Tags: HFT | Lewis | stock | trade

Lewis and Buffett Are Both Right: Markets Are Rigged and It Doesn't Matter

By    |   Wednesday, 18 Mar 2015 08:30 AM

Like the magician's assistant, Michael Lewis is busily misdirecting the attention of his audience to be sure no one learns how the magic happens.

To be clear, the way the stock market works is magic. Millions of investors from all over the world meet in the marketplace to trade securities at what everyone believes to be a fair price. We know the investors believe the securities are trading at a fair price because they are choosing to buy or sell at the current price. No one is forcing investors to buy or sell at any given time.

In order to make markets fairer, the Securities and Exchange Commission requires stocks to trade in penny increments rather than using fractions as we did in the old days. High-frequency trading (HFT) firms have developed to allow for quotes in pennies and to ensure traders can execute trades under these regulations.

In the old days, people stood on the floor of the exchange and took the other side of all trades. These people bought when an individual was selling and they sold to interested buyers. To finance their inventory and pay their expenses, they charged one-eighth of a dollar per share on most trades.

Computers run by HFT firms now take the other side of our trade and do this for a penny or two per share, reducing the trading costs from 12.5 cents to 1 cent per share in many cases.

Lower costs and liquidity are why Warren Buffett says that HFT is not hurting investors. The fact that they use computers to quickly match buyers with sellers seems to lead Lewis to believe the markets are rigged. He ignores the facts that someone needs to provide a market and at a penny a share, investors are winners no matter how the transactions are completed.

Individual investors should ignore the distraction of the magician's assistant and enjoy the benefits of lower trading costs that HFT firms provide.

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MichaelCarr
Like the magician's assistant, Michael Lewis is busily misdirecting the attention of his audience to be sure no one learns how the magic happens.
HFT, Lewis, stock, trade
325
2015-30-18
Wednesday, 18 Mar 2015 08:30 AM
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