(BAMSouth.com Publisher Jack Criss recently spoke with the President & Chief Investment Officer of Pinnacle Trust, Jeremy Nelson, about the controversy surrounding High Frequency Trading that has erupted since the publication of author Michael Lewis’ new book, “Flash Boys.” Nelson has been with Pinnacle Trust, which is based in Madison, Mississippi, for 10 years and is known throughout the South as a leading expert on the markets.
BAMSouth.com: So, while standing on one foot: What exactly IS High Frequency Trading?
Nelson: HFT is a form of algorithmic trading where proprietary trading strategies move in and out of positions in fractions of seconds. The goal is to pick up cents or fractions of a cent on each trade.
BAMSouth.com: In your view, does it serve a useful purpose in the market?
Nelson: I think a good case can be made that HFT provides liquidity to the market. HFT makes up more than half of all trading and has essentially replaced the traditional market maker on the floor of the exchange. With this bid/ask spreads have come down and traders can put in much more precise orders. All that being said, it is a double edged sword. The “Flash Crash” on May 6, 2010 is a perfect example. When high frequency liquidity left the market a vacuum was created and stocks dropped precipitously.
BAMSouth.com: Have your read Michael Lewis’ book? If so, what is your take?
Nelson: I am about a quarter of the way through it—it’s a great read. Not quite as good as his “Big Short,” though. I’ll give you my opinion once I get through the whole thing.
BAMSouth.com: Should the market, i.e., Wall Street, be more transparent? That appears to be one of Lewis’ arguments.
Nelson: I think transparency is good but as technology advances it is going to become more and more difficult for the average investor to understand what is going on behind their computer screen. My feeling is that the average investor just wants to be able to go online, put a trade in and watch it go through. They don’t care how it works. Transparency will help the more sophisticated trader.
BAMSouth.com: What do you think of the new trading system that has started as a result of all this controversy—IEX?
Nelson: It may be good—the jury is still out. There could end up being less liquidity and more spread between the bid and the ask causing people to pay more.
BAMSouth.com: Any final thoughts on the controversy surrounding the Lewis book?
Nelson: I’m concerned that headlines like “Wall Street is Rigged” are going to detract people from investing. Maybe the trading game is rigged against the little guy. The little guy probably shouldn’t be “trading.” They should be investing. Over history, stocks have grown at an inflation-adjusted rate slightly above GDP growth. This ensures that investors can maintain and grow the purchasing power of their money. Investors need to focus on the long-term, invest in diversified portfolios (stocks, bonds and alternatives) and not react to headlines. If they do this, they are much more likely to have a sound financial future.
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