Should High-Frequency Trading Be Banned? One Nobel Winner Thinks So

The IMF recently held a conference entitled Macro and Growth Policies in the Wake of the Crisis. Here’s a video summary from Michael Spence, former Stanford School of Business dean and winner of the 2001 Nobel Memorial Prize in Economic Sciences. It includes Spence’s thoughts about inflation and the coming divergence between growth and employment in the developed world:

Of the four post-conference points that Spence lays out, perhaps the most controversial is his opinion that high-frequency trading should be banned. Not curbed. Not reined in. But banned.Photo: iStockphoto
This caps a busy month for HFT news. The algorithmic method of computer trading makes up as much as 70 percent of all equity volume in the U.S. Last spring’s Flash Crash, sparked debate over the role the practice played in the event, when the Dow Jones dropped more than 600 points in five minutes, only to gain it back within the next 20 minutes. On March 1, a Commodity Futures Trading Commission panel recommended that trading firms implement a mandatory set of internal controls, including “limits on quantity, price collars and a ‘kill button.’” This after the same panel admitted that any externally enforced rules would be “virtually impossible” to enforce.

The next day, March 2, incoming chairman of the EU’s securities watchdog, the European Securities and Markets Authority (ESMA), promised a deep review of the practice. And as evidence of the degree to which banks value their high-frequency source codes, and their vigor to protect them, two cases of attempted code theft have resulted in recent prison sentences: on March 18, Sergey Aleynikov was sentenced to 8 years in prison. The former Goldman Sachs computer programmer came to attention in July, 2009, when he was arrested and accused of stealing Goldman’s secret algorithmic trading code. From the get-go, Goldman went after Aleynikov as hard as possible: FBI stakeouts, a public arrest as he deboarded a plane in Newark. Deemed a flight risk due to his dual Russian/U.S citizenship, he’s been in jail since last month.

And in France, a former Société Générale SA trader was sentenced to 3 years in prison for stealing the French bank’s code. As Spence might see it, one way to better protect high-frequency trading codes is just to ban them. But with $7 billion in profits coursing through fiber-optic cables at something approaching the speed of light, is that even possible?

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  1. Eric M. Jones says:

    All good ideas, but $7 billion is just chump change. The HFT guys are just dealing in crumbs.

    But hey, I’m in favor of having the last investment banker strangled with the intestines of the last hedge fund manager, or seeing parades of these guys doin’ the perp-walk in handcuffs …Jus’ sayin’…!

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  2. TysonF says:

    HFT is gaming the system via an informational advantage not available to over 99% of the trading population.

    It achieves nothing except gains for the few privy to the inside knowledge. It’s actually a drain on society in general as it ties up capital that could be used for innovation and job creation.

    Will it be stopped? Not a chance in this country. Too much money in it and no one in power is willing to make a stand against Wall Street.

    The EU may rightfully so ban the practice.

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    • Steve says:

      I agree completely.

      High frequency trading, and a number of other practices I could name, contribute nothing to society. Yes, they make some profits for the 1%, but not by producing or contributing anything like real value. They should be banned.

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      • JC says:

        Couldn’t the same argument be made about the market in general? Or did I miss something from the movie Wall Street?

        Most traders are leeches by your definition. HFT folks are just a better breed of leech, insofar as they have found a hole to exploit.

        I’ll also add that HFT provides liquidity to the market and loosens trading. HFT does for stocks what speculators do for commodities: they provide a seller for every trade no matter the price point.

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      • TysonF says:

        You are right. Most traders are leaches. The HFT aren’t doing anything except running the old wire scam from the The Sting.

        You have a system setup decades ago that has not been improved in any way to keep up with the current technology.

        To put it in computer terms, the SEC is running Windows 95 with internet explorer 4. They refuse to upgrade or even download the patches. Everyone and their mother can find a well published exploit, write or find someone to write a small bit of code and exploit the system. It’s not clever, it’s not unique, it’s outright looting

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    • Bruce says:

      Not just an informational advantage, they also have a communication advantage. Even if you had the same computers and the same software, the big HF traders would still beat you to the punch because they have direct network connections optimized for low turnaround time. Their networks trade on the order of 100,000 times as fast as the internet, for example (hundreds of nano-seconds vs. tens of milliseconds). And from a security perspective, you don’t want to mandate that all trades traverse the public internet.

      My understanding is that the HF traders also make money off of fees for transactions that are cancelled. So my question is why don’t the organizations who pay these fees take action?

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    • Dan says:

      Excuse me but how does a regular trader contribute to society ?

      And who are you to define speed of trading, if I can trade manually in nano-seconds, would you ban me based on me being faster and more skilled than you ?

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  3. Nosybear says:

    Here’s a counter-intuitive solution: Encourage it. The more people who practice high-frequency trading, the lower the overall profitability (just like being able to predict the market would ultimately make it unpredictable, as everyone is acting on their latest prediction). If enough agencies involve themselves in it, it eventually kills itself off.

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  4. HF mofo says:

    Keep your grubby little hands off my money printing machine.

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  5. David says:

    Look, I understand we aren’t all programmers, but I’d like to inform you (for future reference) that referring to source code as “codes”, eg, in the context “one way to better protect HFT codes….” just makes you look like you don’t know what you’re talking about.

    Correct: “Are you done writing that code? Is the code complete? One way to better protect HFT source code.. My ex-employee stole the source code to my precious software!”

    Great article, keep up the good work and interesting topics!

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  6. Kai says:

    I don’t think it should be banned outright – what should happen however is something to disincentive people from doing it in the first place.

    There should be a sliding scale of taxes on profits from trading, depending on how long the investment is held.
    Something like starting at 90% if you hold something for less than one second, 75% for less than one minute, 66% for less than one hour, 50% for less than 12 hours, 40% for less than 24 hours and 25% for less than 48 hours. Beyond 48 hours there is no additional penalty.

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  7. Hugh S. Myers says:

    Not only ban it, but make it a felony. One with a possibly first time foray into the realm of the death penalty for white collar crime. Perhaps then we might see the light dawn for the thieves in question…

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  8. Tyson says:

    We should just tax the crap out of these transactions. Mark Cuban brought this up last year, seems like a no-brainer:

    http://blogmaverick.com/2010/05/06/tax-the-hell-out-of-wall-street/

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