Why is high-speed trading considered legal by federal regulators? It serves no useful purpose and occasionally causes shock-waves in the stock market, destroying people’s faith in the stability of the trading system.
The nominal function of the stock markets is to efficiently allow companies to raise capital to provide society with products of value. It also allows anyone to invest money in these companies, including those with only small sums they wish to place at risk, as well as sophisticated and wealthy individuals who supposedly are more knowledgeable about investing. Because of the stock markets, many individuals are able to own a piece of various companies, giving them a stake in the economy and an opportunity to make money when these companies are profitable.
Risk is inherent in investing, but healthy markets are responsible for making certain that everyone who invests is subject to the same risk and that no investor has an advantage over any other. Of course this is not true and those who have more information about the companies they invest in are more successful than those who invest blindly. When this success results from research or analysis, general knowledge, or because some individuals are smarter than others, no one can complain. However, those who invest successfully on the basis of insider information can wind up being fined or going to prison because it is illegal.
At this moment in time, high-speed trading is deemed legal though it adds nothing of value to the markets. All it does is provide an advantage 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 stocks at speeds of milliseconds, reacting to any market information or inefficiencies before people are able to respond. In this way, they beat human traders to the punch. And because they are first in their transactions, their moves are less risky than those of normal traders. Currently, approximately half of the total volume on the stock exchanges comes from high-speed trading.
The 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 an advantage when they are making their trades.
These high-speed traders do not help in the efficient allocation of capital to help our economy, do nothing to lower risk in the market for the average investor, 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 curb them by placing a small financial transaction tax on every market trade that occurs. This would mean little to the average investor but would make high-speed trading much less lucrative for those who are trading hundreds of thousands or millions of shares daily. 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