Thu, 18 Oct 12 at 14:02 |
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High-Velocity Trading Is Killing The Market
The computer wins
High frequency trading is more and more in the news lately, thanks to headlines like “Average stock holding period is only eleven seconds.” Although this particular datapoint is exaggerated, HFT firms do dominate the market, flooding systems with hundreds or thousands of orders every minute, canceling almost all of them after a few seconds, and buying and selling for hold times of (more realistically) about two minutes. In effect the exchanges have become playgrounds for massively powerful, lightning-fast and largely unregulated tradebots. And how do they make their money?
HFT is computer-generated front running. It ought to be illegal, but the SEC is too timid to kill it …
As I’ve pointed out before, the solution is remarkably simple in both concept and execution: a transaction tax. Charge a single basis point ($0.001 per dollar) per trade. Negligible — indeed, effectively invisible — to “normal” investors, the cost would nullify the micro-profits HFT traders make on each trade. The arms race would be over.
Anyway, Yves Smith has a nice post up describing the problem and the fix:
HFT has proven to be singularly destructive. Despite the claims of it defenders, it does not increase market liquidity; it merely increases trading volumes without improving ease of execution … The primary objective of a transaction tax is like a vice tax: to discourage activity, not make money … It’s no where near as radical as the banksters would have you believe: the United Kingdom, Hong Kong, Singapore, and (gasp) the US have forms of transaction taxes.
Read the whole thing here.
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