Article Spotlight

 

In this series we analyze current financial articles and explain how the conclusions of the article relate to our investment strategy.

On Wall Street, The Rising Cost of Faster Trades

Article Spotlight: Read the Article

Forty eight milliseconds – that is how long it takes to execute a trade on the NYSE, according to Celent, a research and consulting firm.  High-speed computerized trading has been in the headlines lately, causing many investors to becoming increasingly nervous about the markets.  On one side, proponents are saying faster trading results in cheaper trading.  On the other side, investors are worried about the recent malfunctions, such as Knight Capital losing $440 million in 45 minutes because of software not working properly.

As high-frequency trading firms continue to innovate and hold stocks for mere seconds, investors do benefit from the lower bid-ask spreads.  These lower bid-ask spreads allow investors to move in and out of stocks more quickly and at a cheaper cost.  Questions have started to arise about whether costs will continue to decline.  The New York Times article mentions that:

Research from the broker Abel/Noser indicates that the total cost for an investor to get into and out of a single share of stock fell by more than half between 2000 and 2010, to 3.5 cents. Since then, though, the cost has leveled off and then ticked up in the most recent quarter to 3.8 cents, confirming a trend that has also been visible in recent data from Credit Suisse Trading Strategy and from Celent, a consulting firm specializing in financial markets

Should you be concerned about high frequency trading?  Not unless you are competing against the firms investing the millions of dollars to trade faster (with little evidence that in the long run they will achieve superior performance as they compete with each other). For serious investors, it is better to avoid viewing your horizons in seconds and, instead, look at your investments in terms of years and decades.

Further, invest in thousands of securities around the globe – not individual stocks with the objective of trading in seconds to pick up fractions of pennies with each trade.  One of our core beliefs is that any nonessential costs to the client should be avoided, so we are careful to trade only when necessary.  As high-frequency trading should have little-to-no impact on a long-term investor, we are comfortable that it represents little threat to our investment strategy.

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About Kenneth R. Smith

Ken is the Chief Executive Officer of Empirical Wealth Management. He holds an M.S. in financial analysis and is a Certified Financial Planner®.

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