“The issue here is that people are earning large amounts of money by using sophisticated computers to beat the market. This is effectively a form of insider trading…[T]he front-running high speed trader, like the inside trader, is providing no information to the market. They are causing the price of stocks to adjust milliseconds more quickly than would otherwise be the case. It is implausible that this can provide any benefit to the economy. This is simply siphoning off money at the expense of other actors in the market.”
In the wake of Michael Lewis’ publicity blitz for Flash Boys, and per his “let’s focus on solutions” argument to Piketty above, CEPR’s Dean Baker explains how to easily fix the problem of high-frequency trading. “[O]ne simple method…would virtually destroy the practice. A modest tax on financial transactions would make this sort of rapid trading unprofitable since it depends on extremely small margins.”
