Over the last six months, there has been a building crescendo about the negative effect of high frequency traders on long-term investment returns. We know there is a problem when our clients and professional acquaintances refer to high frequency traders as changing the investment landscape. We view high frequency traders as a normal and accepted part of the stock market.
Unfortunately, the May 6th 2009 intraday market correction of hundreds of points in a matter of minutes, more commonly known as the flash crash, has brought high frequency traders into the lime light. High Frequency Trading uses quantitative investment computer algorithms to hold short-term positions and quickly sell them with the intent of capturing just a fraction of a penny per share or currency unit on every trade.
In an effort to give our opinion, let me first state that high frequency trading has been going on for as long as there has been a stock market. Since the 1800s, if you wanted to trade a stock quickly you had to have enough money to buy a seat on the NYSE. The beginning of the High Frequency Trading started in the early 1980s, where computer trading became available with the ability to place millions of orders a day. The current version of High Frequency Trading is no different than what started in the early 1980s, just a little bit faster on the information and order processing.
So you might be thinking, what in the world does this have to do with me and my retirement investment account: NOTHING. That’s right; after all the hubbub surrounding High Frequency Trading, there is no evidence that long-term investment returns have been affected at all. According to Google Finance1 , for the 30 years beginning, 6-25-1982 to 6-21-2012, the S&P 500 Index has increased by 1,135.56% or an annualized rate of return of 8.74%. This example helps to illustrate that if you intend to be a long-term investor, then high frequency trading will have minimal affect on your returns.
The long-term Investor should be more concerned about buying the right stock at the right price; hence, investing. These High Frequency Traders are playing a different game, by trying to make a quick penny on millions of shares; otherwise known as speculating. So continue to be the long-term investor and grow your nest egg by sticking to a sound investment plan and contributing regularly.