“High-frequency trading” (HFT) was a huge media topic this week due to author Michael Lewis’ appearance on last weekend’s “60 Minutes” as part of his promotion of his latest book titled Flash Boys. What captured media attention was his claim that the stock market was a "rigged game." This statement was based upon his research for Flash Boys that detailed the impact of high-frequency trading on the stock market. HFT is a very complex trading strategy that relies on computers to trade at lightning speed to make a small amount of money on a huge volume of trades. In fact, it is theorized that 30 to 50 percent of the current stock exchange volume is HFT.
High-frequency trading is an extremely complex issue that simply can't be summarized by declaring the stock market a "rigged game." In most forms, HFT is not illegal. It falls into a grey area of trading. If certain investors have a speed advantage, is that unethical? It is hard to say and supporters of HFT maintain that it adds liquidity to the market and facilitates trading. However, the aspect of HFT that is not defensible is that it also allows these trading firms the ability to know what other investors are doing and trade ahead of them. This practice is called "front running" which is certainly unethical and illegal.
The issue is so broad and complex, it is very difficult to determine who is doing what, and how that is impactful to the stock market as a whole. This is not a new issue for regulators who have been looking at HFT for some time now. We think the good news is that the recent attention on the topic will result in appropriate market reforms which will benefit investors. Financial markets operate on the confidence of the participants, and anything that enhances transparency and confidence benefits all investors.
While Mr. Lewis is a great writer and entertaining storyteller, his comments are unnecessarily inflammatory and might be intended to sell books and maximize the value of a possible film adaptation.
Employment Numbers March On
Turning to the capital markets, today the March employment numbers were released with a 192,000 increase in nonfarm jobs and a slight uptick in the unemployment rate to 6.7 percent. The consensus among economists was for a 200,000 increase in jobs. Due to the late-December expiration of long-term unemployment benefits, there was an expectation that the employment numbers would be even stronger than anticipated.
Historically, when long-term unemployment benefits run out, there is a significant pickup in employment. The “whisper number” was for a gain of 250,000 or more jobs. Defined as the number economists secretly hope will be the outcome, the “whisper number” usually is not reached by consensus and therefore is rarely published as an estimate. The bottom-line is that markets perceived the March job creation as a mild disappointment which resulted in some weakness in the equity markets.
Takeaways for the Week
- We view the current employment data to be moving in the right direction
- We are not overly concerned with the monthly volatility of the labor statistics