At Wall Street, Take a U-Turn | Financial Planning Chapel Hill l Old Peak Financial Advisors

At Wall Street, Take a U-Turn

June 26, 2014

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At Wall Street, Take a U-Turn

June 26, 2014

I’ve just read Flash Boys, the best-seller that details Wall Street’s use of ultra high-speed trading technologies to make money at the expense of ordinary investors. If you haven’t read this sorry tale, here’s what you need to know — and how you can fight back.

Traders use high-speed fiber optic cables, switches, software and other technology to “front-run” orders from the average investor. They find out you’re a buyer, buy first and then sell to you, at a higher price, what they just bought. It’s not a huge amount on any one trade, but it adds up. The way to avoid the problem, short of not investing at all? Minimize trading.

Specifically, if you use the kind of mutual funds I use — funds which minimize trading — you will shrink Wall Street’s take. Check the “annual turnover” for a fund (the percentage of its total investments which it trades every year). Most of the stock funds I use trade well under 10% annually. That compares to the typical US mutual fund, which trades 50-100% of its value annually. It will inevitably feed Wall Street, at your expense.

The second way Wall Street makes money is by creating private trading exchanges where they will trade your orders. For a fee, they invite high-speed traders to these exchanges to “front-run” you — and you won’t even know. Wall Street firms are like the guy who lures the sucker to a rigged card game, all the while pretending it’s fair.

How to avoid this? Don’t do business with big Wall Street firms. They have too many lines of business, creating multiple conflicts of interest. The individual investor isn’t big enough to earn their loyalty. Work with an independent firm whose only clients are individual investors.

You cannot entirely avoid Wall Street if you are going to invest. But you can minimize the cut they take. They less they take, the more you keep.

This article is not intended to provide tax, legal, accounting, financial, or professional advice. Readers should seek advice from qualified professionals who can review their specific circumstances. Old Peak Finance endeavors to provide information that is accurate and current. However, we cannot guarantee that this information has not been outdated or otherwise rendered incorrect by new research, legislation, or other changes. Old Peak Finance has no liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website.

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