NEW YORK (TheStreet) -- Think I can't defend what feels like a rigged game? Read on.
My father, who worked in finance for more than 50 years, grew up in the country during the Great Depression as a Roosevelt Democrat. I asked him what he thought of high-frequency traders, the automated computer outfits that buy and sell constantly, utilizing minuscule split-second advantages. High-frequency traders are now the subject of the latest Michael Lewis book, Flash Boys, and the target of New York Attorney General Eric Schneiderman.
Dad replied that if someone worked to better educate and equip themselves to profit legally, then they should prosper. Here are three reasons why the Old Man is right.
1. It starts at the top.Just as innovation in the space program ultimately impacted the entire society, nearly every major advance that has helped individual investors came from the resources only large institutions could muster. Computers, trading programs, specialized investment newsletters and the like were initially the province of larger, richer entities that could afford the research outlay. Technology that benefits high-frequency traders now will eventually be commonplace, just as an iPhone from Apple (AAPL) now contains 240,000-times more computing power than the Voyager I spacecraft. 2. High-frequency traders have tremendous weaknesses to exploit. Earlier this year, I interviewed former Dallas Cowboy cornerback Aaron Kyle. Kyle theorized that more interceptions are returned for touchdowns by members of the secondary now that offensive lineman are so massive in size that they can't pursue relatively sprightly pass defenders after a pick-off. The same holds for high-frequency traders. Large orders do not work with thinly traded securities. That allows for others to profit from those and other limitations. High-frequency traders cannot adapt like an individual investor can. Recent articles in Harvard Magazine and The Wall Street Journal detailed how computers erred in certain circumstances, in one case comparing it to traveling around a rich and detailed city by GPS. 3. High-frequency traders and individual investor will profit. The more resources poured into a market, the better. Obviously, liquidity is important. The technological firepower of high-frequency traders improves exchanges over the long term, as do the transaction fees. In my dad's time, the Big Board closed on Wednesdays to process paperwork. More transactions create greater efficiency for fairly setting asset prices. Are high-frequency traders out to make money? You bet. Why else would anyone work on Wall Street? As Warren Buffett has said, "I always knew I was going to be rich." There is no doubt that most individual investors have benefited from Buffett's impact on the marketplace, just as they have from other innovative ideas in the marketplace. At the time of publication, the author held no positions in any of the stocks mentioned. This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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