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Why Investors Willingly Pay Speed Traders Extra Billions

Why Investors Willingly Pay Speed Traders Extra Billions
Photograph by Scott Eells/Bloomberg

When high-frequency traders defend themselves against criticism that they’re screwing up the stock market by distorting prices or making it more volatile, their argument usually goes like this: Yes, but we’ve lowered the costs of trading. Which is true, in a way. The bid-ask spread for many stocks—the difference between what it costs to buy or sell a share—is often just a penny, much narrower than it used to be. As speed traders have proliferated over the last few years, they’ve made the U.S. stock market considerably more liquid, meaning there’s almost always someone willing to take the other side of your trade.

The problem is that when slower, long-term investors try to buy or sell shares, they often find themselves at the back of the line. They are leapfrogged by thousands of lightning-quick traders who make their living jumping in and out of shares of “ultra liquid” stocks such as Bank of America. Stuck behind this churning scrum of algorithmic traders, normal buy-and-hold investors have to wait to execute their trades for the highest-volume stocks, which often results in worse prices.