The demonization of anyone suspected of using technology to analyze market activity and generate securities transactions continues apace. Just as market makers, floor brokers, arbitrageurs, short sellers, creators of mortgage-backed securities and a host of others have had their moments in the sun (or, rather, the interrogation lamp), today all those who loosely fit the definition of “high-frequency traders” are the bad guys of the markets. And while there are any number of persons using high-frequency trading techniques to bad ends, who should be vigorously pursued, regulated and, where appropriate, prosecuted, it is clearly unfair to attack the entire range of market participants using sophisticated analytics and technology as “flash boys.”
Nevertheless, demonizing “Wall Streeters” has long been grist for the entertainment mill, giving rise to sensational magazine articles, books, movies, TV show episodes and, most recently, blogs. But these attacks on the latest Wall Street bad guys rarely offer any insight as to what the world would be like if no one periodically sought to change the ways in which securities are traded, to develop techniques for more efficient and, yes, profitable trading and, dare we say it, to increase the speed at which transactions can be effected. Perhaps there would still be just two-dozen stockbrokers standing under a buttonwood tree.
In a letter to the SEC last year, Senator Markey of Massachusetts said that “[j]ust as we do not allow people to drive a Formula-One race car at 200 MPH on the Massachusetts Turnpike, we should not allow a few Wall Street firms to trade millions of times faster than the average 401K investor on the S&P 500.” But wouldn’t it be equally reasonable to argue against allowing people with no background or training to sit at home trading directly into the markets through an on-line brokerage account by saying “just as we don’t allow an untrained motorist to drive at 12 MPH on the Massachusetts Turnpike, we should not allow untrained amateurs to slow down the markets to pre-1975 levels”? Indeed, isn’t at-home on-line trading a direct result of the development of technology as a tool for investing?
We are, of course, not advocating keeping on-line retail investors out of the markets (although some have wondered from time to time whether those given the facility to trade directly into the marketplace should have to take an exam, just like someone who wants to drive on the Mass Pike has to take a driving test). The point is simply that not every market participant is or ever will be equally skilled or sophisticated, and if we decide to reduce the markets to the lowest (or slowest) common denominator, a lot of very bad things are likely to happen. Would anyone really benefit from throttling the markets down to the speed of “the average 401K investor”?
As one trader said in an article I read recently (paraphrasing as closely as I can from memory), “when I traded on the floor of the exchange, I was faster at processing information and executing trades than many other floor brokers, and there were others who were faster than me. I never considered that the faster brokers should be forced to slow down to my speed, or that all of us should slow down to the speed of the slowest floor broker.”
Or perhaps we should require everyone driving on the Mass Pike to revert to 20 horsepower Model Ts - just to be safe.