Remember Blockbuster? I loved that place as a kid. It was a family ritual to go to our favorite local Mexican restaurant every Friday night. As soon as the kids finished eating (which was pretty quick, because this place just microwaved the plates…yum!), we would race down to the Blockbuster at the front of the shopping center.
Straight to the game section, which was our spot. Which game were we going to attempt to beat that night? It could have been Goldeneye, or trying to unlock every level of Mario Cart.
Whatever it was, our task for the night was to beat the game… with as many Surge drinks as were needed!
The first run through of each level was always difficult. As we progressed, though, if we lost after getting further into the level from our first time, it didn’t take us as long to get back to the point where we lost, because we knew all the obstacles, and how to get around them. We would quickly hit a checkpoint, and away we went.
High frequency trading (HFT) is that gamer that has already played the level before, and is quick at getting to the end point. The investors are those first time “level” players.
The ABCs of HFT
Michael Lewis brought this term “high frequency trading” to the forefront of everyone’s mind with his 60 Minutes interview on his new book.
He sure as hell knows how to get people talking about his book!
Media outlets clamored to this idea, and it spread like wildfire. It scared people, which was his goal. It scared people, though, because they didn’t understand it, and, of course, Lewis was just taking one side of the argument.
HFT is basically the idea of computer programs understanding what you are going to buy, and purchasing it before you. Then they mark up the shares a small bit.
This would be similar to someone knowing you wanted to buy an iPad, and having faster means of transportation than you. They would go to the same Apple store you intended to go to, buy the iPad at retail price, and then be back at your house offering it to you for a couple dollars more. Instead of paying $500 for that iPad, you pay $515.
2 Ways HFT’esque’ practices are impacting you everyday… And you don’t even know it!
A new trend that is emerging is people growing their own produce. I personally think this is awesome. It does take time and other costs to keep the growing going.
Despite this trend starting to take off, many of us still use the grocery store (or local farmers market) to buy our produce. Well, do you think that these places are selling the produce at cost? No way.
By the time that tomato we purchase in the store gets to us, there have already been a couple of pennies added to the price along the way. The grocery store, the distributor and the farmer have all had to make some money along the way. (The distributor and grocery store get cut out of the equation if shopping at a local farmers market).
My favorite sweatshirt that I put on after work every day provides me great comfort, but many people made a few pennies on that purchase along the way.
The price that I paid for the sweatshirt at the store included the price the store paid and also the price the clothier paid to make the sweatshirt.
Of course, I could cut all of those people out and make my own sweatshirt. But the fact is my time is spent better elsewhere rather than learning how to sew and stitch. That’s the reason I’m willing to pay a little extra for this.
I could also always contact the clothier directly and cut the store out but, again, the convenience of the store makes it worth the markup.
Fact of Matter: HFT doesn’t keep you from making money
Technology has been great in that it has helped us all lower the cost for us to do business, transact business and even communicate while also making it easier for us to do business, transact business and communicate.
Although technology has lowered costs, it hasn’t made things free. We must compensate those that help to create these efficiencies.
High frequency traders help to provide liquidity (the ability to buy and sell securities whenever we want) in the market, and also allow companies like Charles Schwab to charge only $8.95 per trade—as opposed to the $50 it use to cost.
With the technologies that have been developed, we are also now able to trade stocks whenever we want during the day, and we can see how much money we are making from the palm of our hand.
These conveniences and lower “experienced” costs are worth the less than pennies markup that we have to pay on our shares. Those people that bought Facebook at $19 a share aren’t whining about having to pay minimally more.
They still have made money, and high frequency traders didn’t impose on their ability to do that.
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