29 May Predatory High Frequency Trading: A CALL TO ACTION SERIES-Introduction
That Was Then…
My office is located in a historic building in the nation’s oldest city, which also happens to be my home town. Today the ground floor serves as an events venue of old world sophistication and grandeur. From the huge marble columns that line the room on both sides, to the hand crafted scroll work on the walls, there is no doubt it was designed to impress. In all the opulence, however, one object at the back of the room seems out of place. It’s a huge round vault door.
The building was originally built in 1928, to house First National Bank. While the bank’s name changed many times over the years, the vault door remained a constant. I was so thankful that the venue’s owners decided to retrofit the vault into a hip bar area instead of doing away with this enduring piece of my personal history.
As a child, I loved visiting the bank just to stare in awe at door. It’s massive at about 8 feet in diameter and 2 feet thick. During the day the door stood open exposing the intricate inner workings of complex metal gears and locking mechanisms. It looked absolutely impenetrable! I assumed that the money we deposited into the bank would always be safe behind that door. But that was then…
This is Now…
Now I know that security can be an illusion. Like everyone else the Great Recession rocked my world by exposing the fragility and greed of some of our most trusted financial institutions. It was even more disturbing to realize that my chosen profession seemed to be intertwined with the very financial institutions involved in causing the crisis. I had to be strong for my clients who were looking to me for reassurance and advice. It was tough, though, when I was also feeling pretty disillusioned and unsure of how it would all work out. Thankfully, my clients and I emerged a bit battered, but mostly unscathed and appreciating our relationship more than ever.
That said, the last thing we need is another hit to our confidence in the American financial system and markets, but that’s exactly what we received with the recent book Flash Boys by Michael Lewis. It brings to light predatory high frequency trading (HFT) practices that have infiltrated core stock market trading operations.
By most reasonable standards what some HFT firms do would be considered unethical, some would even call it market manipulation for the profit of the few. If you’re not familiar with this practice don’t feel badly. Before this book many investment professionals that thought they were intimately familiar with our trading systems found that they weren’t really privy to the way predatory HFT affects today’s electronic markets.
I’m careful to call it predatory high frequency trading because not all HFT is unethical. Some HFT firms serve an important function in our markets.
Why Should You Care?
Michael Lewis’ book makes a strong case that predatory HFT firms exploit us all by unfairly manipulating stock prices for profit, adding yet another blow to our confidence. This is unfortunate, because like it or not we are ALL dependent on Wall Street today. Whether you are an investment professional, individual investor (401k and pension plan participants included), employee of a publically traded company, or patron of a bank, as an American you are effected by what happens in our market systems. If they fail, we all fail.
That’s why I’ll be devoting my blog for the next few weeks to educating investors on what HFT is, how predatory firms have hijacked over half the trading volume of the American stock markets to date and what we, as concerned Advisors and investors, can do about it.
Please visit my blog regularly to learn more, including what you can do to help bring ethics and fairness back to our market systems.