We Study Billionaires - The Investor’s Podcast Network - TIP 019 : How High Frequency Trading Works - Michael Lewis Book (Investing Podcast)

Starting point is 00:00:00 This is episode 19 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish and Sting Broderson. Good morning, everybody.

Starting point is 00:00:29 This is Preston Pish, and I'm your host for the Investors Podcast, and I'm accompanied by my co-host, Stig Broderson. And today we are going to be talking about something that I think very few people would have ever guessed that Stig Broderson and Preston Pish would ever be talking about. And that is high-frequency trading. So we've got, this is really interesting. I'm just going to shoot that out there, folks. So if you've never read or listened to anything on high-frequency trading, I think there's some things today that we'll be talking about that's going to be blowing your mind. And so the premise of our.

Starting point is 00:01:01 discussion today is Michael Lewis's new book that came out. I don't know how new it is. What is it? Maybe half a year old, something like that. Yeah, from March or something. Yeah. So, okay. There you go, March 2014. So not too new, but it's something that has come out in the past year. So in Michael Lewis's book, and for anyone that's not familiar with Michael Lewis, this guy's probably one of the best writers that covers Wall Street that's out there. You probably recognize and more from his movie The Blind Side, which was done with Sandra Bollick. It was a movie about football. He's also done the movie.

Starting point is 00:01:39 He was the writer for the movie Moneyball, which was with Brad Pitt. He wrote a book back in 2008 after the stock market crash called The Big Short. And now he's got this book called Flash Boys. And I'll tell you, I am a huge fan of Michael Lewis's work. I mean, his writing is just spectacular. So that's what our book, the book that we're covering today is dealing with the rise of high frequency trading. And we've got two segments for the show today.

Starting point is 00:02:08 We're going to first talk about the kind of the general outline of the book and what's discussed in the book. And then at the very end, Stig and I are going to give our thoughts on high frequency trading. So those are really the two segments. So the book starts off with a company called spread networks. And what they're doing is they're running a fiber optic cable line from Chicago to New York. Now, that might not sound like it's all that interesting, but as you discover in the book, the spread networks is building this line.

Starting point is 00:02:37 And what they're doing is they're trying to build the line as straight as possible between Chicago and New York. And it talks about their ridiculous efforts in order to keep this line as straight as possible, as they're like digging underneath the roads and trying to run it through mountains and get it to New York as straight as possible. and you're just wondering, why in the world would a company be spending that much money, first of all, to build this? And what in the world do they need it for? And so the length of this line is 827 miles between Chicago and where it ends in New Jersey, which is right there by the New York Stock Exchange. And the purpose of the line is so that trades can be conducted four milliseconds faster than the current. fiber optic cables that existed before spread networks came in and did this. And so that's kind of how he starts this book.

Starting point is 00:03:35 And I know whenever I was reading it, I was like, what in the world is this? What were your thoughts? I don't know if you were familiar with this before reading the book, but I was blown away when I was reading this. I was blown away as well. And, you know, one thing that really puzzled me was they kept talking about nanoseconds, milliseconds, and to be quite honest, I wasn't sure about how long that was. So I think he gives one example that the blink of an eye is something around from 300 to 400

Starting point is 00:04:06 milliseconds, which is from 0.3 to 0.4 of a second. And when Preston just said is that the whole reason that they built this long cable running through mountains and the rivers, that is to say 4 milliseconds. So that's just crazy. It's just crazy. They saved four milliseconds and they spend millions upon millions of dollars in order to do this. So that's kind of the introduction to high frequency trading and what it's all about. It is all about the speed.

Starting point is 00:04:39 So let's go ahead and start talking more about this book. So whenever we start digging into the book, it really kind of comes down to the story of two different gentlemen. The first guy, his name is Brad Katsuyama, and he used to work for a Canadian bank. And then the other person, his name is Sergei Elanikoff, and he worked at Goldman Sachs as a programmer for a lot of this high-frequency trading. And so it kind of tracks, and it's, I don't want to say it's real linear. The book, it kind of jumps around a little bit talking about their different stories. And it kind of, I like the way that it's structured because it makes it really interesting. you're kind of wondering what's happening next.

