The Average Investor Can (And Should) Ignore the 60 Minutes Story About “Rigged” Markets

The piece on 60 Minutes this past Sunday has ignited a discussion about high-frequency electronic trading systems and undoubtedly has spiked sales of the new Michael Lewis book entitled “Flash Boys: A Wall Street Revolt” which digs deep into the topic. Since I have yet to read the book, I am not going to get into many details here, but the big issue is that technology has become so advanced these days that certain people are now able to get insights into what orders are coming in for a particular security, and jump in front of those orders to make a few pennies per share on the backs of smaller investors. It’s gotten so bad (read: unfair) that a company called Virtu Financial Inc, which recently filed documents to go public, disclosed that it has only lost money on one day out of the first 1,238 trading days it has been operating.

Since I work with regular retail investors, the most salient question my readers might want to ask is “Does this affect me?” I would say “No, it doesn’t.” There are definitely counter-arguments to be made, but for the typical investor (who is investing in the stock market and planning on holding a stock for months or years) the existence of high-frequency trading firms should not even be a blip on their radar. The market is not “rigged” against the types of investments they are making. If you want to invest in Company A, you have done your research, and you feel as though paying $20 per share for that stock is an attractive price, then all you have to do is enter a limit order to buy Company A at $20 per share. In that scenario, you know what you are getting, you know what price you are paying, and you feel good about your odds of success. Over time if your investment thesis proves accurate then you will make money, and vice versa. Nothing else really should matter to you.

Now, it is hard to argue that we should embrace or even accept a system where certain groups of people with more money and better technology should be in a position to game the system and earn a profit 1,237 out of every 1,238 days the market is open. Hopefully regulators will do everything they can to close these loopholes in the system. That said, the discussion around whether regular investors should change how they save and invest based on this new book or the 60 Minutes segment are focusing their coverage and attention on the wrong headlines, in my view. Carry on.

2 thoughts on “The Average Investor Can (And Should) Ignore the 60 Minutes Story About “Rigged” Markets”

  1. Why is everyone thinking that somehow the limit order is a cure all for the problem. The way limit orders work, is you should get a price that is your price or less, but its never less it seems nowadays. What makes you think that anyone is working in your interest? I’ve seen a number of times, where my order for 100 shares of stock didn’t get executed, even though the price dipped below my limit price. It happened when I had a Scottrade account, since then I switch to IB, where it also occurred. Yes, the costs are just pennies. But it adds highly to volatility, and when you miss out on opportunity like I did, cause your limit order did not get filled. You start to wander why the system is rigged to allow for dozens of exchanges, where you limit order is not even sent to the exchange, but is being “SMART” routed!

    1. Well you can make the same argument for bidding on eBay or – actually – for anything else, e.g. bidding for a house.

      I once lost a bid for a RE property as I got a call from the broker while I was executing the locking offer.

      It was a fairly good deal and I suspected the broker for playing behind my back when the reailty turned out to be the seller playing behind our back.

      Their pick failed to raise the cash and the deal landed back to us, but to my shame I *did* suspect the broker at the time.

      There are surely lots of raiders on the market.

      Some claim it is all rigged and they may be right.

      If you believe so just stay out of it.

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