04.08.2014
By Terry Flanagan

HFT Not Black and White, Wealth Managers Say

Within the wealth management community, reaction to the book Flash Boys by Michael Lewis and the issues it raises about high-frequency trading appears to be more tolerant of the practice than might be expected.

“There are costs and benefits to everything,” said Brad McMillan, vice president and chief investment officer at Commonwealth Financial Network, one of the largest independent broker-dealers with 1,600 investment advisors and $72 billion in assets under management.

“One of the significant benefits has been increased liquidity,” he said. “It wouldn’t surprise me if we start turning over rocks there are things we wouldn’t like, but to say this is a systemic problem is not the case. Investors should not worry about this. The system is working.”

Although high-frequency trading does have benefits, “they do not justify some of the abuses,” said McMillan. It’s not being a Luddite to say that those costs need to be limited, even as we preserve the positive aspects.”

“The reality is it’s always been an arms race between technology and regulation,” he said. “To pretend this is something new and different is simply not the case. Shades of gray don’t make a good story, so if you’re a writer, and you need to tell a story, you want to pit black and white against each other. That doesn’t mean it’s the reality.”

Mark Spiegel, managing member of Stanphyl Capital, said that he’s not affected by HFT much because he operates primarily in microcap stock, and doesn’t do much trading to begin with.

“I’m an extremely fundamental investor,” he said. “I don’t do a lot of trading, except when I’m accumulating a position or selling out of it. Eighty percent of what I do is in the microcap space, and there isn’t enough volume to attract HFTs.”

Spiegel’s view of HFT is fairly benign. “If you’re selling something and these guys jump in front of you, it’s annoying, but on the other hand, if you’re buying, you benefit because you get a better price when they jump in front of the best offer. I don’t think they would add liquidity if the market were crashing, I think they would just disappear.”

Some wealth managers are strongly opposed to HFT, however. “I personally think HFT is dangerous and not in the best interests of investors or the integrity of our financial system,” said Al Procaccino, president & CEO of Castle Financial & Retirement Planning Associates in Hazlet, N.J.

McMillan noted, “I don’t blame the people doing the high-frequency trading, as long as they were playing by the rules. I do blame the exchanges that created the rules those traders were gaming. I blame the SEC for allowing this. The failure has been on the part of those setting the rules of the game.”

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