“The stock market is rigged!” Jeff Macke writes for Yahoo Finance. “That’s the headline as suggested by author Michael Lewis during a segment on last night’s 60 Minutes. Promoting his book, Flash Boys: A Wall Street Revolt, Lewis argued that High Frequency Traders (HFTs) are in effect stealing from individual investors, pension funds and literally anyone else who ever buys or sells a stock.
“The HFTs using high speed computer algorithms, fiber wire and other terrifying stuff to pervert the otherwise level playing field on Wall Street,” Macke writes. “How do they do it? In effect they front-run traders; buying the shares you order faster than you can, then sell them back to you for a profit… The trading desks of four different major financial institutions posted gains every single day during the first quarter of 2010. The tradings desks of JP Morgan, Bank of America, Citigroup and Goldman Sachs combined posted 244 winning trading days against zero losses. Were the playing field truly level the odds of a firm making profits or losses on any given day would be roughly 50%. The chances of going 61-0 on such a trading field of dreams would be 2.31 quintillion to 1.”
“Main Street investors will never be able to move faster than the computers so they shouldn’t try,” Macke writes. “The way to beat the HFT crowd is by setting a price you are willing to buy or sell a stock in advance. It’s called a Limit Order and it’s available at no charge from any on or off-line brokerage service.”
Read more in the full article here.