Other Voices

Let's keep perspective on high-frequency trading

Lost in the hype is the key question of how high-frequency trading affects the average investor's portfolio

Apr 27, 2014 @ 12:01 am

By Mark Casady

Michael Lewis' book “Flash Boys: A Wall Street Revolt” (W.W. Norton & Co., 2014) has provoked a wave of media coverage regarding high-frequency trading.

This public dialogue has the potential to shed light on important issues facing our financial markets. But that can happen only if the discussion is fact-based, rational and, most importantly, focused not just on one controversial practice but on the broader set of issues that affect the average investor's access to efficient, liquid and fair financial markets.

Let's start with the HFT debate.

The media coverage around the book's release has included some thoughtful analysis as well as some unsurprising sensationalism. All that is fine as far as it goes, but lost in all the hype is the fundamental question of how high-frequency trading really affects the average investor's portfolio.

At LPL Financial, we don't engage in high-frequency trading, but we recognize that true long-term investors need not be overly concerned about high-frequency trading's impact on their investment portfolios.

High-frequency trading isn't a new phenomenon; it has existed for more than 15 years.

Some think HFT helps create more-liquid and more-efficient markets, thus reducing the costs to investors as they make market transactions.

To be sure, there is a real possibility that some forms of high-frequency trading are abusive. As with most market practices, there are many different forms of high-frequency trading, and Mr. Lewis' book focuses on one model that uses sophisticated computers to see stock orders coming in and take positions ahead of them.

It is possible that some of the firms using these tools are gaming the system. If so, regulators need to take action.

But let's preserve perspective. The vast majority of investors are and should be buying and holding positions for the long term.

An investor who buys shares in Apple Inc. and plans to hold them for months or years is simply not materially affected even if, as some claim, high-frequency trading has caused the price at which those shares were purchased to be a penny higher.

Although the risks posed to average investors by high-frequency trading may be modest, the debate has done a service by helping raise awareness about several tangential activities that may affect investors.†

One example is the practice of payment for equity order flow, in which brokerage firms receive a small payment for directing orders to different parties for execution (LPL Financial doesn't engage in this practice either). In some instances, this can be construed as a conflict of interest or creating additional expense for investors.

Ultimately, it is incumbent upon our industry to make sure that investors have the transparency they need to engage with the financial markets.

There is always room to strengthen investor protections. Mr. Lewis' book and the resulting dialogue can help.

Let's use this moment not to indulge in sensationalism but to really explore what affects investors and how we can protect their interests in the financial markets.

At the end of the day, what matters is protecting investor confidence in our markets. A diversified portfolio — including U.S. equities and built in partnership with the help of an objective, unbiased financial adviser — remains the surest path to achieving one's personal financial goals.

Mark Casady is chairman and chief executive of LPL Financial.

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