High Frequency Trading and Socially Responsible Investing

Michael Lewis is enjoying a lot of media attention these days.  He’s the author of a new book entitled, “Flash Boys,” and he was recently interviewed on 60 Minutes.  The book describes how a growing number of professional traders are gaming the markets through high-speed fiber optic, computer-driven trades programmed to beat average investors to their own trades and thereby profit risk free.

These traders, employed by the large brokerage houses, are able to locate their computers literally right next to the New York Stock Exchange and Nasdaq servers that process market trades.  If you put in an order to buy a stock, they can jump in and buy the stock ahead of you, then turn around and sell it profitably to the highest bidder seconds later, before you even see your bid price.  You pay more for the stock you chose to buy but you don’t even realize the price was artificially inflated.  When algorithmically programmed computers can perform this trick many thousands of times a day, the risk free profits are in the millions.

If you are a socially responsible investor, concerned with investing for a better future in a sustainable economy that works for all of us, high frequency trading should bother you.  Not only is the process blatantly unfair, it potentially destabilizes the markets and, at the very least, effectively creates a tax on the entire U.S. financial system, raising the cost of doing business for all of us.  Moreover, when the markets are essentially rigged, investors and people in general lose trust in our entire political and economic system.

Yet if you are a socially responsible investor, is high speed trading hurting your personal portfolio?  No, it isn’t.  Long-term, socially responsible investors do well when they astutely choose the securities of solid companies that are building value steadily over time by offering products and services that are contributing to a better world.  While high-speed traders can roil the markets in the short term, they have arguably negligible impact on the long-term trend in the stock price, and hence the value, of a successful, responsible company.

So don’t let your concern over high speed trading prevent you from investing prudently for the long term in a diversified portfolio of sustainable, responsible companies.  That is successful wealth building for the good of people and the planet.