Who would have thought, amidst a relatively quiet quarter-end, that the splashiest market news would come from the launch of a book tour? As Michael Lewis promoted his book “Flash Boys” on “60 Minutes,” he called for a major overhaul to our trading exchanges. His aim is to combat what he believes is a “rigged” U.S. stock market, brought to us by high frequency traders.
If there’s one thing we Americans share, it’s a loathing of an unfair system. So it’s no wonder that Lewis’ call to arms handily drowned out quieter reports of the fact that mid-March marked the five-year anniversary of a bull run in the U.S. market that began in 2009.
To the extent that Lewis is generating renewed scrutiny of market costs and efficiencies in a fair market, the conversation is worthwhile. We have been as vehement as Lewis about minimizing hidden trading costs and conflicts of interest such as those found within traders’ black-box relationships. Our emphasis on promoting a level playing field is one of many reasons we turn to alliances such as Dimensional Fund Advisors and other fund managers who demonstrate a transparent track record for managing underlying trading costs.
Is the U.S. stock market a model of perfection, with all high-frequency traders lily white? Clearly not. At the same time, there is considerable evidence that the market is continuing to handsomely reward those who adopt a patient, evidence-based approach to participating in it.
There also is compelling evidence that high-frequency trading has dramatically reduced rather than increased overall trade costs, ironically because of the cut-throat competition it generates compared to traditional tactics. Austin Gerig’s April 3 Time Magazine piece is one of a number of op-eds addressing this point. Other good references include, Jared Kizer’s April 2 Multifactor World blog post and Cliff Asness’s April 1 Wall Street Journal piece.
Put in proper context, Michael Lewis’ work is an interesting perspective on the inner workings of a messy market. It may also contribute to renewed steps toward the ideal of a market where all players receive a fair shake. But achieving perfect trading technique is nowhere near the greatest factor that will contribute to or detract from your own success as an investor. What still matters by a landslide is how you manage these and other market risks – confidently maintaining your low-cost, globally diversified portfolio according to your personal goals.