By Brendan Ruchert-Dixon
Wall Street may be a rigged game in some respects, but it doesn’t matter.
High-frequency trading houses such as Knight Capital Group Inc. (NYSE:KCG) are making the news more and more often, with news outlets questioning whether they are rigging the game against less-advantaged retail investors. However, it’s important to remember there is more than one way to win at this game.
There are a couple complaints I hear a lot about how high-frequency trading is hurting the little guy. The first is that retail investors can’t get the bid/ask prices they deserve because traders with better equipment are jumping ahead of them.
I have noticed it myself many times: I see a stock I want to buy with a bid of 19.07 and an ask of 19.09. I put in a bid of 19.08, only to notice that immediately afterwards I am left out of a trade that executes at 19.0801. I end up either unable to make the trade or forced to bid an extra cent higher to make my purchase.
Is this fair? No. Do I miss out on some profits because of it? Yes. Would I support some kind of regulation to stop this? Sure.
But do I lose sleep over it? No. On any given trade, an individual may miss out on as much as 0.1% (usually less) that they may have booked without this unfair playing field.
As long as small investors only trade in or out of each position only once a or just a few times a year, they’ll miss out on only a fraction of a percent. This is often less than the losses they may have incurred from higher trading commissions as little as 10 years ago.
The above article comes from Covestor. For more information on Brendan Ruchert-Dixon and to view his Alpha Trapper and Beta Blocker Covestor models, visit Covestor.com.
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