But is that really true?
A good example of the supposed oppression of small investors lies in high-frequency (HFT) trading. In this kind of trading, institutional traders set up shop close to exchanges so that trade orders have a short trip and, using Herculean technology, get in front of your trades. These lightning-fast traders snatch a fraction of a cent on each transaction for their own pockets.
The common conception is that this is a form of cheating that comes at a cost to all but the best-funded professionals. Yet ironically, HFT may actually give the average investor an advantage.
The practical question is: Are you willing to put yourself in a situation where someone steps in front of you if this still allows you to get a good price and reduce your risk? The answer is probably a resounding “yes.”
This advantage for smaller investors wasn’t possible before the advent of HFT, when not only did big brokerage houses get a chance to step in front you, but it could take them hours to buy or sell big blocks. Now that this process takes milliseconds, the HFT folks can step in front of you but ironically give you price protection in the process.
The little guy has other advantages of the big institutional traders:
Some use their relative freedom and flexibility to freak out, reflexively day trading on every news events, many of which won’t matter much in the long run. Thus, they churn their portfolios, running up costs.
Or, they become fixated on a stock beyond all reason, investing good money after bad with the curiously unshakeable conviction that their initial analysis was correct. In doing so, they may liquidate other stocks that, while not barn-burners, serve a protective or defensive purpose. And over-reacting often means violating asset allocation strategies, throwing balance out of kilter and increasing overall risk to a portfolio.
To make the most of the advantages little guys have, you have be a smart little guy. Little alone won’t do it.
Any opinions expressed in this column are solely those of the author.
Dave Sheaff Gilreath is a founding principal of Sheaff Brock Investment Advisors LLC. He has more than 30 years of experience in the financial services industry, beginning with Bache Halsey Stuart Shields and later Morgan Stanley Dean Witter. At Sheaff Brock, he shares responsibility for setting investment policy, asset allocation and security selection for the company's managed accounts. He also consults with the clients on portfolio construction. Gilreath received his Certified Financial Planner® (CFP) designation in 1984. He attended Miami University in Oxford, Ohio, where he earned a B.S. degree.