photograph by Leung Cho Pan / dreamstime.com
If the stock market is rigged, as author Michael Lewis says it is in his new best-seller Flash Boys: A Wall Street Revolt, then what should small investors do?
Be careful, writes Lewis, whose book was excerpted in The New York Times and featured on 60 Minutes. Like his previous book Moneyball (literally, inside baseball), it profiles a renegade who carefully studies the game with fresh eyes and figures out something ahead of the herd. In this case the renegade is a trader named Brad Katsuyama.
“The average investor has no hope of knowing, of course, even the little he needs to know. He logs onto his TD Ameritrade or E*Trade or Schwab account, enters a ticker symbol of some stock, and clicks an icon that says “Buy”: Then what? He may think he knows what happens after he presses the key on his computer keyboard, but, trust me, he does not. If he did, he’d think twice before he pressed it.”
Not that the average investor has much choice. Company 401(k) plans have made us do-it-yourself investors, like it or not. With money-market funds paying less than 1 percent and government bonds 2 percent, money has flowed into stocks — the TINA market, as in “there is no alternative.”
So what happens when I log into my TD Ameritrade account? Thanks to something called decimalization, stock prices are quoted in fractions of a penny instead of fractions of a dollar as they used to be. My trading history shows I bought Ford at 9.7799, Exxon Mobil at 99.0099, and FedEx at $93.01. The spread between the bid and ask price is a few pennies. What do I care? Following Warren Buffett’s advice, my holding period for these blue-chips is forever. A “limit” order instead of a “market” order will get the stock at a set price, assuming it doesn’t keep going up or “move away from you.”
Trades cost $9.99, but I got 50 free ones for moving an account from a “full-service” firm that charged eight times as much in commissions. My Vanguard Total Stock Market Index Fund charges $17 per $1,000 invested, and there is no sales charge and no back-end load. I can look at a chart that shows that its historical performance beats other mutual funds that charge front-end sales fees of 5.75 percent and annual expenses of $116 per $1,000 invested. I am old enough to remember mutual funds that charged 8 percent loads, as well as something called 12b-1 fees.
I can get research reports, ratings, price history, dividend payout, graphs and charts, market jargon, and instant order execution at the click of a button. Technology has made investing as accessible — and devalued — as journalism.
I understand how pennies add up to millions for big traders and mutual funds. And I can see why they jealously protect their intellectual capital, research, and equal access to a level playing field. One of the first to point out the flaws in the system was Memphis-based Southeastern Asset Management, which wrote about high-frequency trading in its mid-year shareholder report in 2010:
“Recent advances in technology, however, have enabled select short-term traders to gain structural advantages over other market participants. The ‘Flash Crash’ on May 6th highlighted some of the issues.”
The Flash Crash was the day the Dow fell 1,000 points in one day. It was below 10,000 for a short time. It is above 16,000 today.
It could, of course, go back to 10,000, or to 8,000, where it was in 2008. But my point is that small investors and big firms alike have enjoyed large gains in a “rigged” market.
Rigged is a matter of context and degree. You want to see rigged? Try buying a plane ticket from Memphis to Dallas on short notice, using frequent flyer miles. Or figuring out how much you and your insurance company will pay for an operation.
Try getting AT&T to unbundle your cable television package.
Or buying four tickets on Stub Hub.
Now that’s rigged.