens before they sign on. At this point, it matters less that they actually allow it than it does that they hear that WE WANT IT. If Wall Street banks and Broker Dealers hear it enough through their Advisors or the investors directly, they will comply eventually. Believe it or not, they usually do want to make you, their end customer, happy.

Please also remember that your personal financial Advisor doesn’t usually control where you are able to trade. At this time and for various reasons, even my clients are not able to take advantage of this new trading system, though I have requested we get it. As Advisors, we are usually constrained by the way the exchange system is set up and therefore cannot “make” it happen. However, most of us want to be advocates for our clients. Many Advisors are just as upset by this situation as you are and will continue to ask on your behalf until something gives.

You can also join the “I am an Investor” collective at http://iamaninvestor.org/ to encourage equal opportunity for all investors, market fairness, integrity and transparency. Add your voice to their outcry by liking them on Facebook, following them on Twitter and/or connecting on LinkedIn.

Conclusion

Predatory High Frequency Trading may have started with a loophole created by well-meaning Regulation, but it was smart insiders who figured out how to profit from it. While most of us appreciate the entrepreneurial spirit and capitalist drive that allow America to continue to enjoy overall economic prosperity, it’s become apparent that free markets are not always “free”. Freedom to make money from one’s own initiative sometimes comes with a price. In the case of the U.S. financial system, we pay the heavy price when simple success and security are not enough and greed becomes the norm.

It’s been said many times that a small group of dedicated individuals can change the world. I still believe that in America that’s true. We have the unique ability to demand change or to change things ourselves. Let’s not take that for granted.

Predatory high frequency trading can be stopped. You can help. If we all work together, make our voices heard, and stand firm in our conviction ethics can be reinserted into our free market system. Take action. Hold on to hope and don’t give up!

My Hope

As a child, visiting the stately old bank building that now houses my office was a treat. Every time I entered the bank and saw the huge vault door standing open with it’s gleaming hardware and awesome size I was awed anew. Who could penetrate or corrupt such a formidable ally? It never crossed my mind that it could be breached.

As an adult, I still view it with awe but I’ve learned that nothing is guaranteed in this life and security can be an illusion. Still, just seeing that it’s still there and will be for many years to come gives me hope. After all, it served its original purpose gallantly for many years and now repurposed will serve another purpose just as well. Similarly, the American stock markets and the institutions that facilitate free market trading on them also serve a purpose: to bring corporations and investors together to create greater prosperity than they otherwise could without each other. Our financial system deserves to be restored to its original integrity, fairness and transparency to serve the same important function for future generations.