McClure Investment Management, LLC
2014 1Q Market Commentary
For a market that hasn’t gone much of anywhere (+1.30% for the first quarter of 2014) there sure has been lots of yelling and screaming going on. Let’s look at where the noise has been coming from:
High Frequency Traders
Author Michael Lewis’ appearance on 60 Minutes has kicked up a firestorm of controversy regarding High Frequency Trading (HFT) which he describes in his new book, Flash Boys. His assertion is that high frequency traders are able to insert themselves between us and our stock trades acting as a sort of unwanted middleman. I believe Lewis’ assertion is essentially true, these traders make our buy prices minutely higher and our sell prices minutely lower. (As my investing style has very low turnover this is a very small issue for us.) However, the public outcry has been significant and is still ongoing. To date, the best public shouting match came on Tuesday, April 1st on CNBC as Brad Katsuyama, the good guy from Flash Boys, got into it with bad guy William O’Brien. It’s worth seeing. Lewis has since also been interviewed on numerous programs including Charlie Rose and The Daily Show. While Lewis’ claims have some merit, I believe his calling the market “rigged” is an exaggeration. The playing field may not be 100% fair, but it is far from rigged.
Scott Patterson’s Dark Pools, written in 2012 addresses the issue of HFT in a slightly less accessible but, ultimately more comprehensive manner. If you follow this link to Dark Pools on Amazon, you’ll see that Michael Lewis himself called it “an excellent history of the early electronic traders.”
Don’t get me wrong, Michael Lewis is a great writer. He’s written some great books, i.e. The Big Short and Liar’s Poker, that I’ve used as required reading in courses I’ve taught. But Flash Boys isn’t going to be one of them.
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