Something very significant happened on Wall Street last Wednesday: HAL, the computer in 2001: A Space Odyssey, decided to get into the stock market at a firm called Knight Capital Group. Before they pulled the plug, HAL had lost the company $440 million. Not bad for a half-hour's work.
HAL was able to do it because the days of value investing in the stock market are close to over. Instead, the place is given over to boys with their toys: high speed computerized stock trading programs that buy and sell huge blocks of stocks several times a day based on penny differences in price. No "buy and hold" for this crowd.
Felix Salmon has an amazing animated graphic which illustrates the increase of computerized high frequency trading. Please take a look at it. Please, please, please. Keep an eye on the dates in the lower left-hand corner, and watch it to the end. (It's in a continuous loop, it will be obvious when it has started again.)
Back in 2007, I wasn’t a fan of a financial-transactions tax; today, I am. And this chart shows better than anything why my opinion has changed. The stock market is clearly more dangerous than it was in 2007, with much greater tail risk; meanwhile, in return for facing that danger, society as a whole has received precious little utility. Are spreads a tiny bit tighter than they might be otherwise? Perhaps. But that has no effect on stock-market returns for long-term or even medium-term investors.
The stock market today is a war zone, where algobots fight each other over pennies, millions of times a second. Sometimes, the casualties are merely companies like Knight, and few people have much sympathy for them. But inevitably, at some point in the future, significant losses will end up being borne by investors with no direct connection to the HFT world, which is so complex that its potential systemic repercussions are literally unknowable. The potential cost is huge; the short-term benefits are minuscule. Let’s give HFT the funeral it deserves.That would be a start, but just a start. Glass-Steagall, the repeal of which played a large part in the Crash of 2008, is no closer to being restored than it was then. Not a confidence builder.
Andrew Sorkin reports, "Of 878 students at 18 high schools across 11 different states surveyed by the Financial Literacy Group, three-quarters of them said they agreed with this statement: “The stock market is rigged mostly to benefit greedy Wall Street bankers.”
Pretty smart kids.