Scott,I read an interesting article by Mark Cuban who says that the stock market is "for suckers" given the type of computer day trading that moves stocks out of positions as soon as they rise a bit so that the trader gets a quick profit. Does this suggest that it will be hard to see any decent long term growth in equities for the average investor if the big traders are unwilling to keep their money in equities long term?
Count me as skeptical of the whole notion that high-speed or computerized trading is depressing the stock market or otherwise distorting valuations.If anything, it has added to the market's liquidity and I think that is a good thing. The only thing that computerized trading is capable of exploiting is a lack of liquidity that leads to volatile stock prices. You can profit from a volatile but relatively trendless stock market by buying dips and selling rallies. I think that's what has been going on for the past few months. And I note that the Vix (implied volatility) has been trending down since May, and that is good evidence that rapid-fire traders may be contributing to market liquidity.
Bill-Not that you asked me, but a worthy read is Redleaf/Vigilante's "Panic."They argue that public onwership (that is, stocks publicly traded etc) is weak ownership. This is a profound commentary--and suggests that shareholders are in a weak position to exercise their perogatives and interests. I have long held this view.My guess is that investing in companies in which there are a few large shareholders might make sense--the large common shareholders will effectively represent all common shareholders.As an aside, Ray Irani, ceo-chair of Oxy Petroleum, has "earned" nearly $900 million in wages in the last 10 years. Oxy is a medium-sized oil company, and publicly held.If there was a single individual who owned Oxy, do you think they would have hired a chief executive and paid him $900 million in 10 years?Public shareholders seem to have little recourse, but to "vote with their feet" -- that is, sell.
Bill,I disagree with Scott. There is no need for HFT that seeks to exploit milliseconds. This does nothing for liquidity, valuations, or confidence. I would argue it undermines all three. In times of market stress, HFT et al derail what would normally be well functioning markets. We long passed the benefits of technology improving the market and reducing costs. We should heavily tax day/HFT trading as it only serves to scalp money from one hand to another without providing any economic benefit to our country.
RE HFT: Please describe to me what profit opportunities or arbitrage opportunities that these people are exploiting? I will then tell you how to profit yourself from doing the same thing. Otherwise, trading that is driven by a mechanical analysis of prices can impart no trend or direction to prices, since it lacks any fundamental focus.
Banks and HFs can setup collocated servers on stock exchanges to pick-off stock price information before it hits the public wires.Companies can submit faux orders across markets to analyze what the impact of a real trade could be.We are not talking about trends, we are talking scalping markets.Quote from the Cuban article: "Remember the rule about first there are the innovators, then the imitators, then the idiots ? It is why the stock market is truly in trouble.There is SO MUCH CAPITAL available at so little cost to so many that the time-line from innovator to idiot is measured in days, hours and probably even milliseconds.The guys who are actually smart and uncover new opportunities can’t even get in a position large enough to make it worth their while before the imitators and then idiots pile in right behind them."
My beef with the HFT thing is that it implies that there are those who trade with an advantage to the average investor. This is destructive to confidence in a fair, level, playing field. It is counterproductive to bringing average investors back to the market. Speaking of that, the average investor is largely nonexistant in today's equity markets. He is parked in bank accounts and bonds, probably of short duration, and/or he is in gold. I believe he will return, to some extent, but not soon, and not before meaningfully higher prices. HFT in an impediment to this IMO. It might well be that these contraptions contribute somehow to overall liquidity (they work in up markets as well as down) but for my money it isn't worth it. I agree with Pub. Shut the machines down and make EVERYONE play by the same rules. It will contribute to a much healthier market over time. Bill,The numbers of people who think the stock market is for suckers are legion. It is one of the things that indicate to me there is great value there now. There have ALWAYS been traders in the markets and always will be. Money that comes out frequently comes back in somewhere else. Rest assured there are many many institutions that can and will hold equities over long periods of time. You and I will never see them. They do not appear on CNBC nor do they write investment letters that require bold attention demanding headlines. They care not a whit for the 'fast money' crowd and pay little to no attention to them. When prices are right, they will buy in sizes that would stun average individual investors...and they just might turn around the next day and do it again. Equities have gone into and out of favor many times over the years and will continue to do so.
John,Thanks for your input. I wish you were still in the business so I could buy an hour or two of your time!
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