For the last month or so, swings in the market of 500-600 points up and down on a daily basis have occurred on a number of occasions, frightening seasoned investors and money managers along with market novices. This degree of fluctuation and apparent instability is bad for the market as it drives fearful investors to take their money and run, and is also bad for the economy. The loss of wealth on paper makes consumers less likely to spend, the major driver of the American economy, and makes banks less likely to lend to companies who wish to expand and to provide loans for new construction.
The blame for this market volatility has been placed mainly on China, whose economy appears to be slowing. During this period, the Chinese stock markets have dropped precipitously and the Chinese currency (the yuan) has been devalued to try and increase exports. Because of the Chinese economy’s reduction in growth, commodity prices (oil, coal, copper, iron ore, aluminum, and so forth) have all taken a tumble, bringing down the stock prices of these companies worldwide.
If these were the reasons for the American stock markets’ woes, we should have seen the markets just move downward, instead of the volatility that has been present. The huge swings in stock prices up and down that have occurred several times daily are most likely due to market manipulation by high speed traders, who exacerbate any volatility that might be present normally in the markets.
At this moment in time, high-speed (flash) trading is deemed legal though it adds nothing of value to the markets. All it does is provide advantages to those who do the trading, allowing them to make huge sums of money by speculating on particular stocks. With the use of computer algorithms, the traders buy and sell hundreds of thousands to millions of shares of stocks at speeds of milliseconds, reacting to any market information or inefficiencies before other people are able to respond. In this way, they beat human traders to the punch. Currently, approximately half of the total volume on the stock exchanges comes from high-speed trading.
High-speed traders claim that the increase in trading volume they provide has added liquidity to the markets which is beneficial to all investors. But that claim is a mirage. More volume does nothing to help the small investor, particularly when the high-speed traders are skimming money off the top. Eventually, all of us pay for the money they are making. And some of the short-lived crashes in the market over the last several years can be blamed on the high-speed traders and sudden increases in volume that could not be handled by the exchanges.
With a number of these high-speed trading organizations competing against each other, they pay to obtain information early from various legal sources, such as company’s earning’s reports, or data from third parties or from economic surveys. Anything they get first, buffs up their algorithms, giving them advantages when they make their trades.
To curb this market manipulation, a transactions tax on all stock trades would make high speed high volume trading much less lucrative. However, the tax would have to be structured in such a way that traders could not move to other markets to make their trades. Or the tax could be enacted in coordination with other nations to make it universal or near universal. The amount of the levy that has been discussed is three basis points on every trade, or three cents for every hundred dollars traded. The Joint Committee on Taxation has estimated that this tax would bring $352 billion into American government coffers over ten years. Initial public offerings and bond sales would be exempted from this tax so as not to interfere with the raising of capital. Withdrawals from IRAs and education funds would also not be subjected to this tax.
Companies that trade huge volumes of shares of stock back and forth daily would be affected most by this tax. These high-speed traders do not help in the efficient allocation of capital to help the economy, do nothing to lower risk in the market for normal investors, and can cause instability in the markets. They generate money for those with the right algorithms but provide nothing of any social value, benefitting no one but themselves. There is no reason for these high-speed traders to exist, and the S.E.C. or the government could easily tax them out of business or make it much less profitable. A transaction tax would mean little to most stock market investors and would raise revenue for the federal government in a way that would be painless for the average American citizen. Why hasn’t the S.E.C. or the government acted?
Resurrecting Democracy
www.robertlevinebooks.com
Political junkie, Vietnam vet, neurologist- three books on aging and dementia. Book on health care reform in 2009- Shock Therapy for the American Health Care System. Book on the need for a centrist third party- Resurrecting Democracy- A Citizen’s Call for a Centrist Third Party published in 2011. Aging Wisely, published in August 2014 by Rowman and Littlefield. Latest book- The Uninformed Voter published May 2020