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How to Survive in the Age of High-Frequency Trading

Stocks in this article: NFLX FB AEP NEE AAPL BRK.B BRK.A BATS KCG

Dos and Don'ts

Although we hope regulators will eventually step in and restore some order to the market, betting on the timing and nature of any upcoming changes would be unproductive speculation. In the meantime, it's clear that savvy investors need to adjust to current realities. We researched what works and what doesn't, and here are some of our results:


1. Go for the kill. Don't expose yourself to the higher level of risk inherent in this market unless the trade promises superior return. When you find it, execute. This means less frequent trading and deeper research.

2. Piggyback on the expertise of professional investors. Doing your own quality research is hard, time consuming and expensive. Use the research reputable hedge fund managers have already done by utilizing services like Stockpickr to pick the brains of professional investors.

3. Minimize use of leverage and increase your time horizon. Being leveraged in a lightning-quick computer-driven environment may result in dramatic losses. Increasing your time horizons is a solid way to mitigate the potential risks that come with increased short-term volatility.

4. Integrate equity indexes into your portfolio. Scholarly research (e.g., Triumph of the Optimists by Dimson, Marsh and Staunton) shows that equity index investing, such as through SPDR S&P 500 ETF (SPY), is a solid strategy for a long-term outlook.


1. Attempt to trade economic releases or earnings reports. Algorithmic trading platforms feed machine-readable economic and earnings releases into their models to determine the impact of news within milliseconds, leaving a human trader virtually no chance to profit. Competing against a player with this kind of technological edge is unwise. Don't do it.

2. Trade frequently attempting to capture small moves. Exploiting short-term moves is a game dominated by HFT, and with good reason. With millisecond execution times, algos will jump ahead of your orders to capture risk-free opportunity. Don't.

3. Place stop orders. Stop orders are visible to HFT algorithms, which in turn happily prey upon investors who use them. Don't.

Adapting to the new equities landscape isn't the only option. Charlie Munger of Berkshire Hathaway (BRK.B) famously referred to abusive HFT algorithms as rats in a granary, and the savvy investor may well want to look into other granaries altogether.

Investment alternatives beyond the more traditional stocks and bonds are growing in popularity and sophistication, offering options for those of us frustrated with the state of affairs in equities. We talked about direct land investment in a previous article, and will discuss other opportunities in upcoming pieces.

At the time of publication the author held no positions in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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