News & Insights
The Not So Flash Boys (and Girls)
Star journalist Michael Lewis has produced quite a stir during the last few days with his exposé of the arcane and byzantine world of high frequency trading or HFT. The headline quote from the book is "The market is rigged" and it has caused some well-deserved discomfort among these opportunistic creatures of the HFT community. The stock market's HFT denizens are its least accountable participants and inhabit the backwaters and eddies of the market's poorly understood infrastructure exploiting a few milliseconds of information advantage granted them by virtue of their close physical proximity to the trading centers and, in many cases, the preferential access granted them by the various stock exchanges for cash.
This sale of preferred access to the HFT crowd is perfectly legal but does place the institutions and individuals without this access at a disadvantage which costs them just a small fraction of a penny on most trades but adds up to billions for the HFT crowd. The exchanges sell this access for cash which represents a considerable source of revenue to the shareholders of the exchanges. Legal or not, this is certainly a shady practice, but no shadier than the abuses that took place during the era of "fixed commissions" in the 60's & 70's or when some stocks traded in fractional increments 15 years ago. This legal picking of the stock investor's pocket has been a cost of doing business since brokers first met under a buttonwood tree on Wall Street in the 18th century. This and the other conflicted practices which abound in our financial system are why investment firms like Altavista have chosen a fee for service approach. Our clients pay us a fee which represents our only source of income. The last thing an investor needs is to have the firm they entrust to navigate through the various risks and conflicts implicit in financial markets find itself conflicted.
In essence, Altavista is at the precise opposite end of the spectrum of the "Flash Boys." We do not pursue investment strategies that depend on or are materially affected by the pennies that the hyperactive overgrown adolescents of the HFT world seek to extract. To us the stock market is a place where we can go to obtain shares in good companies that we expect to hold for a considerable period of time. We believe we can do this on a fair basis, but we applaud Mr. Lewis for shining a light on Wall Street's murkier practices.
The current investment climate is a mixed bag for investors as the S&P 500 crosses and re-crosses its all-time nominal high during recent weeks. We expect the economy to grow at a faster pace than last year despite the slowdown experienced in the first quarter. We think growth will be propelled largely by a pickup in business investment in capital goods. This sector of the economy has been slow to recover out of the financial crisis and we believe the conditions are set for an overdue increase. On the other hand, we think that stock prices largely reflect this anticipated development and so we would not be aggressive in our stock positioning.
However, with the Federal Reserve's current expansionary policies intact, it is difficult to see what would knock the market off its slightly overvalued perch. We think interest rates are set to rise, but this rise will likely occur slowly, so bond investors will have time to react to the changing "yield curve” implied by these rising rates. The biggest risks are in the emerging markets, particularly China. These risks are well discounted by the market and the modest valuation of these markets should make them a profitable place to invest for patient investors over the next 3 to 5 years.
THE ALTAVISTA INVESTMENT TEAM – SPRING 2014