Sunday, October 25, 2009

Staying Calm in a World of Dark Pools, Dark Doings

Is this a stock market or a maelstrom?

Last week, the Securities and Exchange Commission accused the Galleon Group of hedge funds of trading on inside information. Tens of millions of shares move each day through "dark pools," where quotes aren't displayed until after the trade is done. "Flash orders," appearing for a split second, give some customers a sneak peak at potential trades. More than two-thirds of stock-market volume comes from high-frequency traders, who can buy or sell in less than 400 microseconds, or nearly a thousand times faster than you can blink your eye.

When markets move so maniacally fast, and firms like Galleon seem to have such an informational edge, how can small investors possibly stand a chance? The game seems rigged to favor the hyperactive giants of Wall Street.

In one sense, that is true. If you try to play Wall Street's new game on Wall Street's terms, you will probably come off the field on a gurney. But you are under no obligation to churn your own portfolio just because other people juggle stocks for only minutes or seconds at a time. Paradoxically, their frenzy renders you a service as a buy-and-hold investor: On the very rare occasions when you do need to trade, you will be able to do so more efficiently than ever before.

Let us put the high-speed market in perspective.

Read more