The Independent Market Observer

4/1/14 – High-Frequency Trading and Market Trust

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Apr 1, 2014 1:00:00 PM

and tagged Commentary

Leave a comment

The New York Times has an excerpt from Michael Lewis’s new book, Flash Boys, which is essentially about how the stock markets have become rigged. There will be a tremendous amount of debate on whether his charges are fair, what actions should be taken, and so forth—the FBI has apparently already launched an investigation—but to my mind, this somewhat misses the point.

Right now, we have banks that have paid billions in penalties for not following the rules on mortgage lending. We have repeated systemic breakdowns of the markets. Many banks are being investigated, and sued, for market fixing in interest rates, gold prices, and other areas.

The financial system exists to serve society and to allocate capital efficiently for the benefit of all. For it to work, it has to have the trust of the larger society. Who wants to invest in a rigged game? All of these scandals point to a massive failure on the part of regulators and institutions that is eroding the real value Wall Street brings. Lewis’s book is about one instance of this systemic failure.

I don’t blame the people doing the high-frequency trading, as long as they were playing by the rules. I do blame the exchanges that created the rules those traders were gaming. I blame the SEC for allowing this. The failure has been on the part of those setting the rules of the game.

This is not the first and won’t be the last financial scandal. In my own world, that of financial advisors who work with individuals and institutions, there are occasional tragedies when someone steals from his or her clients. As sad as that is, it doesn’t invalidate the work of the many great advisors out there, like the ones we have at Commonwealth.

I was looking back yesterday at some books I’ve discussed here on the blog, and found my review of the Fourth Turning. That book, which has had a very good prediction success rate, forecasted a sea change in American society by around 2025. Looking at how the country has changed in my lifetime (roughly the past 50 years), one of the major trends has been an increased focus on making money to the exclusion of other activities. Along with this has come the increasing financialization of the economy. A reversal of this trend could be one of the changes on the horizon.

As always, there are two sides to the story. High-frequency trading does have benefits, but they do not justify some of the abuses. The financialization of the economy has helped millions, but it has also done damage. It’s not being a Luddite to say that those costs need to be limited, even as we preserve the positive aspects.

I wrote last year and before that the LIBOR interest rate-fixing scandal would have legs. That is happening, although it’s not getting much publicity, but what I didn’t appreciate at the time was how widespread this kind of behavior might be, and what the systemic effects were. This is what we’re starting to see, in Lewis’s book and other reports.

Subscribe via Email

Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®