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Why high-frequency trading is meaningless

You've probably been reading a lot about high-frequency trading lately. I'm going to explain why you and your clients have nothing to worry about.

You’ve probably been reading a lot about high-frequency trading lately. I’m going to explain why you and your clients have nothing to worry about.
First, let me tell you what’s going on, which is really quite simple.
Bunches of guys are pooling millions of dollars, investing in algorithms, and then trading equities a gazillion times a day. They route their orders through big brokerage firms that keep investing fortunes in computers so the whole process can go faster and faster. Serving the traders and their brokers are the exchanges, who also have invested bazillions in computers to speed things along.
Since this entire process is never fast enough to please traders who salivate over a three-nanosecond advantage over their competitors, exchanges are now allowing “naked access.”
Before you start breathing heavily, all “naked access” means is that exchanges are allowing traders to bypass the frustrating microsecond delays required to identify who they are and then plunge directly into the trading maelstrom anonymously.
This is raising some eyebrows at the Securities and Exchange Commission, which is also worried about “flash orders,” or superspeedy orders in which some of the super-duper traders get to sneak a peek at other traders’ pent-up orders secretly and change their plans as a result.
Where will all this hyper-trading end? Probably in some mess that Congress and Michael Moore will tut-tut about.
Despite a few arcane rules that the SEC may eventually impose, steroidal trading is likely to continue unabated. Hyperkinetic traders will defend their frenzied trading by opining that it adds liquidity, which is good for everyone. (Sure, and if you believe that, let me sell you some auction rate securities.)
The truth is, for average people, Wall Street’s trading arenas are like Times Square in the raunchy days before Disneyfication: A glittery, dangerous place that becomes more exciting and iconic the farther you are from the actual tawdry mess.
All this trading benefits no one but traders, the exchanges — which are now for-profit businesses — and computer salespeople. Sure, as a nation, we should invest in more productive (and boring) things like faster railroads and better cell phones. On the other hand, if the financial markets didn’t waste capital on faster trading, they’d probably waste it on leveraged buyouts, which do more damage.
OK, so what should the adviser to an ordinary investor do?
Not much. Just as in the past, I’m sure individual investors are being disadvantaged vis-à-vis traders and institutions. But there’s no evidence they’re being hosed more now than they were before.
The best advice is simply to steer clear. Just as normal people didn’t hang out in Times Square in the old days, in the long term, mom-and-pop investors shouldn’t be making regular visits to real or electronic trading floors. Equity markets are important, but dangerous, places. Advisers should be cautioning investors to enter at their own risk, and to do so rarely or as part of a pack (as an investor in a mutual fund, for instance).
When individual investors do enter the markets, use them sparingly and hold purchases for the long term. Those actions pretty much offset any pricing pain retail investors suffer.
High-speed trading is just the latest in a long line of Wall Street developments that primarily help Wall Street. Enjoy the spectacle, but do so from a distance.