In the wake of the recent collapse of the financial marketplace, many of us have naturally become more skittish about how to handle our investments. This is especially true for the 50 plus male, as the market downturn has made our upcoming retirement years uncertain, and in many cases simply vanish. Never before has the general investing public been made to feel as if they are being “gamed” by the big boys on Wall Street and suffering the resultant consequences of financial transactions made by the few causing irreparable harm to the masses.
In the past few weeks, a new area of concern has been getting increasing attention from the 
financial pundits. While I’m sure quite a few 50 plus males are aware of this technological innovation that has encroached upon the financial markets, many of you may not be as cognizant. I am not presenting myself as a financial expert or sounding any alarms; I’m just providing some exposure to an activity that until fairly recently stayed hidden from most of us.
I speak of “high-frequency trading,” a practice defined as making trades in microseconds (think of this as the ability to transact buy and sell orders thousands of times a second) through the use of supercomputers and highly sophisticated algorithms. This trading can include not just stocks, but commodities and currencies as well. Why has this garnered so much attention lately? The answer is straightforward considering we’re addressing the financial marketplace…ever increasing profits, even in the midst of the recent market collapse, coupled with what is becoming an outsized share of daily trading volume (recent estimates have this at more than half of U.S. stock-trading volume).
High-frequency trading isn’t just practiced by the remaining Wall Street behemoths or better-known hedge funds. Newer firms specializing in this trading as market makers have become major players. Without getting overly specific, high-frequency trading involves utilizing spreads of fractions of a penny per share in many thousands of trades a day while simultaneously restraining how much capital is being risked. The concerns center around whether this activity helps or hinders the market’s efficiencies (such as liquidity, spreads, etc,) and whether the average guy is getting the best pricing when buying and selling. Adding to this confusion are by-products of high-frequency trading such as flash orders, which is another high-speed type of trading where certain exchanges let traders quickly expose (no more than half a second) their orders to other players in the market. This has raised red-flags of “front-running,” whereby the big boys get better pricing than you or I by trading ahead of the general public.
Many of us have a sizable proportion of our savings in mutual funds. Many of these funds are now using “dark pools,” yet another outgrowth of high-frequency trading to combat the marketplaces that cater to high-frequency traders. Dark pools are places where a fund’s managers can buy and sell large blocks of stocks ‘anonymously” so as to avert letting the market know about these big moves and hence altering prices.
There are many articles you can search for on the internet dealing with this subject matter. I have
referenced “What’s Behind High-Frequency Trading” by Scott Patterson and Geoffrey Rogow in the Wall Street Journal. “Wall Streets New Masters,” written by Liz Moyer and Emily Lambert in the September 21st, 2009 edition of Forbes has provided another excellent information resource.
In sum, while all of this market activity has raised the antennae of the SEC and various politicians, the jury is still out on high-frequency trading activities. Once again, the rule of the day is “caveat emptor” (let the buyer beware) when determining how to handle the equity portion of your portfolio. I just pray we are not getting the short end of the stick.
-Neal
