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“You’re Playing with Sharks”

Posted by Larry Doyle on July 22, 2010 6:20 AM |

Is it safe to go in the water? In other words, is it safe to play in the markets under the current construct? Do small retail investors truly stand a chance against the ‘big boys’ on Wall Street running high powered algorithmic trading programs and assorted other high frequency trading mechanisms? Are fundamental traders being thrown around amidst the ‘high waves’ and ‘strong surf’ pounding the shore?

No doubt, the scene on Wall Street has changed dramatically over the years. The onslaught of high frequency trading complete with a wide array of ‘bait and tackle’ such as flash orders, dark pools, naked access, co-location, and much more make it extremely challenging — if not downright daunting — for those who believe they can navigate these waters with simple ‘rod and reel.’

The Wall Street Journal recently highlighted the treacherous nature of the ‘water’ in the current markets in writing, Trend Investing Gains Its Share of Converts:

Volatile stock markets have left investor confidence in tatters. Now, some say it is time to accept the turmoil and adopt more-dynamic trading strategies.

Proponents of “trend” investing—buying and selling stocks depending on technical analysis of the market’s direction—say the tactic not only enables investors to navigate unstable markets, but also prevents big losses when prices fall.

This stance is winning converts at a time when concern about the strength of the U.S. economic recovery and the future of consumer spending is running high. Yet this technique is controversial, as it counters conventional wisdom that time in the market, not market timing, offers individual investors their best chance for success.

To trend followers, the notion of buy-and-hold investing—picking stocks based on fundamentals and keeping the investments for months or years—has no place in today’s market and, in fact, is a recipe for defeat.

“You have to understand the game you’re playing; you’re playing with sharks,” said Kenny Landgraf, president of Kenjol Capital Management in Austin, Texas . “You may believe in buy and hold, but there are large players out there that don’t.”

Navigating the current markets is not a leisurely activity for the ill-equipped or uninformed. While I am not an active day-trader, I am certainly respectful of the fact that the structure of our equity exchanges and equity markets overall have changed. The overwhelming percentage of equity volumes traded are directed by high frequency trading programs. In light of that, do not think for a second that the waters are not filled with lots of sharks. Navigate accordingly or otherwise, much like this scene from the 1975 summer thriller Jaws, you also may need a bigger boat.

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