This week, the stock market was roiled by another trading glitch by high-frequency trading, this time by Knight Capital Group.
With the proliferation of high-frequency trading programs and the havoc they cause when they go haywire, some people may have the perception that the stock market is out of the league of small investors these days.
For instance, Jason Zweig, normally a bastion of common sense investing advice, wrote in The Wall Street Journal on Thursday, "The hearts of many small investors have been broken by the serial setbacks of the past few years," in a column titled "When will retail investors call it quits?"
He quotes Joseph Amiel, a lawyer and novelist in New York:
"The game is stacked against them. I know from speaking to other small investors that they feel that no matter what they do, they're going to be late to the game and probably wrong. And they'd rather keep it safe even at one-one-hundredth of a percent interest in a cash account than risk losing it all on a roulette-wheel stock market."
That's exactly the problem that plagues so many small investors; they shouldn't necessarily be investing the way that high-frequency traders are doing, which is by taking advantage of split-second pricing inefficiencies. Even without the computerized opponents, it's more often than not a losing proposition for small investors to try to time the market or day trade.
Some people do it successfully. Many don't.
"They shouldn't be in that business in the first place. Its speculation," says Larry Swedroe, principal and director of research at Buckingham Asset Management in St. Louis, Mo., and author of "Wise Investing Made Simpler" and "The Only Guide You'll Ever Need for the Right Financial Plan."
Any number of events that are completely unrelated to the stock market can influence prices, but in general, prices usually return to where they should have been after the dust settles.
"The same thing happened after the flash crash and any other event like that if it doesn't change the fundamental value of corporations; all it affects are day traders going in and out, and it doesn't affect me at all as a long-term investor," Swedroe says.
And, according to Swedroe, high-frequency trading actually helps small investors a little bit by tightening the bid-ask spreads, which makes trading more efficient and orderly for everyone.
"In terms of percentages, you would see a small stock trade at a 5 percent bid-offer spread; today those spreads have come way down. The offset to that is that there is much less liquidity in the market. If you want to move a large block of stock, you can't do that as easily without moving the price," he says.
Unless you're selling a few million shares, that's not too much of a problem. What do you think about high-frequency trading or the stock market today?
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