Starting point is 00:05:21 It almost kind of reads like a movie, and you can kind of see where Michael Lewis got all of his writing skills from. But to give you guys some quick stats on high-frequency trading. So in the United States, and this stat came from 2009, high-frequency trading firms represented 2% of the approximate 20,000 firms operating today. But it accounted for 73% of all equity or stock order volume. So although these companies are like, there's just a couple of them out there, a few of them, they're accounting for 73% of the trades on the stock market, which I think is just mind-blowing.

Starting point is 00:06:02 And what the book talks about is you go further through it, it starts talking about some of these strategies and how these companies are doing this. And I'll be honest with you. After reading the book and spending all that time kind of trying to understand this, it is still confusing and still difficult. call it to understand. And I think that's one of the main reasons why there's only a few people or a few companies out there that are doing this. And they're able to really kind of make, you know, in my opinion, a mockery of a lot of these big businesses like Goldman Sachs, Bank of New York, Mellon, I mean, you name it. These banks, all these banks that were conducting

Starting point is 00:06:39 all these trades, all these high frequency owners are crushing them and pretty much telling them what they will and will not do when it comes to trading the stocks. So, Let's go ahead and quickly discuss some of the different strategies that high-frequency traders implement. So from the research that I did, and this doesn't really come from the book, he doesn't really go into each of the strategies. But we're going to do that here on this episode. So the first one is a market-making strategy. The next one that we have is a ticker tape trading strategy. They've got event arbitrage.

Starting point is 00:07:16 They've got statistical arbitrage. they have news-based trading and they have low-latency strategies that they implement. So you can see it's not like they're just doing one type of trading here. But the one that we're going to talk about and kind of give you an example of is this last one with the low-latency strategies. I'm sorry, the low-latency strategies. And this is one that Michael Lewis covered in the book. And it revolves around this idea of basically using arbitrage in order to conduct trades faster than the other,

Starting point is 00:07:48 person. So what in the world does that mean? So I'm going to give you an example. So let's say that instead of trading stock in a market, let's say that we're buying and selling apples in a market, like literally like apples that you would eat. Because it's not really that much different when you talk about, you know, market strategies. Let's say that I was going to go and buy 1,000 apples from a fruit market. Okay. And in order to do that, that's a pretty large order of apples. I mean, if I go to a market, they might not have a thousand apples for me to buy. They might only have 100 when I arrive at the first market. Let's say that there's five different fruit markets all around the area where I live.

Starting point is 00:08:31 And I go up to the very first market and I want to buy a hundred apples or I want to buy a thousand apples, but whenever I get there, I see that the vendor only has 100 apples to sell me. So when I go up there and I tell them, hey, I'd like to buy a thousand apples, he says, oh, I'm sorry. I can only sell you $100 at $1 per apple. So I obviously conduct that trade, and I would buy those 100 apples for $100. But this is where things get a little tricky, and this is where we're describing how high-frequency trading works, or at least one of the strategies that they use with high-frequency trading. So let's say that Stig was standing right there, and he watched this order and this transaction take place, this event. and Stig saw that I was trying to buy a thousand apples.

Starting point is 00:09:21 And he also saw that I only purchased 100 apples. And he saw the price that I paid for them. So what Stig does, and let's say that I'm just driving in my car from market to market, well, Stig, he owns a helicopter. And he's, he listened to this order take place. Okay. And he goes and he gets in his helicopter and he flies to the next market because he knows I've got another 900 apples to buy. and me, I get in my car and I'm driving to the next market.

Starting point is 00:09:50 So do you see the advantage that's happening here? Stig is able to take that piece of information that he knows at the event. He knows as much as I know at this point, but he has an advantage. He has a speed advantage in order to get to the other market faster than me. And so he goes to the next market. And at the next market, which we'll call market B, Stig, finally, finds that there's another vendor there selling yet another hundred apples.

Starting point is 00:10:20 And so he buys that hundred apples for $1 per apple. So he spends $100 buying these apples. And then he sells the apples back to the original vendor. Okay, immediately sells them right back to the person who he just bought them from. And he sells them to the guy for $101. And sure enough, he knows that I'm on my way.

