There's been a lot of coverage of late on Michael Lewis' comments regarding high-frequency trading and how the odds are stacked against the retail investor. I was on CNBC discussing this as well as market movement, and thought it might be worth expanding on the discussion through the lens of a portfolio manager.

First, allow me to say right off the bat that I can certainly understand and appreciate the frustration many may have around this complex issue. Certain high-frequency trading firms may indeed have an informational/speed advantage which results in market-price movement which could harm investors in the very short-term.

“ "People feel like the system is rigged against them, and here is the painful part, they're right. The system is rigged." - Elizabeth Warren ”

However, if one is truly an "investor," then the long-term trajectory of the stock market really shouldn't feel the impact of shorter-term traders who try to scalp pennies in nanoseconds. More harm is done by investors who overtrade and continuously watch their accounts than by high-frequency traders, purely because volatility tends to make investors far more conservative than they likely should be. Studies have shown that those who check their statements quarterly as opposed to monthly (let alone daily and minute-by-minute) tend to far outperform over time precisely because there are less data points to get scared by.

It can be argued that where high-frequency traders can indeed hurt retail investors is through a scenario like the Flash Crash of May 6, 2010, where markets collapsed in a matter of minutes as high-frequency players left, resulting in a bid void. Stocks obviously had a huge comeback since then, but the fear of further collapses and market integrity did cause many to take money off the table at the wrong time. This of course raises the question of how to prevent that from happening, since it is unlikely high-frequency trading will ever be banned, and likely more disruptions like the Flash Crash of 2010 take place.

While stock-market direction may be somewhat unpredictable in the short-term, the "whites of the eyes" of volatility tend to show up before it hits. Knowing when volatility is likely to rise can help “unrig” markets, as it allows traders and investors the ability to minimize price gyrations which could hurt the decision making process. The 2014 Dow Award winning paper "An Intermarket Approach to Beta Rotation" which I co-authored with Charlie Bilello shows one way of getting ahead of the volatility question through relative movement. Another way of doing so is to look at credit spreads.

Take a look below at the price ratio of the SPDR Barclays High Yield Bond ETF JNK, -0.29% relative to the PIMCO 7-15 Years Treasury US:TENZ. As a reminder, a rising price ratio means the numerator/JNK is outperforming (up more/down less) the denominator/TENZ. For a larger chart, please click here.

This is one way of tracking credit spreads, which are directly related to the potential for future volatility. When rising, it means spreads are narrowing (healthy), while falling means they are widening (not healthy). Note that for the most part, spreads remain strong and the ratio indicates on the credit side of things, all is well so far. However, should this ratio break down suddenly, it might be indicative of something more nefarious to come.

Bottom line? To unrig this market, don't necessarily look at what high-frequency traders are doing, but what the results of their actions are. If precursors to volatility are sending warning signs, you're better off paying attention to them then blaming a potential source.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.