Michael Lewis is at it again. The author (of The Big Short, Liar’s Poker, Moneyball fame) is out with a new book, Flash Boys: A Wall Street Revolt,in which he claims the U.S. stock market is rigged in favor of high-speed electronic trading firms. High-frequency trading (HFT) uses computer programs to send a ton of orders into the market and make profits on price imbalances that may arise within a millisecond of trading. The price imbalances are just fractions of a penny but given the volume they trade in, these firms can make serious money on a very small difference.
Say what, Michael Lewis!? The market is unfair!? Well, yes, unfortunately it is. But it’s not just because of high frequency trading. As I pointed out in my article on Bill Ackman and Herbalife, there are tons of reasons why large, institutional investors have an advantage over individual investors. The ability to actually manipulate the market, like Ackman has been trying to do, should be regulated and not present. But there’s no way to regulate against other advantages, such as the huge research teams and number of computer programmers hedge funds employ.
So, does this mean we should all give up and stick our money in the mattress? Absolutely not. The market is still fair enough that an individual investor can profit given they do their proper research. And you can absolutely use existing market advantages to make your research stronger. For one, take advantage of the millions hedge funds have to spend on research (without actually spending any of your own money) by looking at what hedge funds are buying.
The news will often report what big moves hedge funds are making, such as this article from last week about which technology stocks hedge funds are buying. Or, you could check out a list like the one Goldman Sachs publishes about the top 50 companies held most by hedge funds (below). You should never take these picks at face value, but you can use them as a great starting point to guide you on which companies to look into.