Friday, July 24, 2009

Another Reason Why a Buy/Hold Strategy is the Way to Go, Part 2

By Taesik Yoon – In a post last Friday I wrote about a white paper written by Sal L. Arnuk and Joseph Saluzzi of Themis Trading LLC that discussed specific trading strategies designed at “exploiting new market dynamics” and how this has negatively affected real investors.

My coworker Sam (another contributor here) sent me a link to a front page article on today’s New York Times titled Stock Traders Find Speed Pays, in Milliseconds.

Click HERE for a link to the article.

The article essentially deals with the same topic--how traders are able to profit from high-frequency/high speed trading due to incentives, loopholes, and speed advantage in order placement. However, it’s more reader friendly. It also provides a very detailed real world example of how such a trading strategy led to higher prices being paid by regular (i.e. slower) investors for shares of Broadcom, a semiconductor company, on July 15.

As I noted in my prior post, the best way to minimize the impact of such strategies is to follow a simple BUY/HOLD strategy. Even in the example presented in the article, the exploitation in Broadcom’s stock price was within the range of $26.20 and $26.40 per share. For portfolio managers attempting to get the best execution for large blocks of share purchases, this probably will lead to inflated prices paid. But for an investor willing to hold long-term, paying $26.20 or $26.40 doesn’t make much of a difference if you expect the stock to be at $40 in a couple of years.

Of course, no one wants to pay more than they have to. Nor should they. But until these practices are curbed, the risk that you may pay higher prices on stock purchases does exist. Let’s just hope that these strategies don’t result in the persistence of (or worse yet, growth in) artificially inflated stock prices over longer periods. The last thing we need is the development of another bubble.