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High Frequency Trading

When discussing retail investing (what our clients do) I have been known to argue against “do-it-yourself” methods; arguing that the game has substantially changed for the average investor over the past 20 years or so. One of the reasons I feel this way is the advent and growth of high frequency trading.  Wholesaler firms like KCG and Citadel are high frequency trading firms that have a very direct impact on retail clients. When an investor places a trade through a broker, the client pays the broker a commission for the broker to send the order to a firm like KCG or Citadel where the trade is then executed, either using the wholesaler’s inventory or the open market. You would assume that a portion of the commission goes to the wholesaler firm for their service, but no, the wholesaler actually pays the broker. So how do these firms make money? Every order (trade) has a “spread.” This is the difference between the bid and the ask. In other words, every stock has two prices, what someone is willing to sell it for and what someone is willing to buy it for. It is also important to understand that there are different price feeds coming from the exchange itself. Very fast feeds (that cost money) and, well, not so fast feeds (that retail investors have access to). One could come to the conclusion that wholesale firms use the slower speeds to guarantee the price of a stock for retail clients but rely on a faster feed to understand where the market is really priced. They could then make a tremendous amount of money by trading that spread. They would either choose a price that allows them to make money or a price that doesn’t cause them to lose anything. This issue has never really captured regulators’ attention until now. Reuters reported that “federal authorities are investigating the market-making arms of Citadel LLC and KCG Holdings Inc, looking into the possibility that the two giants of electronic trading are giving small investors a poor deal when executing stock transactions on their behalf.”  There are many people that argue this arrangement isn’t necessarily bad for investors because ultimately the spread differences are not that large and it reduces commissions. Personally, I would rather see commissions go up if it means more transparency. 


The CEO of LendingClub resigned amidst controversy surrounding a deal with Jeffries. In the aftermath LendingClub’s stock fell by 35%. The SEC is looking into the “internal-control lapses and abuses related to the sale of some of its loans.” Many people are wondering if the company will be able to rebuild investor trust. I am just wondering what the heck happened. From what I can gather LendingClub sold $22 million of “near-prime loans” to Jeffries. LendingClub later realized that they has made an error on the application dates for $3 million of the loans. In order to correct they issue, they bought all the loans back from the investor at par. This is where I start to get lost. Surely, there must have been a bigger problem than application dates? If the loans looked good to the investor apart from the application dates, why sell them back? It seems like an apology would suffice. Additionally, LendingClub turned around and sold the loans to another investor at par. This further suggests that the loans themselves were fine. I wonder if the same rules apply to global investment banks as friends in high school. I remember wanting to date a girl that my friend broke up, but couldn’t because that was against the friend code. Did Morgan Stanley want to buy these loans? Then couldn’t because Jeffries said, “that’s not cool dude.” I’m sure more details will come to light as this plays out but the current chain of events doesn’t really make sense to me. Sure, messing up the application dates is not great but I don’t see how that would cause the CEO to resign as well as 3 senior managers to step down. 


Sallie Krawcheck, the former CFO of Citigroup recently launched a digital investment platform, or in the parlance of our times, a robo-advisor. This isn’t any robo-advisor though, it’s a robo-advisor for women.  According to Krawcheck, Ellevest will take into account the unique challenges women face in their careers as well the decisions that they make in their lives. I have to admit that I find this interesting but I am still not convinced that my investments will do better if they know my gender. As a planner, I applaud any investor that engages with their money from a unique, holistic, planning perspective. So far, Ellevest doesn’t appear to do that. The software will “regularly engage with clients, updating their portfolios to reflect their evolving goals. And if a woman gets off track, Ellevest will reach out to tell you, in a highly personalized way, what you need to do to get back on.” I’m sorry, but this still doesn’t sound like planning. For investors that are not interested in building a personal plan with a highly trained professional, investing with a company like Wealthfront (.25% annually) or Betterment (.15%-.35%) can be a good option. Ellevest charges .50% annually. One take away from this, is that if you are a woman and you want your investments to know you’re a woman, you should pay roughly twice the going rate for the same service. Also, maybe you would like a “highly personalized” message from a computer telling you you’re not saving enough? I have to admit there is a small part of me that wonders what would happen if a man invested through Ellevest. I mean, with the entire platform based on making investments for women it would probably stop working right? Or maybe, just maybe, it would invest my money in a diverse selection of securities and rebalance them monthly. Maybe. 


This commentary on this website reflects the personal opinions, viewpoints and analyses of the Gainplan LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Gainplan LLC or performance returns of any Gainplan LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Gainplan LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.Gainplan LLC provides links for your convenience to websites produced by other providers or industry related material. Accessing websites through links directs you away from our website. Gainplan LLC is not responsible for errors or omissions in the material on third party websites, and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.

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