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 CBS “60 Minutes,” he called for a major overhaul to our stock 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 opinionated Americans share, it’s a loathing of an unfair system. So it’s no wonder that Lewis’s 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.
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 investing.
There is also compelling evidence that high-frequency trading has dramatically reduced rather than increased overall transaction costs, ironically because of the cut-throat competition it generates compared to traditional tactics. Felix Salmon’s March 31 Reuters’ commentary is one of a number of opinion pieces addressing this point. Other solid references include Jared Kizer’s April 2 Multifactor World blog post and Cliff Asness’s April 1 Wall Street Journal article.
Put in proper context, Michael Lewis’s work provides an interesting perspective on the inner workings of a messy market. It may also contribute to renewed efforts to ensure that all market participants receive a fair shake. But achieving perfect trading technique is nowhere near the most important factor in your success as an investor. What still counts more is how you manage these and other market risks – confidently maintaining a low-cost, globally-diversified portfolio aligned with your personal goals.