Kill High Frequency Trading
There is currently a minor uproar over the revelation that various non-governmental groups sell early access— two seconds early—to their market-moving news releases to paying customers, who can then trade on that information before everyone else. This points to a larger problem: the entire institution of "high frequency trading" has no public benefit, and tons of risk.
High frequency traders use powerful computers and powerful algorithms to buy and sell millions upon millions of shares of stocks and other securities, millisecond by millisecond. They make money on the tiny up-and-down fluctuations in securities prices throughout the day. They do not analyze the "fundamentals" of companies, or make long-term bets based on macroeconomic theories. The entire industry is one of proprietary computer programs trying to jump into the tiny gaps in stock prices that appear and disappear faster than you can cough.
High frequency trading (HFT) is the ultimate expression of machine triumphing over man in the financial markets. It is also the ultimate expression of a financial strategy with no redeeming social value whatsoever, and tons of risk. The economy is an underlying and immutable facet of human life. The world of finance, as much as we deride it, has a proper role to play in society: to direct capital to where it can be most useful, which benefits both borrowers and lenders. HFT does not meaningfully help direct capital into its most useful role; it is merely an electronic arbitrage trick, that funnels a portion of the market's value into the pockets of the people with the most powerful computers. And all of those computers programmed to trade automatically based on various parameters can lead to massive and dangerous selloffs if the right conditions arise; HFT was responsible for the "flash crash" of 2010, which sent the stock market down—and then up— almost a thousand points in a period of just a few minutes for no apparent reason, causing many heart palpitations among CNBC viewers. Last year, one huge HFT firm lost more than $400 million in a single day, due to a software "glitch." Whoops.
The normal argument for increased trading volume is that it provides "liquidity" to the market— that is, it enables people to buy and sell stocks any time they want. In the case of HFT, this reasoning is absurd. No human needs to buy and sell stocks on a second by second basis. Only high frequency trading computers need to do that. The entire HFT field exists only to justify and enrich itself.
The fact that traders would pay hefty fees to receive a market-moving report two seconds early— and would, according to the WSJ, then be able to place bets on seven million shares in one second— is ridiculous on its face, and a testament to just how far away from "useful to society" the world of finance has gotten. Ideally, Wall Street would be little more than a utility company for money: just as the electric company apportions electricity where it's needed, Wall Street apportions money where it's needed. And, like the electric company, Wall Street should be paid a sane and reasonable salary for this service. It should not be paid bazillions of dollars for this service, any more than a bank teller should be entitled to a percentage cut of the money they hand out to customers each day.
There's some evidence that competition in HFT may be squeezing all of the profits out of it. Great. But it's still responsible for half of all stock trades, and all of the billion-dollar profits that HFT firms take out of the market come at the expense of normal investors like you and me and your pension fund, who don't own supercomputers. Faster and faster computers and more clever algorithms are a financial arms race that leads nowhere, and benefits super-insiders at the expense of the public. A financial transaction tax would be a great way to kill off the whole industry, and restore a (small) measure of sanity and stability to financial markets. Money exists to benefit all humans. Not just voracious computer programmers.
[Photo: AP]