Joesph Stiglitz is quoted a lot in this piece that is well worth reading. A snippet:
Better “nanosecond” price discovery comes at the expense of a
market in which prices reflect less well the underlying fundamentals.
As a result, resources will not be allocated as efficiently as they
otherwise would be.Because one reason that market
efficiency matters is that prices are a signal to companies about where
they should invest. Facebook's recent purchases,
for instance, tell entrepreneurs that developing new messaging apps is
an order of magnitude more valuable for society than is developing
virtual reality.2
And high-frequency trading does not do much for those signals, because,
you know, the usual: High-frequency trading happens faster than you can
blink, and the people deciding what real investments to make are too
busy blinking to pay attention to it.
The big argument is that financial gains by high frequency traders result in losses to investors in the real economy.
How Much Trading Should There Be? - Bloomberg View
Joe Stiglitz's concern is valid and brokers at exchanges should address this HFT issue. I recently talked to my friend Tendai who worked as an intern at Goldman Sachs and then later at Morgan Stanley as a programmer and he said that the technology and the computing power at these big investment banks is such that they could easily execute trades faster than the average investor.
ReplyDeleteTo reiterate a point I made in "the stock market is rigged" thread, when someone is both a broker and principal at the same time, they can use the knowledge that someone else is going to take a position to their advantage. To prevent this kind of front running, I think more regulation in this area is warranted. Brokers should uphold equity in the market; that is, they should make sure all trading parties have an equal playing field regardless of how fast each party can execute a trade.
One possible solution is what Brad Katsuyama is doing (see the link below), which is to intentionally slow down the speed at which these investment banks can execute trades.
Another possible solution is to drastically raise capital gains taxes for very short holding periods, this will create more of a disincentive for using HFT for front-running.
Link to the HFT debate:
http://www.cnbc.com/id/101544772