High Speed Trading: Does it Affect You?
High speed trading or high frequency trading has dominated the headlines this past week as Michael Lewis, author of the book "Flash Boys," claimed that markets are rigged in an interview with CBS' "60 Minutes." The basis for Lewis's statement is a large number of professional traders have quicker access to markets due to high speed fiber optic cables built directly into the stock exchange servers. Additionally, these traders can pay extra to gain a trading advantage, offering a deeper look at the size and depth of the market. Advocates of high speed trading argue flash traders provide liquidity to markets and make markets more efficient. On the other hand, those against high frequency trading argue everyone should have access to the same information at the same time and high sp traders have an unfair advantage.
While it is certainly up for debate whether high frequency trading is fair or foul, these new allegations have no effect on how we do business. In fact, the controversy surrounding high frequency trading helps to reinforce our core principles here at Highland Financial Advisors: attempting to beat the market through individual security selection and market timing is highly unlikely to increase long-term investment returns.
Although these allegations and the millions of dollars being generated by flash traders are alarming, rest assured this has little impact on your portfolios. Many of the lost dollars are coming out of the pockets of day traders, who think they can outsmart the markets by moving into and out of individual stocks throughout the day, or professional traders who don't have access to the fastest servers. We do not trade individual securities. We invest in mutual funds and ETFs, focusing on the long run not milliseconds. We continue to believe investing requires a long-term time horizon and attempting to beat the market through market timing is a losing bet.
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