These days, most stock trades aren’t made by human beings. They’re made by supercomputers that flip stocks in fractions of a second.(1) That isn’t investment. It’s speculation, helping Wall Street bankers get rich quick. And every dollar the computers win is a dollar you lose. Even worse, high-speed trading is destabilizing our financial system. It helped cause the “flash crash” that once destroyed a trillion dollars of wealth in minutes. (2)
So let’s fix the problem. Let’s create a small speculation tax: a fraction of a penny on every share of stock bought or sold. Those of us who invest for the long term will never notice the cost. But from Wall Street speculators, we’ll raise hundreds of billions of dollars(3) – money we can invest in our roads, bridges, schools, energy research, our social safety net, and more. Most Democrats are afraid to support a transaction tax. But the computers on Wall Street are beating the rest of us up – so I say, let’s fight back.
Zombie Computers Have Taken Over Wall Street
More than half of all stocks traded today are done by computers without any human oversight.(4) Once a trader flips the switch, the computer buys and sells without any oversight, swapping thousands of shares -- mainly with other computers doing exactly the same thing. Each successful trade may net the computers only a few pennies, but by trading many times a second, speculators can turn billions of dollars in profits.
The problem is that, when computers do battle against other computers without any human oversight, the result can be chaotic and unpredictable – causing massive volatility. If and when something goes wrong, almost nothing can be done to fix it.
As this chart from Nanex shows, trading volume has exploded since 2006, when the zombie computers started to take over. These high speed trades serve no positive purpose, and as one columnist noted, “Inevitably, at some point in the future, significant losses will end up being borne by investors with no direct connection to the [High Frequency Trading] world.”(6)
While some people are trying to fight back, “the firms are trying to stave off the regulators who are proposing to curb their activities.”(7)
$1 Trillion Wiped Out in Minutes
These computer programs have real-world consequences. In the spring of 2010 automated trading caused the largest single day plunge in history.(8) The Dow Jones Industrial Average lost 600 points in five minutes, and even as markets plunged, no one fully understood what happened because the computers were trading so fast. The SEC conducted a full investigation and, the New York Times noted, found that a computer “was programmed to execute the trade ‘without regard to price or time,’”(9) and sold off billions in securities. This caused all of the other automated systems to respond which led to an automated feeding frenzy where “contracts changed hands 27,000 times in 14 seconds.” (10)
All it took to stop the crash was a five second pause in trading. (11)
Even a Pioneer Thinks Wall Street Has Gone Too Far
But you don’t have to take Rush Holt’s word that we need to slow down. Thomas Peterffy, who helped pioneer the practice of computer trading in the 1980s, says that such trading has gotten out of control. He recently told NPR, "We are competing at milliseconds," he says. "And whether you can shave three milliseconds off an order has absolutely no social value."(12)
Computers, in other words, not only add instability; lightning trading takes us away from the very purpose of the market. Traders argue that the purpose of a stock market is to allocate capital efficiently and establish fair prices of goods and services. But high-frequency trading isn’t doing that. It’s just gaming the system.
A Transaction Tax Would Bring Back Stability
There’s a simple solution: a small speculation tax applied to each share of stock bought or sold. Because high-frequency traders typically earn only pennies in profit on each trade, a speculation tax of a fraction of a cent would be enough to dissuade speculators – but such a tiny tax would go almost completely unnoticed by average Americans who invest for the long term. Even better, the speculation tax could generate $43 billion a year we could invest here at home, helping to support our our roads, bridges, schools, energy research, our social safety net, and more.(13)