Does it erode confidence in the market?
Now, there is an argument that allowing high-frequency traders to game the system, if you will, is bad in a more general sense, by discouraging people from investing in stocks in the same way that they don’t gamble at a casino. The results of a recent Gallop poll are instructive on this point. According to its estimate, only 52% of Americans own stock outright or as part of a mutual fund or self-directed retirement account. This was the lowest level since Gallop began monitoring the metric nearly 15 years ago.
Charles Schwab, the founder and chairman of the eponymous Charles Schwab Corp (NYSE:SCHW), touched on this in a recent op-ed piece. “[L]ooking at our capital markets today, we should all be concerned. It’s becoming increasingly difficult for individual investors to compete on a level playing field. The system seems rigged against them. And they are responding by walking away.”
In response, I would say: Consider the source. Stockbrokers like Charles Schwab Corp (NYSE:SCHW), Morgan Stanley (NYSE:MS), E TRADE Financial Corporation (NASDAQ:ETFC), and to a lesser extent, Bank of America Corp (NYSE:BAC)‘s Merrill Lynch make money on trading commissions. And as day traders, their bread and butter customers, come to terms with their complete competitive disadvantage, they will presumably trade less.
Beyond this, while individual investors may be abandoning individual stock ownership, as Charles Schwab Corp (NYSE:SCHW) points out, the explanation behind the trend isn’t clear-cut. The Gallop poll cited above, and quoted by Schwab to bolster his point, concludes that it’s probably a function of Americans’ ability to buy stocks more than anything else. Meanwhile, its 2011 survey had this to say: “The financial crisis and the losses it produced for many investors have combined with government bailouts and Wall Street scandals to turn many Americans away from investing in stocks.”
Our last remaining edge on Wall Street
The point is, we really don’t know whether or not high-frequency trading is bad for the market. To cite my colleague Ilan again, “There’s a larger point about what markets have turned into, but public policy-wise, you often want to think of [high frequency trading] as an alternative to other forms of market making, not to investing.”
At the same time, we can say with greater certainty that there’s little to no harm done to long-term investors. Activity like this may even play into our favor. “I’m a long-term investor,” fellow Fool Morgan Housel recently wrote. “The fact that you and I don’t have to play these insane short-term games is the last remaining edge we have over Wall Street. And frankly, it’s enormous.”
The article Legal Insider Trading for $6,000 a Month originally appeared on Fool.com and is written by John Maxfield.
John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America.
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