Beat high-frequency trading machines by not playing their game

Individuals dont stand a chance anymore because they are largely competing against rational machines often guided by herd-like irrational forces. The robots can rule in the blink of an eye.

Im not spouting lines from an Isaac Asimov novel. but citing reality. The machines and people who program and profit from them have won for now.

I knew it was over for human traders when I heard that high-frequency trading firms were hooking up their data lines directly to exchange computers to gain an extra hundredth of a second in execution time.

High-speed programs are designed to move millions of shares in a fraction of a second to take advantage of small movements in securities prices. These algorithms are ideal Wall Street workers. They dont need health insurance and you dont have to pay them bonuses to help finance their Lamborghinis or homes in the Hamptons.

Theres no way to beat the machines, unless of course, you have a faster machine, better programs or the ability to predict the future. Your odds are better in Vegas, which never had great odds for a palooka pulling a one-armed bandit.

Who are you trading against when you take on the machines? Any entity from a boutique investment firm with a handful of quants math majors who flocked to Wall Street for the big bucks to a mega-bank or hedge fund. Some 60 percent of the volume of the New York Stock Exchange is attributed to high-speed trading. maybe more.

Although many market observers blamed machine traders for a flash crash last year, regulators have done little to slow down these speed demons.

Machine traders dont even need a human analyst to pull the trigger on trades based on the days news or price changes. Who watches CNBC any more in these firms? They dont have to: Machine-readable feeds from all of the news services and exchanges go right into their computers and trading decisions happen without much direct human intervention.

The trading floor is becoming as relevant as the telegraph system.

Thats why will see even more flash crashes and huge price swings called mini-flash crashes.

The only perennial truth about the stock market is that it will remain volatile and virtually unpredictable because its based on the mass actions of millions of people. Its like trying to predict the direction of a giant school of dumb fish.

Every day, even more money is chasing potential price swings at the speed of light all over the world. The more traders adopt these systems, the greater the chaos.

There are, of course, various ways of protecting your money from the market madness. Crafting a low-risk, long-term portfolio allocation of stocks, bonds and alternatives for your age, lifestyle and risk profile is one way.

For long-term stock investors, youll be better off in exchange-traded funds like the Vanguard High-Dividend Yield fund or the SPDR S&P Dividend fund. Both offer a portfolio of high-dividend paying stocks.

You can also create a high-dividend portfolio of your own, but youd need to diversify across at least a dozen industries to buffer sector risk .

Dividends generally arent impacted by high-speed trading. If a company has sufficient earnings, they cut you a check every quarter. Once you create your portfolio (with individual stocks), youd enroll in dividend-reinvestment programs to buy new shares on a regular basis on a dollar-cost averaging basis. That would ensure you wouldnt be buying in at the market peak. The majority of these programs allow you to buy new shares commission-free.

Dont even try to time the purchase of your stocks, because Washington will do nothing to protect you against huge market swings.

Wall Street is spreading plenty of money around in lobbying efforts to make sure that their trading desks dont get regulated in any meaningful way. Sated with financial services industry contributions, House Republicans have already spent most of the year trying to kill Dodd-Frank financial reforms, so high-speed trading isnt even near the top of their agenda.

So my advice couldnt be more succinct. The best way to beat the machines is pretty simple: Dont even play them. Game over.