The Tortoise And The Hare Go To Wall Street

“If you want to beat the S&P 500, start thinking of the index as a filter and not a benchmark. It’s the starting line; not the finish line.” Andrew D. Ellis, Founder, ThinkingLonger, LLC

Our friends over at the Wall Street Journal are laying bare the next step in the march of the High Frequency Traders, those behemoths who use microwaves, lasers and advanced fiber optic cables to execute trades faster than a human being can even conceive of them. Once upon a time, it was enough to be physically close to the exchange, so the distance a signal would have to travel through a cable was as short as possible, thereby reducing the time for transmission. But what about trades between distant points, like New York to London? Currently, fiber optic cables transmit orders between financial centers (i.e., New York to London) at 2/3’s of the speed of light. Isn’t that fast enough? Maybe not.

Our human friends over at Robinhood and r/WallStreetBets have been able to get the better of these trading monsters from time to time. Even in the absence of provable coordinated action, pursuing a common objective consistently over time has allowed them to level the playing field against the HFTs. Let’s talk about GameStop and look a little closer.

HFTs can bring huge amounts of capital to a trade, but their standard operating procedure is to buy and sell, buy and sell, trade, trade, trade, as quickly as possible for small incremental profits. But individual traders don’t act like that. They are “in” for a longer haul (if only by comparison). Our Reddit friends bought GameStop and kept buying over an extended period of time. Their collective actions beat the HFTs because they did not take quick profits. They stayed and bought more, and more, and more, thereby moving the market against the HFTs in general and the short sellers in specific. By comparison to the HFTs, the GameStop buyers were trading at a snail’s pace, but it didn’t matter; they were moving the market like slow-moving lava and in’s and out’s of the HFTs could not change the direction of the flow.

Now, our HFT friends are trying to get even faster. Data transmission is moving to space where satellites may be able to deliver trades faster than fiber optic cables down on Earth. And, for the HFTs, that shift makes sense. When they are trading amongst themselves, speed can make a difference. But, and here is the big “but,” when HFTs have to trade against a unified block of committed buyers (or sellers) who are willing to stay the course on a particular stock (and keep buying (or selling) larger and larger positions), speed becomes irrelevant.

Here’s the moral of the story: on Wall Street, if the hares are racing among themselves, bet on the fastest hare. But, if there’s a tortoise in the race, and the tortoise is really, really big, and keeps plodding ahead inexorably in the same direction, bet on the tortoise.

Originally published at https://www.thinkinglonger.com on April 30, 2021.