Is High-Frequency Trading Ruining Capitalism?
Believe it or not, there was an important hearing on “The Hill” today. I know you're used to the self aggrandizement and the breast-beating from Congress, but today members actually talked about something important, something every investor needs to know about. We talked about it last night; high-frequency trading.
This is just computerized trading on steroids. Traders place hundreds, even thousands of buy and sell orders; sometimes for the same stock, all at the same time. The idea is to exploit small, quick moves in the market. Forget about thinking long term; think in nanoseconds.
A former high frequency trader, David Lauer, testified in front of the Senate banking committee laying out the dangers of this type of trading.
He said, "U.S. equity markets are in dire straits. We are truly in a crisis. Over the past three decades a technological revolution has swept over Wall Street."
No kidding. It's swept over Wall Street and rolled over investors.
HFT was behind the evaporation of $1 trillion in market cap in the flash crash in May 2010. Then in August of the next year there was crazier volatility, like swings of 4.5% left unexplained.
Initial public offerings of Facebook and bats both went awry because of computerized trading glitches.
Lauer says mini crashes happen every day. You could get stung if you trade stocks or if you invest in the market. Who knows if the next mini crash will have maxi results.
Feeling worried yet? You should be, because the New York Stock Exchange is under investigation for giving these types of traders access to information about trades before the rest of us.
Here's what I think: individual investors should get the same respect as any other investors.
Even if your name isn't Goldman or Sachs, you should be treated fairly by the markets. We should have an even playing field.
The NYSE of course says they didn't do anything wrong but one former regulator, Harvey Pitt, on our show last night says the time has come to put a leash on these traders. Why? Simply because investors like you and me have stopped trusting the market. Fewer companies are coming to market with IPOs. Why bother when the process is such a mess?
Harvey Pitt said, "The flight of the retail investor during a period of incredible stock market returns is a sure sign that this exodus is a result of mistrust rather than economic conditions. Investor confidence is nonexistent...”
Lauer says we are at the crisis point now. He believes the major exchanges deal only with what he calls a "toxic flow", or more plainly, trades nobody wants to deal with. This is all crazy computerized nonsense.
Long-term investors are fleeing the conventional exchanges. More than half of trading on exchanges is now said to be computerized trading. It's time for some serious reform before we have a bigger, badder flash crash that none of us can afford.