Michael Lewis’ books are always worth reading. From Liar’s Poker to The Big Short, Lewis tells absorbing, entertaining stories in his uniquely wry voice. That makes Michael Lewis’ latest book — Flash Boys — a must read.
But if the big reveal of Flash Boys is that the stock market is rigged … that’s a pretty lame twist. The market is rigged? Well, duh.
As Michael Lewis told CBS’s 60 Minutes Sunday night:
“The United States stock market, the most iconic market in global capitalism, is rigged by a combination of the stock exchanges, the big Wall Street banks and high frequency traders.”
We know, Mike. We know.
Indeed, as Josh Brown of The Reformed Broker points out, the protean New York Stock Exchange was born rigged. That was the whole point. What Michael Lewis told 60 Minutes is fascinating and important, but it’s not a scandal or a revelation.
Now I’m not a glass-half-full kind of guy. I’m not glass-half-empty guy, either. Like George Carlin, I see a glass that’s twice as big as it needs to be. And coming from that angle lets me appreciate that although the market is rigged, it has never been a better time to be an individual investor.
Michael Lewis Now Delivered to Your Laptop
Jason Zweig at the Wall Street Journal persuasively argued that position a couple of years ago. For one thing, rank-and-file retail investors have better information than they ever did in the old days. Company regulatory filings are a few clicks away on a smartphone, for crying out loud. Before the web, reports filed with the Securities and Exchange Commission required a trip to an office and a bucket full of dimes to buy printouts of microfiche.
News and press releases are likewise instantaneous and free. Big, important magazine pieces come to you, via Twitter (TWTR) or RSS. No one needs to learn how to use the Reader’s Guide to Periodical Literature anymore, which ranks up there with indoor toilets for making our lives better.
Furthermore — and more importantly — it’s less costly to invest and trade than it has ever been. TD Ameritrade (AMTD) offers unlimited online trading in stocks for $9.99 per trade. TradeKing is even cheaper, with unlimited trades for $4.95 a trade.
Compare that with the costs of a few decades ago, and it’s a boon for retail investors. Jason Zweig writes that when he was a teenager trading stocks, commissions ate up something like 50% of his gross profit. To trade at all, he had to call a stock broker long-distance, which back in the day cost a small fortune.
And then there are exchange-traded funds, which have only been around for about 20 years and only got really popular in, say, the last 10. Fees on these passive products can be as skimpy as 0.5% — a good example being the Vanguard S&P 500 ETF (VOO). Mutual funds, especially the actively managed ones, cost many times that. And if they have sales charges and miscellaneous fees, forget about it.
Not only do 80% of actively managed mutual funds fail to keep up with their benchmarks, but charges and fees can absolutely chew up your gains. Vanguard figures that an expense ratio of 1.2% and an average annual return of 6% takes an ever-larger piece of your portfolio pie. After 10 years, 23% of your returns are lost to fees. After 50 years, more than half goes into someone else’s pocket.
So, yeah, Michael Lewis was right when he told 60 Minutes that the stock market is rigged. But it always has been, and so what? Decimalization, the web, ETFs and competition almost certainly offset those costs.
Besides, maybe regulators will rein in or shut down high-frequency trading, but rest assured that some other way to rig the market will only take its place.
Hey, at least Michael Lewis will have more fodder for another excellent book.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.