The Real Rigging By Charles Payne

Apr. 01, 2014 10:04 AM ETGOOG, GIS
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Long/Short Equity, Portfolio Strategy

Contributor Since 2008

Wall Street Strategies has been providing independent stock market research since 1991 to individual, retail and institutional clients through a balanced approach to investing and trading. Charles Payne, our founder and chief analyst, is routinely sought after for his stock market, political, and general opinions by several prestigious news organizations. Currently, Mr. Payne is a contributor to the Fox News Network and Fox Business Network. He also hosts his own radio show on KFIAM 640 every Saturday from 2-4pm PST. Mr. Payne recently released his first book entitled Be Smart Act Fast Get Rich. Our all-star analytical team is called first when the media needs to know. We are regularly featured on several well respected finance-oriented radio and television programs such as Fox, CNBC, BNN, WSJ to name a few and widely recognized in the media as a leaders in the analyst community. In addition, Wall Street Strategies is part of Factset, Jaywalk, and Thomson-Reuters Consensus Estimates. Meet our analysts: Brian Sozzi is an equity research analyst specializing in the softline/hardline goods sectors of the retail industry for Wall Street Strategies Inc. Mr. Sozzi graduated Summa Cum Laude from Dowling College, receiving his Bachelors of Business Administration with a concentration in Finance and Accounting. Routinely sought after as a trusted point of reference for opinions and insight on the global economy and retail sector stock evaluation, Mr. Sozzi is a frequent on air contributor to CNBC, Fox Business Network, and Bloomberg, and is cited regularly by online/print publications that include Forbes, Bloomberg, The Wall Street Journal, Thestreet.com, CBS Marketwatch, Reuters, Seekingalpha, Associated Press, Crain’s NY Business, Fortune, Barron’s, AOL Finance, and the Financial Times. In 2009, Mr. Sozzi became recognized by Starmine as a top-ranked equity research analyst for stocks under coverage in such categories as EPS Estimate Accuracy and Industry Excess Return. David Silver is a Research Analyst for Wall Street Strategies. He is a graduate of Tulane University’s A.B. Freeman School of Business where he received his Bachelor of Science in Management with a dual degree in Finance and Accounting. David actively covers companies in the Transports, Autos, and Beverage sectors. He is routinely invited to appear on business oriented television and radio shows including CNBC, Fox News, Fox Business News, the Business News Network of Canada, WCBS Radio, and the Wall Street Journal Radio. In addition, David has been quoted in major business publications such as the Wall Street Journal, Forbes, Marketwatch, CNN Money, and Autoweek. David Urani is a research analyst with concentrations on the homebuilding, staffing, medical devices, and logistical services industries. Along with providing institutional clients with up-to-date reports of individual stocks within his industry coverage, David assists the rest of the Wall Street Strategies research desk with timely analysis of vital economic data. A graduate of the A.B. Freeman School of Business at Tulane University, David earned a Bachelor of Science in Management while majoring in finance. With prior training experience running small businesses, he has an eye for key fundamentals that keep Companies running efficiently. David’s insight has been featured in several outside sources, including the Fox Business Network, MarketWatch, and SeekingAlpha. Carlos Guillen is an Equity Research Analyst providing coverage of the technology sector for Wall Street Strategies, Inc. Mr. Guillen has had experience working in both the sell side and the buy side. Prior to working as an analyst, he was a Design Engineer for Lambda Electronics. Mr. Guillen holds an M.B.A. from NYU’s Stern School of Business, and he has a B.S. in Electrical Engineering from Manhattan College. Conley Tuner is a Research Analyst with Wall Street Strategies Inc. He is a frequent contributor to a number of media outlets including MarketWatch, Bloomberg, BBC news and Xinhua news. Conley holds a Masters in Business Administration and a Masters in International Affairs from the George Washington University. Jennifer N. Coombs is an Equity Research Analyst at Wall Street Strategies. She previously worked on the buy side as an Associate Equity Research Analyst covering the transportation subsector of the industrials sector at AIG SunAmerica Asset Management Corporation. Jennifer also covered Real Estate Investment Trusts (REITs) and has done broader research for the industrials, financials and consumer sectors. Prior to joining their research department, Jennifer worked as a Trading Assistant for SunAmerica’s index funds. She also worked briefly in the client portfolio management department at Dwight Asset Management Company – a fixed income subsidiary of Goldman Sachs. Jennifer graduated with distinction from Clarkson University where she earned a B.S. in Financial Information Analysis and Political Science, with minors in Economics and Law. Jennifer specialized in international markets, and briefly studied East Asian Economics at Sungkyunkwan University in Seoul, South Korea. Jennifer is currently a member of the New York Society of Security Analysts (NYSSA).

It was that fatal and perfidious bark
Built in the eclipse, and rigged with curses dark,
That sunk so low that sacred head of thine

Lycidas
-Milton

John Milton's 'Lycidas' spends time looking for those that looked the other way, or did not sound the alarm as 'Lycidas' drowned. Calling, and maybe even accusing nymphs and muses, there was still no answer. Phoebus (Apollo) enters the conversation asking all to focus on the positives of the afterlife, which indeed is where the poem turns, but not before making clear that the source of its ire is the Church of England, which has led its flock astray.

When it comes to the investing flock, several events and parties have played a role in its retreat from the stock market.

People have long memories, and the Internet Bubble continues to haunt them more than anything else does.

That difficult period coupled with the crash of 2008, created an everlasting fatal and perfidious bark.

