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dudemonkey (54.40)

A rational perspective on high-frequency trading

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July 29, 2009 – Comments (1)

To an intelligent investor, high frequency trading is an interesting philosophical point and a reaffirmation of the principles of buying great companies at a discount to their intrinsic values.  We knew that we couldn't compete with Goldman Sachs and the other big players in the space so we simply elected not to play their game.

It can be argued that the big players are able to shave fractions of a penny off of transactions and pocket the difference and it can be argued that this might not be great for trading in general.  I don't really have an opinion on that because, frankly, I don't know enough about the technical details of how these trades occur.  But, at the end of the day, there are few implications of this kind of front-runner trading on the intelligent investor.

To an intelligent investor, it's the VALUE not the PRICE of a company that is foremost in our minds.  We estimate the value of the company and sit and wait for the price to fail to fully reflect the value and then we scoop up shares by the handful, shovelfull, or truckfull depending on where in your investing career you are.  Goldman Sachs and the other members of their banking syndicate can never really take that strategy away from us, they can only make it easier by creating wild volatility.

You could argue that they could force prices to be permanently divorced from the fundamentals of a company, but I question how long they could do that and continue to make money trading in an entirely irrational market.  However, even if they were to do that, we would simply redefine  our valuation to measure the dividends or current assets or something else that we could reasonably  expect to be predictable.

1 Comments – Post Your Own

#1) On July 29, 2009 at 10:47 AM, SolarisKing (< 20) wrote:

I find it hard to believe how many people on this site find nothing wrong with the fact that there is a one sided advantage given to the folks who already have an advantage, and have already shown that they CAN NOT be trusted.

Even if YOU (generic large case you) as  an investor manage to ride it the right way, i feel compassion for all those others that get screwed.

This sort of manipulation runs small businesses into the ground. Is that really good for anybody?

I mean, come on. GS has admited publically that the HFT is an unfair market manipulation. Those are the words that GS used when they filed against the fellow that stole the secrets.

Winning by following the cheaters is not how we should think.

And saying we can not do anything about it is an excuse. That excuse has been used throughout history, Every time anything was ever accomplished (american revolution, abolish slavery, etc) against an empire, first a large percentage of the population said 'we can't do anything about it'. 

Can't, or won't? Where would you be now if your ancestors had said that?

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