In his newsletter, Scott Bidstrup gives a cogent explanation of why flash trading on stock exchanges is parasitic.
"High Frequency Trading" - high speed, high volume "flash" trading as it is known on the street, executed in milliseconds by computer programs - is basically incompatible with retail investing. An investor might buy and hold a stock for a fraction of a second and make only a tiny fraction of a percent profit on it - here this second, gone the next. It makes markets too volatile for retail investors - like you and me - to trade in safely, because prices jump around wildly. In doing so, flash trading is draining economic resources from the real economy and putting them in casino capitalism that only rentiers the real economy without creating wealth at all.
The fact that it is going on - even being encouraged by the exchanges - is evidence that the exchanges and brokerages are not really all that interested any longer in retail investors, and go where the money is, since flash trading is extremely profitable for the exchanges.
There's a fix, which the Europeans are ready to implement, but which cannot work unless all the world's securities exchanges are prepared to do it together. And the Europeans have been begging the U.S. regulators to implement it, but so far, the Obama administration has refused
The fix is to make flash trading uneconomic by simply imposing a tiny transaction tax on each and every flash trade. It doesn't have to be much - the number bandied about is about half a percent - but that would be enough to discourage gambling on flash trading and encourage investing for the long term - which is what the markets are supposedly for. But the Obama administration will not go along - because USAnian politics goes where the money is, and the money isn't in retail investing.
Its your "free market" at work.
Black and white issue, this is it!
Wow! Several years ago in a "Senior Seminar" program I remarked that Wall Street is a den for gamblers.
Another senior in the group immediately, and noisily, challenged me.
Will you believed I answered with "I guess folks who talk the loudest get to define words" and didn't contest his view?
I didn't want to make a scene.
Thanks, Ruth, for pointing out that bailing out Wall Street harms most Americans.
Once more I am called upon to question my freemarket views. A "perfect" market is a HUMAN market, with educated guesses, holding investments over time, good and bad gambles (as determined by human judgment). A machine-perfect economy is geared only to making money. Used to be called program trading.
Once again, automating something changes it qualitatively. Once again, just because it can be automated and turned over to machines doesn't mean it should. And once again, machines are not necessarily our friends.
Alan, having spent a few well-paid years writing instructions for machines that tell them:
1) what do do,
2) how to do it,
3) when to start doing it, and importantly
4) when to stop doing it,
I will take your final sentence a step further: machines have no friends.
Would you agree that a perfect market is a human construct that exists only in human minds?
Much like that other human construct, a god. And like a god, indifferent to human concerns.
Not a deus ex machina, which serves a purpose for a writer who has lost control of a story.
Definitely agree. It's a "to-the-extent-possible-but-inevitably-flawed" perfect market.
Your last metaphor is right-on. Already, as Jaron Lanier notes in You Are Not A Gadget, we are locked into the MIDI sound profile, the Windows file, MS Word formatting, and who knows what else. Also, for a disturbing prediction, check out "The Perils of Perfection, " NY Times Magazine, 3/3/13.
Are there NO limits to the operation of the flash-trading machines??? No way to tell them when to stop?
As far as I can tell unregulated flash trading contributes to market volatility. But for me the worst thing is the way it completely undermines ordinary human investors, even those who are skilled and knowledgeable. Flash trading works so fast it can detect a buy order before it can be processed, buy that stock and resell it to that buyer, stealing the profit he might have made.