360° Coverage : Is The Stock Market Really Rigged?

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Is The Stock Market Really Rigged?

Apr 1 2014, 4:04pm CDT | by

In case you missed it, CNBC aired an interview between Brian Katsuyama and William O’Brien about High Frequency Trading.  The conversation started as a result of Michael Lewis’s new book,...

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17 weeks ago

Is The Stock Market Really Rigged?

Apr 1 2014, 4:04pm CDT | by

In case you missed it, CNBC aired an interview between Brian Katsuyama and William O’Brien about High Frequency Trading.  The conversation started as a result of Michael Lewis’s new book, Flash Boys, in conjunction with a 60 Minutes story that aired this previous Sunday.  The big hubbub is all about Katsuyama’s quote, “The market is rigged.”

As an advisor, I received a few calls from clients after the 60 Minutes story aired and now, as the story catches fire, I anticipate even more questions.  A comment such as, “The stock market is rigged” is no joking matter.  It can potentially shake the very foundations of investor/client trust … and in my opinion is exactly what we need more of.  Investing, after all, isn’t a free, zero sum game.  But HFT (High Frequency Trading) is a problem that affects more than just wealthy Wall Street hedge fund players.

In a nutshell, the evidence offered in the book and the 60 Minutes story suggests some financial firms are investing billions of dollars in computerized systems and fiber optic cables in order to trade faster than everyone else.  The sixty minutes piece does an excellent job of explaining the details and technology used to profit from this approach.  For a more simplified perspective, investors can think of it like purchasing golf clubs through an online auction.  Let’s say you find the perfect set and send in a bid of $1,000 for both the woods and irons.  However, just as your order for the woods is confirmed, an HFT sees it and sends its own faster bid to buy the irons ahead of you.  Then,  before the online auction company even knows it, the HFT turns around and resells it to you at a higher price, which you inevitably pay because you don’t want a mismatched set of clubs.

On the surface, High Frequency Trading would appear to be a Wall Street or institutional problem, not a Main Street concern.  However, I have to side with Katsuyama who notes that many of the institutional traders being forced to pay-up are some of the people who control your future.  We’re talking about pension fund and mutual fund managers who may be generating lower returns as a result of increased fees.

Right now, no one knows if this is costing Middle Americans millions of dollars, or if its shaving years off of their retirement dreams.  But what we do know is that it is a problem more and more investors need to be aware of.  After all, individual investors control nearly $19 trillion in retirement savings alone.

Our firm works through two different trading platforms, which I have contacted to request a statement from them about  High Frequency Trading, trade routing, and if options are available to work with the likes of IEX, which has developed a potential solution.  I would encourage readers to do the same with the companies they work with.

As far as the question whether the stock market is really rigged, the answer is absolutely YES! It’s rigged with risks and opportunities that investors take each and every day.  The reality is, HFC is not illegal (yet) and we do live in a capitalistic society.  News and information like this can shake markets, and when it does,  investors and advisors have to be prepared to respond by investing their money is the place they feel is most suitable.  Do you want to support firms and platforms that foster HFC?  Do you want your pension or fund manager to  have a policy against it or method to prevent it? Ultimately, the markets can only stayed rigged as long as investors allow it to take place.

P.S. Let me know what you think of High Frequency Trading by leaving a comment… and thanks for following me at Forbes.com and on Twitter @robertlaura

Source: Forbes Business

 
Update
10

7 weeks ago

RM47mil KWSG contributions still unclaimed

Jun 9 2014 7:54am CDT | Source: Business Times Malaysia

KUALA LUMPUR: About RM47 million of contributions in the Teachers Provident Fund (KWSG) still remain unclaimed, the Dewan Rakyat was tol ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
9

7 weeks ago

Gold shop lost almost RM1mil

Jun 9 2014 3:50am CDT | Source: Business Times Malaysia

KANGAR: A gold shop owner lost almost RM1 million after after the safe on in his shop was broke ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
8

7 weeks ago

Motion to debate MAS losses in Dewan Rakyat rejected

Jun 9 2014 3:39am CDT | Source: Business Times Malaysia

KUALA LUMPUR: AN emergency motion to debate the losses incurred by Malaysia Airlines last year, amounting to RM1.2 billion was rejected by the Dewan R ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
7

7 weeks ago

MH370 Tragedy: Hisham: RM27.6 mil spent on 1st phase of SAR

Jun 9 2014 2:11am CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia spent some RM27.6 million in its first phase of the search operations for missing Malaysia Airline flight MH370, said Acting Transport Minister, Datuk S ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
6

7 weeks ago

9.1m litres of diesel seized in a month

Jun 8 2014 1:11am CDT | Source: Business Times Malaysia

PUTRAJAYA: The Domestic Trade, Cooperatives, and Consumerism ministry has seized some 9.1 million litres of diesel and property worth RM58 million since mounting ‘Operasi Diesel Selatan’ in the southern states last month ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
5

7 weeks ago

Girl, 9, awarded RM2.78m compensation for medical negligence

Jun 6 2014 4:56am CDT | Source: Business Times Malaysia

KUALA LUMPUR: A nine-year-old girl who suffered brain damage during her birth at a government hospital was awarded over RM2.78 m ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
4

7 weeks ago

Malaysia's total trade in April up 12pc

Jun 5 2014 11:52pm CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia's total trade in April 2014 rose by 12 per cent from a year ago to RM123.86 billion due to growing trading activities, International Trade and Industry Minister Datuk Seri Mustapa Moha ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
3

8 weeks ago

Works Ministry to spend RM20m for upgrading works at 50 accident black spots

Jun 4 2014 11:35pm CDT | Source: Business Times Malaysia

JOHOR BARU: The Works Ministry will implement upgrading works at 50 accident prone locations in the country that have been identified this year involving an alloca ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
2

8 weeks ago

Najib launches loan scheme for Ramadan traders

Jun 4 2014 10:24pm CDT | Source: Business Times Malaysia

PUTRAJAYA: Prime Minister Datuk Seri Najib Razak today launches RM45 million Ramadan Bazaar Scheme 2 ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
1

8 weeks ago

Residents bring up objection against Kidex to Suhakam

Jun 4 2014 4:49am CDT | Source: Business Times Malaysia

PETALING JAYA: A group of 20 Petaling Jaya residents held a meeting with the Human Rights Commission of Malaysia (Suhakam) over their objection against the proposed RM2.2 billion Kinrara ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 

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