September 17, 2010

New Scapegoat: High-Frequency Trading

My reaction to a Yahoo/CNBC piece follows. It has been submitted as a comment but has not yet appeared.

A sensible individual investor, as I understand the term 'investor', will buy a stock and hold it for at least a year so as to get the tax savings on long-term gains.

I don't see how such an investor will be damaged by high-frequency trading that scalps a tenth of a cent or so off the price he pays at any given moment. As far as I can see, the long-term value of a stock remains determined by the company's economic performance.

Even a day trader, who is taxed at the short-term capital gains rate, should be able to adjust to high-frequency biases of a fraction of a cent. Anyway, if high-frequency traders have learned to do faster and better the kinds of things that day traders do manually, so what?

Like any innovation, high-frequency trading has benefits and disadvantages--and unintended consequences. It sounds like regulators are learning to get a handle on the unintended negative consequences. A transformational technology like high-frequency technology should continue to be scrutinized by regulators, but afaic regulators should only intervene if it is "reasonably" clear that more harm than good would come if they do not act. Flash crashes are a case in point. However, it sounds like high-frequency trading is being invoked as an all-purpose scapegoat. ("I don't understand how this stuff works and I can't afford the technology, so that must be why I lose money in the market." Whaaat?!)

Investing and trading are challenging and risky under the best of conditions. We do not have the best of conditions: the country has been misgoverned and the economy has been mismanaged for ten years. The people responsible (for) the misgoverning and mismanaging are happy to create scapegoats. It's taken (little) for ordinary citizens, who miss the prosperity we had back when the country was run competently, to be taken in.

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