A Speed Limit for the Stock Market
By ROGER LOWENSTEIN
Some 50 percent to 70 percent of all trading is done by “traders” who live in server parks, are nourished by direct current and speak only in binary pulses. Several other countries are starting to regulate this high-frequency trading, or H.F.T. But in the United States, the deep-seated bias toward “liquidity” — the notion that more volume will always make it easier for investors to buy and sell shares — has discouraged regulators from taking action.
The purpose of financial markets, remember, is not to provide a forum for split-second trading. I
f you want to gamble, go to Las Vegas. Markets exist to provide some minimal level of liquidity, so that long-term investors have the confidence to invest. And they exist so that companies and investors can discover how much an ownership position in, say, Apple is worth. When Apple stock goes up, it sends a signal to other firms to invest in the same or similar technologies. Thus does a capitalist society allocate resources.
A well-functioning market can accommodate some hyperactive turnstile traders as long as it has enough legitimate investors — people who are thinking about the outlook for companies down the road.
The reason that market squares like me harp on the long term isn’t because we’re technologically illiterate. It’s because, again, society relies on the market to allocate capital. If market signals are based on algorithms that become outmoded in a nanosecond, we end up with empty factories and useless investment.
How much effort do high-speed traders devote to analyzing the future prospects of Apple? Precisely none. Their aim is only to exploit tiny price discrepancies that disappear in milliseconds.
David Lauer, a former trader, told the Senate panel that high-speed technology was “a destructive force in the market” with “no social benefit.” He’s right. The “liquidity” H.F.T. provides is long past the point of being helpful
It’s not just that such trading is unfair to traditional investors who, obviously, cannot take advantage of price movements they cannot see. (
In May 2010, several publicly traded companies briefly lost nearly $1 trillion of market value in a so-called “flash crash” that the S.E.C. said was triggered by a single firm using algorithms to rapidly sell 75,000 futures contracts.
Intraday trades should be taxed at 50 percent. And “investments” that mature in 60 seconds should be regarded as, in effect, electronic errors — with any profit going to the government. This will greatly reduce high-speed trading and divert its remaining gains to the public.