Starting point is 00:10:43 I'm driving to that market in order to purchase those apples. So in some cases, Stig could sell those apples back to me directly, or he could just sell them back to the person he just bought them from at a higher price, telling that person that there's a person coming to buy a thousand apples and here's your hundred, so you can charge them $101 or whatever the case might be. But the real, whether he's selling them to me or he's selling them back to the original person, doesn't really much matter. What does matter is that Stig beat me to that order. Okay. He, He jumped out in front of me and he was able to purchase it faster than I was able to purchase it.

Starting point is 00:11:21 And so this takes place at all the different markets across the U.S. around the world. And these high-frequency traders are faster and they're able to execute the orders quicker than the other person can arrive. So Stig, go ahead. I saw you had something you wanted to add. Yeah, because one thing that was really surprised about was these trading companies that had, you know, years and years of winning days. I mean, they didn't even have one losing day. And how is that possible when you're trading? I mean, you're really betting against other people.

Starting point is 00:11:52 And the only way you can win, like, every day for four or five consecutive years is really to have information that the other party doesn't have. So as you see in this example from Preston, the only way I can beat him is if I know exactly what is going to happen before he knows. And I think that's kind of like the underlying fracture that you need to understand here. It's a game of information and it's a game of speed. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer.

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Starting point is 00:16:14 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. And so Stig has a great point, a fantastic point that was highlighted in the book. I think it was, I can't remember the exact number, but it was like around 800 days of trading, and they only had one day that they lost money from the trading activity that they had. And that one day that they lost was because there was like a glitch in their system and they had like an air.

Starting point is 00:16:46 It wasn't because they just got beat. So to kind of give you an idea of how well their strategies are working, it's pretty amazing. And something else that I want to highlight is every day, whenever the, whenever the market closes, these high-frequency trading companies have zero shares on their books. So they trade millions upon millions of times a day. And then whenever the market closes, they don't have one security sitting on their books at the end of the day. Just the proceeds of what they made from all their transactions. Some interesting stuff.

Starting point is 00:17:22 I don't really even know how to possibly describe how interesting this book was and how I don't even know how to describe it. It was just really cool. And something that I think everybody would really enjoy. Yeah, go ahead, stick. Yeah, one thing that I'm thinking with you, Preston, I was really surprised about almost everything I read in this book is because it really puzzled me.

Starting point is 00:17:42 How did these high-frequency companies know which trade I was going to send in as an investor? And what's happening is that if I'm an institutional investor or I'm a big investor and I'll have my actually pay my broker to execute an order for me, that broker will actually sell the information that I'm having a big buy order, for instance, to these high-frequency companies. So that broker is actually paid twice, and I'm actually paying for it twice, partly because I'll get a worse price, and partly because I'm also paying commission to my broker.

Starting point is 00:18:16 So let's go and let's talk about what was really in the book, this book, Flash Boys. And so what happened was, is there was really two, main themes that I think Michael Lewis was trying to get across here. And the first one revolved around this programmer from Goldman Sachs, Sergei Elena Koff. And so Sergei was a programmer for Goldman Sachs trying to implement a high-frequency strategy for Goldman. And whenever Sergei left and he went to get work for another business, Goldman Sachs brought up criminal charges against Sergei for stealing some of the code that he was working on whenever he was

Starting point is 00:18:55 at Goldman Sachs. I think Michael Lewis does a really good job describing the full story on Sergei and how the code that he had actually taken from Goldman was actually open source code. And open source code is nothing, you could just go find it on the internet. It wasn't like something that was proprietary or for Goldman Sachs. At least that's the way that Michael Lewis describes it in the book. So it talks about a lot of the injustice and how this poor gentleman was really, I mean, he was thrown in prison. So this is the information that I got on Sergei. It says that Sergei is a former Goldman Sachs computer programmer.

Starting point is 00:19:32 He immigrated from Russia to the U.S. in 1990. In December of 2010, he was wrongfully convicted of two counts of theft of trading secrets and sentenced to 97 months in prison. But in 2012, his convictions were overturned by the United States Court of Appeals for the Second Circuit that entered a judgment of acquittal reversing the decision of the district court. So you can see that he was wrongfully accused. And I think it was really neat how Michael Lewis talked about how Goldman Sachs and maybe like their middle management brought up these claims because no one understood how this stuff worked. And you got these a few technical

Starting point is 00:20:09 type people that are writing code for this stuff. And they're the only ones to truly understand how it's implemented and used. And you got these big bank executives that are trying to enforce, hey, this guy stole something, but yet they have no clue how any of it works. And I think that was really his point that he was trying to bring up in the book is, you got these big bank executives that are clueless how this stuff works, and they're trying to bring up claims against different programmers that are implementing the strategies, and then they're not even actually stealing anything. They were just taking open source information.

