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?

Eric M. Jones

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'...!


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.


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.


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.


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


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.

HF mofo

Keep your grubby little hands off my money printing machine.


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!


Amen, brother, amen. It's sort of like saying "The bad man stole the moneys from my bank"


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.

Hugh S. Myers

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...


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


Does HFT give any societal benefit, such as reducing inefficiencies or directing capital to where it should go? I confess I am largely ignorant of how financial markets work. (I do own some shares - every year or so, I look to see what they're worth.)
If there is no such benefit (or such benefit is very small) and if a simple intervention could remove the opportunity without adversely impacting useful investment, then I think it should be prevented. If it is making money for people and doing nothing useful, then that money must be being taken from those who are doing something useful.
How about changing the trading so that they are performed to the 'tick' of some clock? Say every 30 seconds, all orders for trades in ACME are collected and resolved, then nothing happens (except storing the incoming orders) for another 30 seconds. (In my ignorance, I have no idea what the appropriate 'tick' time for the clock would be, but I'm guessing some time between 5 seconds and 5 minutes, with different times for different types of investment.) Different shares would have different schedules, to even out data flows and computer processing demands - e.g. ACME processes at 12 and 42 seconds past the minute, whereas TOON trades at 3 and 33 seconds past the minute.



HFT provides broad, instant liquidity to every market it's in. No matter your price point, there's a trade to be had right now thanks to HFT.


I think HFT should be banned outright but I'd go even further and make every trade should that the purchaser needs to hold the financial product for a non-trivial period before it could be sold. Maybe a month or longer. This would shape the stock market such that it will smooth out the wild shifts in stock value. It would prevent good companies from being ruined in an instant due to some unflattering article in the WSJ. It would force investors to look to the long range benefits of the companies themselves keep those investors (parasites) who are trading just for the sake of a quick buck.


How would you enforce such a thing? Just put a small tax on all transactions that don't involve physical property (i.e. all financial instruments, stocks, bonds, futures, derivatives, etc.). It wouldn't affect ordinary investors like me in any significant way. It would slow down day traders. But HST people make so many transactions they would be killed. And the govt. needs the revenue.


For the record, the Societe Generale guy was using Excel VBA macros . . . not exactly high-end hacker stuff. And frankly, it makes him not even close to the same species as the guys with the high-end data centers.

Most computer people would not even consider him to be a computer person. He'd be viewed as an office stooge using a highly customized component of MS Office. Which, in hacker circles, is like walking into an outlaw biker bar without a weapon.


Instead of banning it, why not simply tax it to death....90% capital gains rate on any trade held less than one trading day...70% capital gains rate on any trade held less than five trading days (i.e. one calendar week)...and 50% capital gains rate on any trade held less than twenty trading days (usually about one calendar month).

Kate MacMahon

I agree that electronic high-speed trading should not be allowed. The amount of value damage that can be done in a very short time to portfolios managed by those of us who do not have access to this technology is frightening.

Joshua Northey

People cite the main benefit of this as "increased market liquidity". But the whole point is that the market is TOO liquid, and it starts sloshing around like crazy. No reason the market cannot take a few hours to adjust to news instead of a few milliseconds.

Sure we don't want the market to flow like honey, but flowing like water is fine, it doesn't need to be a super-fluid, and in fact that is undesirable.