August 9, 2012 | In: Opinion

Should High Speed Trading Be Banned?

High speed trading is the “trading du jour” nowadays. Every bank is now running to implement its own system of high speed trading, simply because this method of trading incurs no loss whatsoever. High speed trading consists of a computer software (running on very powerful servers that are hosted in premises that are very close to the stock exchange) that executes many successful trades per second based on some complex algorithms. Obviously, this method is a panacea for any investor, but few can afford it.

Investors, obviously, are not the only ones who dream about this method – it seems that banks are dreaming about it too, and that’s why many banks, including some very prominent US banks, have already implemented this method.

According to those who benefit from high speed trading (or high frequency trading), this method has two “great” advantages to the market’s ecosystem:

  • It greatly improves liquidity.
  • It lowers the transaction fees on smaller investors because the total number of transactions every day is very high and stock exchanges don’t need to raise more money from investors to cover their costs.

While these two advantages are OK – let’s see if the method is worth it when we consider its disadvantages:

  • It’s run by bloodsucking investors who couldn’t care less about the overall health of the market – they’re just there for the money.
  • It has resulted in several technical crashes – every technical crash we have heard of since high speed trading was invented was because of this method.

  • It makes trading less fun, and gives an unfair advantage to wealthy investors with more powerful machines who have more proximity to the physical location of the stock market.

  • It creates a sense of distrust in the whole system since more and more decisions are being made by machines rather than by humans. Machines, by the way, do not understand the companies they are selling and they are buying stocks for.

High speed trading isn’t something that someone should be congratulated for, it’s a parasite that is slowly, but surely, draining the money from the pockets of small investors and destroying the trust in the US financial system. As such, high speed trading should be banned, before we reach a point where companies do not have real investors anymore!

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