Starting point is 00:20:41 So, Stig, go ahead. Yeah, and I think that another great point that Lewis brings up is that these managers, these big-time executives, they have to almost have to, to accuse Alenikov for doing something wrong because if he can just take code that doesn't have any value, what's the reason why these managers are there anyway? I mean, what's the reason why they gain millions and dollars?

Starting point is 00:21:04 What's the reason why they're building up a whole system if it's basically just an open source code with a few tricks here and there? So it's kind of making their own position justice if they're accusing this poor person for stealing the code. And I think he liked to, and something that was kind of neat the way he did it in the book, is I think he wanted to highlight the difference between this guy who's making maybe $100,000 or $200,000 a year as a programmer, writing the secret sauce for how all this stuff works for the bank to make billions of dollars.

Starting point is 00:21:36 And yet there's some executive that's sitting above him making $3, $4 million a year. And he has no clue how it works, but yet he's the guy pointing the finger at one of these programmers. So the contrast there is I think with Michael Lewis was really highlighting in the book. And it was kind of a very neat discussion and something that I think shed a lot of light on something that very few people had seen or even understood. So the next character in the book that we really enjoyed the discussion on and we're in talks of trying to get this gentleman to come onto our show. And he's responded to us. So we're very hopeful that we'll be able to bring him on in the future. But this guy's name is Brad Katsuyama.

Starting point is 00:22:17 And he worked for the Royal Bank of Canada. And most of the book is centered around Brad and his adventure of debunking high-frequency trading and what he ultimately did. So whenever he was working for the Royal Bank of Canada, he was working with these different traders and he would see these orders come in. And then the people that from his bank were trying to execute the orders would put in their order a large volume order. And just to see it change and they weren't able to get.

Starting point is 00:22:47 get the 100,000 trades in. They would only get maybe 20,000 trades in. And they're, they're trying to wonder, how is this happening before we were always able to get the full 100,000 trades in? And so he starts pulling back the onion on this and he starts studying it. And he's realizing that he has high-frequency traders that are beating him to all the other exchanges and all the other markets where they're trying to process the 100,000 share order. And so it talks about how Katsuyama is going through and methodically trying to solve this problem. And so what happened was, and so this is a big generalization of the whole story. But in essence, what happened was is whenever Katsuyama's people were executing an order for, let's call it, 100,000 shares,

Starting point is 00:23:34 they might get only 20,000 of them that come back at the price that they wanted, and then the rest wouldn't get executed because the price of the stock had gone up. What was happening was they were able to snag those 20,000 orders at the first exchange that was closest, literally by distance, that was the closest distance to where they were executing the order. But then on all the other exchanges that were further away because of the speed of the line, they weren't able to get that price because they were getting beat by high-frequency traders. Just like the example that I had described with Stig and I trying to buy apples, the same exact thing. And I'm just going to jump to the end here.

Starting point is 00:24:11 So Brad Katsuyama, he's trying to. to think of ways that he can basically beat the high-frequency traders and not do it through investing in really expensive internet lines and ways to move the trade faster. So what he did is he had a bunch of programmers develop a software program called Thor. And what Thor did is it put an automatic delay into the order so that they would all be executed on different exchanges at the exact same time. So it'd kind of be like if we were going back to our original example of the apples. So let's say that I was trying to buy a thousand apples, but I was trying to buy them on five different exchanges. So let's say that there were 200 apples available on each exchange so that the scenario makes sense. So what I would do is I would effectively have five people that would

Starting point is 00:25:06 all go to each market all at the exact same time. And then we'd all look at our watch. And whenever our watch would say that it was exactly 12 o'clock, all five of us would purchase our 200 apples at each one of the markets. So that way, a thousand orders all were executed at the exact same time. And so Brad Katsuyama came up with this idea of basically putting a delay into, so it's a little hard to do that because you don't have five different people being able to walk to each one of these exchanges. But the way he did it was through software algorithms that he knew the time that it took for the order to get to another market. So what he was, would do is he'd send out the orders first to the markets that were really the farthest away,

Starting point is 00:25:47 and then he would put a time delay into the markets that were closest to him so that all those orders were executed at the exact same time. So that was Brad Katsuyama's Thor software solution. Now, where it got really interesting was Brad Katsuyama found out about all these, what they called dark pool exchanges that companies like Goldman Sachs and all these big banks, Morgan Stanley had these dark pool exchanges where they were executing orders as well. So Brad takes it to the next level. This guy goes out and he says, you know what? I'm going to start my own stock exchange.