Consequently, the percentage of America who thinks investing $1,000 in the stock market is a good idea remains well below the peak of 2000, although up significantly from that March 2009, low point. How could this co-exist with a five-year rally where the Dow is up almost 10,000 points? The fear mongers have a great perch to block out the sunshine of hope, or even opportunity; and at the same time line their own pockets.

Enter Michael Lewis.

Not the New Thing

The famous author was on 60 Minutes this past weekend, and unleashed the most amazing blanket statements about the entire market, and the role of high-frequency trading (HFT). His comments were beyond reckless and self-serving. I understand the need to be sensational when selling a book, but for a guy with so many bestsellers and movies, his indictment of the entire stock market is inexcusable. What is nuts is this is not even news...not even close to being news. Check out these headlines:

"High-Frequency Trading Jumps Ahead in Line" WSJ, September 19, 2012

"Who's Afraid of High-Frequency Trading"? Reuters, December 2, 2009

Using buzzwords like 'rigged' and 'victims,' Lewis explained how all relevant parties have colluded against the individual investor who does not have a shot at investing. Forget that he is comparing big boys racing back and forth in front of each other to scalp a penny off trades, like 10,000 shares of GOOG. Their weapons of choice are rows of servers, and even super computers that measure algorithms coupled with faster pipes, allowing them to get in front of trades. I think it sucks, but it is not illegal, and it should not stop private individuals from investing.

High-frequency trading takes on several forms, and the one featured in Lewis' book points to information traveling from Weehawken, New Jersey, carrying trades from the New York Stock Exchange and making its way to Mahwah, New Jersey. That trip uses public communication lines, while the Flash Boys jump ahead using fiber-optic pipes.

The system seems unfair, however it does not change the fundamentals of stocks, and the extra penny that it might cost the late-arriving trade is nowhere near the analogy used during the 60 Minutes piece, where Lewis said the system is akin to buying $20 tickets on Stub Hub, only to find the price has leaped to $25.

If someone thinks General Mills GIS will be higher in five years, they should buy the stock and on dips add to their position. If you think Apple AAPL is undervalued, then you should own the stock and only worry about getting beat by the HFT crowd if you are looking to sell your position five minutes after you purchase it. From Lewis' perspective, one should only invest (or trade; he interchanges the words so often to blur the decisive difference) through a firm called IEX, run by the hero of his new book, "Flash Boys," by Brad Katsuyama.

Same-Sex Love and Fair Trading

The book suggests that Katsuyama had an epiphany about his trades coming back fractionally filled and discovered the injustice of HFT. To remedy this he decided to open his own firm where trades had stalled by 350 microseconds and in effect, leveling the playing field. Everyone has shtick, so I get IEX.com wanting to be the champion of the little investor, even though one is not in the crosshairs of the high-frequency crowd, and do not do enough trading where their focus should be on saving a penny here or there.

What I do not get from watching the video on http://www.iextrading.com/ is what does HFT have to do with...?

* Skinny black kid in front of a dilapidated school
* Same-sex couple
* Multiracial family
* Soldier
* Farmer
* Fireman

Are these the "victims" of high-frequency trading? Why does it stop people from loving who they want, when they want? When I watched the video, it is like a leftwing crusade against all that is wrong with free markets and capitalism, for which they aim to "rise above." There is an agenda here with demonizing the stock market and making everyone a victim, taking away "equal opportunity" and "deserved rights," which includes success, and economic opportunity.

Michael Lewis does not care about this issue that's lingered on for more than a decade, however he has found a new way to pounce on the 1%, and their favorite platform for generating wealth. The media missed this part of the story big time, but at some point, they will catch on as the next carnation of "Occupy" will have plenty of signs berating HFT. I am so annoyed with these false problems, or taking issues that should be addressed, turning them into something they are not.

Moreover, it is about division, anger, and fear. Milton saw the wisdom of making sure we know 'Lycidas' finds his way to heaven: "Tomorrow to fresh woods, and pastures new." Lewis makes sure investors dig a greater foxhole, and hope that mean, old Wall Street stops them from loving each other, and having the right to succeed.

HFT Facts

There are different types of high-frequency trading organizations and intentions. While apologists argue HFT provides liquidity, those looking to take liquidity and those with a mixed approach are far more profitable endeavors. Keep in mind, HFT thrives in chaotic scenarios with high volume and volatility, hence the wide swings in annual revenue.

2013 $2.2 billion
2012 $1.8 billion
2009 $7.2 billion

The average daily volume in 2009 was 9.8 billion shares versus 6.4 billion in 2012.Triggering a stock market panic would actually line the pockets of the HFT crowd immensely. Maybe they should cheer for another bestseller from Michael Lewis.

In Conclusion

I'm not a fan of high frequency trading but the hysteria is puzzling, and my sense there is a lot more to this as part of a larger anti-Wall Street story gnaws. On that note, people become spoiled. When I got into the business and switched from research to the brokerage side, a round trip (buying and selling) cost investors hundreds of dollars. Technology has played a large role in changing this to the point a dozen round trips can be made for the same cost and that more than covers the extra penny you may or may not pay.

In the meantime, I think there are greater problems for the market. I see leaked news, stock upgrades and other peculiar action in stocks all the time. Why did Lululemon LULU trade higher in down sessions leading to its earnings announcement last week, and even after laying an egg and offering lower guidance, the stock traded sharply higher? Today there are two stocks that will open higher, telegraphed big time yesterday. From a day-to-day basis there are shenanigans and other disturbing issues.

In the longer run (more than a day or week) Lululemon will find its right place - it could be higher - based on fundamentals and future potential. All stocks eventually do trade higher, which is why investing is different than trading.

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