There is a firestorm on Wall Street, ignited by author Michael Lewis, with the release of his new book Flash Boys. It is an explanation of how “high-frequency traders” (HFT) have rigged the stock market by getting buy-and-sell information literally nanoseconds before the stock exchanges, where trades actually take place.
Knowing a good number of BUYS are coming in, which will drive up the price per share, they buy just ahead of those orders and then sell at the higher price to those sending in the BUY orders. They might buy and then sell the same stocks in nanoseconds.
It is estimated that 70% of all trades are now by HFT. Are buyers getting ripped off? Yes! Is it enough to matter? No! If you are a long term investor, it should not matter if you pay an extra two cents per share. Is it illegal? If it is not, it should be! Even Charles Schwab agrees it should be illegal.
But, the petty theft, albeit on a grand scale, is not my primary concern. Long time readers know I have cautioned about high-frequency trading since the “Flash Crash” of May 6th, 2010, when the Dow suddenly dropped a thousand points. That was due to a technology problem. HFT is steroids for technology problems on Wall Street.
The only way to underwrite or minimize this risk is to avoid panic if/when it happens!. Just like the Dow recovered those thousand points, we will survive an HFT-Crash, but it will seem like a near-death experience at the time.