Starting point is 00:26:24 And I'm going to do it in a manner so that high-frequency traders cannot take advantage of the orders. And what he did is he actually put coils of line so that whenever the orders would arrive, they would arrive at the exact same time in high-frequency traders. could not exploit the time dimension and the distance dimension between markets, which is just crazy. So, but go ahead, stick. Yeah, and Brad is really a unique person. I mean, not only because he's standing up almost like one-man army against Wall Street and all the big banks. But at the point of time when he launched his bank, he was the only exchange out of 66

Starting point is 00:27:06 that actually disclosed the rules and the procedures of the exchange. Now, it's not like I have read all the regulation for exchanges in the U.S. I mean, that's probably going to take me a long time if I decided to do that. But I was just surprised when I heard it that I thought it was like public available. Like everyone could go in and see if some trading companies got an advantage due to others. But apparently, Brad's exchange is the only one who chose to disclose how they were treating investors and brokers and what the rules and procedure was. and that was quite surprising to me. So I think the thing that was probably most impressive for me about Brad Katsuyama

Starting point is 00:27:48 was the fact that he was making a lot of money when he was working at the Bank of Canada. I mean, he was probably making, I think I remember reading like $2 million. Is that right? So he was making like $2 million. And this guy just decides, you know what? I've got to do what's right and I'm going to leave and I'm going to start my own exchange so that I can fix this problem. And so I give this guy a lot of credit.

Starting point is 00:28:11 My hats off to him. I really hope he comes on the show. Okay. So let's go ahead and conclude the book. And so at the end of the book, it was really, really comes full circle. And this just shows you how good Michael Lewis's writing style is. If you're a person who, you know, is interested in the stock market and investing, Michael Lewis is basically like the action novel writer.

Starting point is 00:28:33 He's like the Tom Clancy of investing books. So at the end of the book, he concludes by talking about that right now, instead of them doing a hard landline between Chicago and New York, they're now setting up conventional microwave links antennas between Chicago and New York, which follows an even straighter route than the spread network's 827 mile cable. And so these microwave antennas are now shooting from one, and for microwave antenna, it has to be a direct. line of communication. So they're putting these things on top of mountain tops, and they're basically shooting these signals from Chicago to New York across the Appalachian Mountains through these microwave antennas. So whenever they set up these microwave antennas, they shaved another 4.5 milliseconds off of the speed between Chicago and New York. And I'm sure that they are charging these high-frequency traders that utilize this line a hefty sum of money. And so when

Starting point is 00:29:36 whenever we talk about that and we think about that, that's really going to lead us into our last segment here, which is our thoughts on high frequency trading. So my opinion on high frequency trading, first of all, I think this stuff is ludicrous. This is crazy. And I think that it has a limit. And I think the limit is the fact that this stuff is not cheap to do. Everyone wants to talk about the income or the top line of the income statement of how much they're making on this stuff. But what they're not talking about is number one, the cost associated with all the computers, the high-powered computers that they put on each one of these exchanges in order to process all this stuff. They don't talk about the expense of how much it is to run all these

Starting point is 00:30:20 different lines. And the fact that, and this was really my second point, is that the competition is fierce. And the competition is only going to get fiercer. And the thing is, if you're not the fastest guy in the block, you're probably going to get your lunch eating. I mean, you're going to get taken for a ride if you're not the fastest guy in the block. And so what you're doing is you're in this fierce competition environment that's very high dollar threshold in order to enter. And so I think that this is something that as speed, you can only go so fast. Okay. And you can only invest so much money to go so fast. And what I think you're going to get is a point of no returns where after they invest all this money and they figure out the fastest way to get from one market to the other,

Starting point is 00:31:05 I think it's going to kind of devour itself over time. And so whenever I ask myself, where is this going to be in 10 or 20 years? I really think that you're going to be at a point where the margins and the growth on this stuff is going to deteriorate over time. Go ahead, Stick. I know you have a point. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving.

