Author: Brendan Ruchert-Dixon
Covestor models: Alpha Trapper and Beta Blocker
Wall Street may be a rigged game in some respects, but it doesn’t matter.
High-frequency trading houses such as Knight Capital are making the news more and more often, with news outlets questioning whether they are rigging the game against less-advantaged retail investors. However, it’s important to remember there is more than one way to win at this game.
There are a couple complaints I hear a lot about how high-frequency trading is hurting the little guy.
The first is that retail investors can’t get the bid/ask prices they deserve because traders with better equipment are jumping ahead of them. I have noticed this myself many times: I see a stock I want to buy with a bid of 19.07 and an ask of 19.09. I put in a bid of 19.08, only to notice that immediately afterwards I am left out of a trade that executes at 19.0801. I end up either unable to make the trade or forced to bid an extra cent higher to make my purchase.
Is this fair? No. Do I miss out on some profits because of it? Yes. Would I support some kind of regulation to stop this? Sure.
But do I lose sleep over it? No. On any given trade, an individual may miss out on as much as 0.1% (usually less) that they may have booked without this unfair playing field.
As long as small investors only trade in or out of each position only once or just a few times a year, they’ll miss out on only a fraction of a percent. This is often less than the losses they may have incurred from higher trading commissions as little as 10 years ago.
Get to know Brendan:
