High-Frequency Wall Street
There is the dimension of the High-Frequency Traders, a lightning-fast world of high-speed communications and supercomputers. In this dimension, trades are made literally in the blink of an eye. A High-Frequency Trader buys and sells before a conventional order reaches the floor for execution. In a couple of minutes, it takes for our home computer to route an order from the internet service provider (ISP), to broker, to executing authority, and back to you, a High-Frequency Trader (HFT) could have executed and settled a couple of trade, far outdistancing you and me.
Many on Wall Street consider High-Frequency Trading as a sophisticated case of “Front Running.” A group of highly capitalized, technologically advanced traders can beat the average investor to the market and thereby take advantage of the retail investor’s order flow. They are buying and selling ahead of the public.
While a couple of years ago, it looked like we would get some reform in High-Frequency Trading, the current Administration in Washington has chosen not to pursue it.
The Wall Street Standard
You and I, and the Federal Reserve, live in what I call the Wall Street Standard Time. The Federal Reserve meets ten times a year, meshing well with the quarterly earnings reports for public corporations. Standard time is the time of the stock market, measured in days and weeks.
Leading this part of Wall Street is the Federal Reserve, and especially its Chairman Jerome Powell. The Fed sets the itinerary of standard time investing. And the Fed’s two principal indicators (by Law) are stable prices and full employment. You hear those indicators echoed in the latest Fed Statement issued last Wednesday:
“Recent indicators suggest that economic activity has been expanding moderately. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.”
So there are those two indicators, employment “Job gains have been robust…” and stable prices: “Inflation remains elevated…” (oops!).
Add to the Fed’s twin mandates (stable prices/full employment) and corporate earnings, and you’ve covered the waterfront in terms of what Wall Street Standard Time Dimensional investors see. In the world of those of us who are average investors, we look to see that the economy is doing well, our neighbors are employed, and the companies we invest in are profitable.
It’s a dimension of time that fits well with our investment style. While some investors may trade as many as five or six times a year, and perhaps even more, the average retail portfolio turns over only once or twice yearly. It’s a trading pattern that fits nicely with those quarterly earnings reports and a Federal Reserve that meets ten times a year.
Current important indicators for Standard Time Investors are Inflation and earnings. The current low unemployment rate has most investors assuming everything is OK in the labor markets.
Long-Term Wall Street
There is a third dimension to Wall Street, the genuinely long-term investors. It is a group that we hear very little about. A marketplace that generates no headlines and has very few spokespersons. No one ever asks the long-term investor for their latest “hot tip.” You’ll get no “inside info” from these investors. The chances are they don’t even know about Apple’s latest iPhone or the newest cutting-edge tech development. Their principal investments are bonds, mainly US Treasury Bonds.
Ironically this is the most significant investment market in the world.
It’s a place of basis points and actuarial tables, where the tiniest fraction of a return can mean all the difference between investment success or failure. The principal investors are Endowments, Insurance Companies, Sovereign Funds, and the like. These are gigantic portfolios hedged against life insurance policies, retirement accounts, and endowment contracts.
They take the concept of Macro and write it large. Unlike the High-Frequency Traders’ minutes and seconds or the Standard Investors’ days and weeks, these Long-Term Investors look to the years and decades. They are the insurance company that needs to make good on a policy that will pay off in 20 or 30 years. The University will need to replace a science lab 25 years from now. Or the Sovereign Fund that needs to provide Social Security benefits for their next citizen for 30 years.
So, as you’d suspect, their perspective differs entirely from the High Frequency or Standard Investor Perspective. Indeed, interest rates are essential to the long-term investor. But not necessarily today’s interest rates.
For instance, the Federal Reserve has been steadily raising interest rates; in Federal Funds, the shortest interest rate is now 5.5%. This move by the Fed has driven the yield on the 2-year Treasury Note to 4.88%. That is a higher yield than any of the longer-maturity US Treasuries. It’s 87 basis points higher than the closely watched 10-year Treasuries.
Yield Inversion is an extremely rare event. Short-term Treasuries are supposed to have a LOWER yield than longer term. Moreover, this inversion (2 years to 10 years) has been going on for a year now, one of the most prolonged periods ever where short-term bonds yield more than long-term. My long-term bond investing friends tell me this is a surefire indication that long-term interest rates will be lower in the future than today’s rates.
Finally, the long-term investor takes a different view of the labor markets. In contrast, Standard Time Investors view the shallow unemployment rate (currently 3.6%) as indicating a healthy economy. However, Long-term investors are puzzled by some recent anomalies. From Q1 2021 to Q2 2023, there has been a 33% increase in workers with a disability; this is the highest number of disabled in 24 years. Combined with the anecdotal reports of “Sudden Death Syndrome,” it raises questions among Long-term investors about the health and vitality of American workers.
So are you a High-Frequency Trader? A Standard Time Investor? Or A Long-Term Investor? It can make all the difference in how you view the financial world.
