What is high frequency trading? Is it something you need to worry about? Don’t let the unknown keep you out of the market.
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When you buy a share, it goes through an exchange. An exchange is a huge data center where multiple computers communicate with each other. The big investment banks have computers in these centers.
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You call or e-mail your broker and tell them to buy one share of Apple for example. He or she places the order through the exchange. If a big investment bank has a computer in the exchange and your broker does not, the investment bank can make the buy faster. Thus queue jumping your broker and buying it first. The investment bank then sells it to you via your broker at a marginally higher price. That is the millisecond advantage. The price of a stock is determined by supply and demand. When an investment bank gets there first, they falsely inflate demand.
IEX is a new exchange not allowing these queue jumps in order to level the playing field and preventing the exchanges from charging extra for front row seats. You can’t choose your exchange. But investment companies pass these losses onto you in the form of higher fees. So be vigilant about your fees.
Does this scare you? It shouldn’t, there is nothing you can do. It should piss you off, but not scare you out of the market. By staying in the market, even with this going on, you’ll make more than if that money were stashed under your mattress. Your best protection is to avoid high investing fees.
The difference between a 1% and a 2% fee is a lot over the long term.Tweet This
Is this going away? There may be some slow change via legislation. More importantly, the DOJ is investigating it according to Attorney General Eric Holder. It may violate insider trading laws.
Legislation in this country has been going pretty bad lately.Tweet This
So what is the takeaway from this episode? The big investment banks are screwing the system. Use smaller ones who charge lower feels like Fidelity, Schwab, or E-Trade. And contact your local member of Congress and demand banker accountability.
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The Divide: American Injustice in the Age of the Wealth Gap: Matt Taibbi’s book on the growing wealth gap in America.
Flash Boys: A Wall Street Revolt: Michael Lewis’ book about the creation of an exchange where high frequency trading will garner no advantage.