Separating “Flash” from Substance

"Flash Boys"—Michael Lewis' new bestseller about how the investment markets are supposedly rigged—has garnered an avalanche of media coverage, including a feature on "60 Minutes."

There's no doubt that Lewis' expose of how certain high-frequency traders enrich themselves at other investors' expense is fascinating. But it's also worth noting an event that was overshadowed by the release of the book: The five-year anniversary of the U.S. bull market that began in March of 2009, lifting the S&P 500 more than 170%

As investors, it's important to decide for ourselves which news is likely to have the largest impact on our ability to reach our goals. While there's definitely more sizzle to a story of wrongdoing on Wall Street, we believe it's more instructive for long-term investors to look at longer-term trends such as the stock market's remarkable run.

Let's be clear: Lewis' expose of high-frequency trading is a positive.

If there's one thing we opinionated Americans share, it's a loathing of an unfair system. To the extent that Lewis is generating renewed scrutiny of market costs and efficiencies in a fair market, the conversation he has sparked is worthwhile. We have been as vehement as Lewis about minimizing hidden trading costs and conflicts of interest such as those found within the "black-box" trading relationships that Lewis describes.

Our emphasis on promoting a level playing field is one of many reasons we are allied with fund managers such as Dimensional Fund Advisors who demonstrate a track record of transparency in managing underlying trading costs.

It's also worth noting that the story of high-speed trading has nuances that the media has largely overlooked. There actually is some compelling evidence that competition generated by high-frequency trading has dramatically reduced, rather than increased, overall trade costs. Felix Salmon's March 31 Reuters commentary is one of a number of op-eds addressing this point. Jared Kizer's April 2 Multifactor World blog post and Cliff Asness's and Michael Mendelson's April 1 Wall Street Journal piece are two more contrarian takes on the subject.

Still, achieving perfect trading technique is nowhere near the greatest factor that will contribute to or detract from your personal success as an investor. Of far more importance is owning a low-cost, globally diversified, long-term portfolio designed to meet your specific goals.

History has shown that such portfolios allow investors to maximize their rewards while minimizing a whole range of risks—which include, in our view, any risk of negative impact from high-frequency trading.

It’s worth noting that Michael Lewis invests his own money in what he calls a conservative, “boring” manner—which we believe is the smart approach. Listen to what he has to say here.

Is the U.S. stock market a model of perfection, where no investor has an unfair advantage over another? Clearly not. At the same time, the last five years have shown that the market can handsomely reward those who adopt a patient, evidence-based approach to participating in it.

We encourage you to check out Lewis' latest book if you're interested in learning about the inner workings of a messy market. And we certainly hope that it contributes to renewed steps toward the ideal of a market where all players receive a fair shake.

In the meantime, remain confident that Align Wealth Management stands by your side as firmly as ever. As your fiduciary advisor, we will continue to aggressively champion your best interests, while keeping a close eye on opportunities and on risks of every kind.