Turning the Stock Market into a Ponzi Scheme: High Frequency Trading

“…the high-frequency traders, have today’s prices.  And so imagine you had the results of the horse race before the race was run, and you could walk into the track and make bets against people about the race.  It’s not — that’s not really a fair environment….,” Michael Lewis, PBS News Hour on April 4, 2014.

Stockbrokers have always made their money by skimming commissions off investors they represent and the profits of companies whose stocks they are trading.  Although the financial services sector of our economy, as a  whole, makes its money by taking capital out of the system, the services they provide help the markets stay liquid, i.e. businesses can raise when money when they need it and average people have a straightforward vehicle for investing the excesses of their earnings in order to expand their revenue streams, among other benefits. 

Unfortunately, the advent of the internet age has allowed a new class of traders to emerge who are able to trade so quickly that they are essentially guaranteed they will always buy low and sell high.  This means average traders cannot compete and so-called high frequency traders are able to take more and more capital (money) out of the economy as a profit for themselves.   When this happens, the services of the financial services sector are no longer valuable. 

In fact, they become a burden to the overall economy at such a point, because the stock market is simply siphoning off the savings of average investors and stealing away the profits of businesses that are needed for investment in innovation and human resources.  Because high frequency traders are using computers and sophisticated software algorithms that allow them to make trades at less than a thousandth of a second, i.e. long before a human can even click a mouse, we should consider a floor to how fast trades can be made. 

Meanwhile, it is important to recognize our Nation made the foolish decision to allow our economy to shift toward a service-based economy, versus a production-based economy, when our leaders were seeking to expand our economy through policies like free trade.  Someone working in a service industry does not produce anything as these jobs exist to support what already exists.  This is not to say that services are not important or essential; after all, doctors are service providers that lengthen the gap between cradle and grave to delight of everyone.  That said, what is in existence will only last so long, thus we need to be a productive society in order to have a future. 

At the same time, service industries cannot generate new capital as they do not produce anything.  Consequently, they can only suck up what capital already exists in the economy, which would not be such an issue if there was enough production to compensate for the redistribution of wealth toward those providing services.  Because the US economy has been rebuilt to favor those with a great deal of financial capital, i.e. the wealthy who are becoming ever more wealthier, the distorting influence of practices like high frequency trading and capital gains tax deductions for the wealthy are doing serious harm to our economy by starving the bulk of our population.  Moreover, we need policy shifts to change these bad practices and fix our economy.