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Starting point is 00:34:23 future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. Yeah. I would like to talk to about like from the investors point of view but first I'd like to say that I feel really sad about that it doesn't create any value I mean you have so many brilliant people so many you know PhD in engineering and scientists and they can do so many good things for humanity and then they were just sitting in programming to try and beat each

Starting point is 00:35:08 other in a completely hopeless game and that was actually the thing that was sad in me the most I don't know what you take was Preston so it's it's a amazing that you said that because my exact same thought, I kept thinking back to that Charles Coke book where he talks about what value are you adding to society. The more value you create, the more wealth you're going to create for yourself. And that just kept coming up in my head as I was reading this book was like, what are they doing? Like, what value are they creating for society? The fact that they can beat somebody else's order to another market in four milliseconds. I mean, that's crazy. That does nothing but drive up the price and just,

Starting point is 00:35:47 Yeah, it was a little frustrating. So that's, I guess, where I would, when I look at it from an investing standpoint, I totally agree with you that even if the numbers made sense, what value are we creating here? And I think that that's the thing that I think a lot of investors need to have at the forefront of their mind whenever they're buying something. Because I think you're always going to get burnt if you're investing in something that does not create value for society. I think that that's just probably the golden role here. But, and, you know, to back up our claim on the fact that they're going to devour their self, So when you look at the numbers, the profit margins from 2009, the estimate is that high frequency trading made $5 billion.

Starting point is 00:36:26 In 2012, though, the estimate of how much profit was made through high frequency trading, it was $1.25 billion. So it went down by effectively, it's at 20% of the level it was back in 2009 already, and that was in a 2012 number. And we're already in 2015. So who knows how much it's gone and deteriorated since then. So some interesting things that you wonder, you know, what's the direction of this stuff? Now, if you disagree with us and you think that this is value added to society or whatever, guess what? There's publicly traded companies that do this stuff. For example, Knight Capital Group, their ticker is KCG.

Starting point is 00:37:06 If you want to invest in high frequency trading, there's a company to do it. So if you want to be an owner of this stuff, you can do it. I would steer away from this. just my personal opinion. I have a zero interest in this stuff. And I think that, I think it's very interesting, extremely interesting, but it's not something I'm interested in investing in. My take, because I was also thinking, what does this mean to me as an investor? Can I trust the financial markets? What should I be cautious about? And I got to say that even though it is disturbing for me that you might here and there be paying a few cents more per share

Starting point is 00:37:42 because of this high frequency trading. And I don't think if you are a small-time investor, which I am, and if you're only trading a few times a year or 10, 15, 20 times perhaps, I don't think it's that big a problem. I think it can be very costly and it can be a problem if you're trying to go in and out of the market all the time and you're trying to compete with these guys. But if you are a value investor, a long-term investor,

Starting point is 00:38:10 I think that you shouldn't be too worried about this, High frequency trading. Yeah, I completely agree with what you just said, Stig. All right, so this is the point in the show where we're going to go ahead and play a question from our audience. So our question today comes from Satish Austin, and he has a very good question, so we're going to go ahead and play it right now. Hi, this is Satish. Thanks for your course in YouTube. As I understand, value investing is based on making financial positions, based on business fundamentals.

Starting point is 00:38:39 However, I also hear that both institutions and individuals make large profits are fairly making trade positions based on technical analysis of the charts. Should I not use both fundamental and technical analysis? If yes, then how do I balance between them? Thanks. Okay, Satish, this question, I would. really like this question because a lot of people out there feel like they've got to do one or the other and you're asking, why don't I do both? And so what you're really getting into is do I use statistical methods through charting, through candlesticks, all those types of things you see a lot of day traders

Starting point is 00:39:27 execute? Or do I use the value investing approach where I'm looking at the fundamentals of the business and owning it forever? Why not mesh those two approaches together and invest that way? And I think that that's a fantastic question. But with that said, here's my opinion. I haven't been able to execute an approach using technical analysis, which is the chartology, the candlesticking and that kind of stuff successfully. I have not been able to do that. I don't know any day trading billionaires that are out there.

Starting point is 00:40:01 And I kind of use that as my benchmark for, is there a way to be successful at doing this? and I look at how many people out there have been successful in a major way. And you know what? I don't know of any. But I do know that high frequency trading implements some of these tactics. So I think that the way that we can say and that there are billionaires out there now, but they're billionaires that have executed high frequency trading. And they've implemented in a way that's utilizing these high-speed internet connections

Starting point is 00:40:31 in order to defeat and beat other people to the trade. And I think that is probably the only way that a person can be highly successful using technical analysis. That's my opinion. I might be wrong about that. But based on the fact that you look at how many people out there that are billionaires that have been successful with this, there's a few. For example, there's Vincent Viola, who's the owner of Virtue Financial. I tried to get Vince to come on our show. Vince actually responded to me, and he said, no.

Starting point is 00:41:03 He's a West Pointer. So I was able to contact them through the Alumni Association, and he said that he was not interested in doing any interviews. But he is one of the only people that I know of that's a billionaire through executing these strategies of technical analysis and using high frequency trading as the vehicle in order to do that. So my opinion is, unless you are somebody that could stand up a company that could compete in this high frequency trading realm using technical analysis methods, I just don't see how you could do it successfully. So as a result, I see that you have to rely on value investing maybe as a better approach in order to capture gains successfully in the long term. So Stig, I know you definitely have some points on this. Yeah, and I think that, you know, I completely agree with you, Preston, but I think I have like two main reasons why I'm not going into this whole technical analysis thing. The first one is definitely time.

Starting point is 00:42:00 Now, to me, to sit down and look at these charts and make all this work, I don't know if it's, just that me that's being too lazy. But it just seems much more appealing to me to read a few annual reports, track a company, buy the stock, and just wait for 10 years. I mean, that really works for me. If I had to want to the market every day, I probably couldn't do anything else. So, I mean, from a time perspective, I don't think it's the right procedure. And I might not be too persuaded into that it actually works. And there's a few reasons for that. One is the whole fee structure. So if you, Saqqqq, as a personal and private investor, if you start to trade on exchange,

Starting point is 00:42:40 you might be paying something like $5 to $10 for every trade you're doing. To beat the market when you have to pay fees every time and you're doing hundreds or thousands of trades, I think that's really, really hard. Because on the other hand, you're competing with companies that getting what we call liquidity rebates. And what that actually means is that they can buy a stock at $10 and sell that $10. and actually make a profit because they're getting, well, it's a kind of technical thing,

Starting point is 00:43:08 but they're actually getting something back from the exchange of running liquidity. So while you're paying $5 to $10, they're actually getting paid to trade at the exact the same price. So it's a really unfair game, also given they have more manpower and have a lot more computer power than the common investor. So I just think it's a game where the dig is stacked and it's definitely not stacked in your favor. So I completely agree. Satish, I'm not sure if that answered your question, but we're of the

Starting point is 00:43:39 opinion that a value investing approach is probably the best way to go for the common investor, just because of the pure capital that is required in order to compete in a market like this, the infrastructure that's required, and the fact that I just don't think that you can go out there and find somebody who has successfully implemented technical analysis and has been able to show, hey, I'm worth $100 million and I was implementing technical analysis from the very beginning. I don't think you're going to be able to find that person. And if you do,

Starting point is 00:44:08 I'd love for you to shoot us their name and maybe we could get them on the show or whatever and study the person and bring that to light. But I haven't found that person. So that's what we got for you today. We really appreciate everybody joining us. Satish will be sure to send you a free signed copy of our book, the Warren

Starting point is 00:44:24 Buffett accounting book. And for anybody else out there, send us your questions. We love getting these questions and I think that they're very beneficial to the audience. So go to AsktheInvesters.com and record your questions there. But that's all that we have for you today. We'll keep you updated on whether we can get Brad Katziyama on the show in a later date and we can discuss his investors exchange more potentially in the future as well. So thankful for everybody joining us and we'll see you next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.

Starting point is 00:44:58 Submit your questions or request a guest appearance to the investors podcast by going to www. www. Asktheinvestors.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 019 : How High Frequency Trading Works - Michael Lewis Book (Investing Podcast)

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