The recent wild swings in the stock market, not surprisingly, have unsettled many investors. Yet, they have led to exorbitant profits for high-frequency traders, and few, if any profits for retail participants in the market.
The high-frequency trading mania has led to extreme volatility and much heavier trading volume. Now there are multiple, computer-driven trading strategies as the market itself has had many sharp sell-offs, strong market rebounds followed by even more selling.
In the investing world nowadays high-frequency traders use computers to identify fleeting price movements in the stock and other securities, including bonds, currencies, and commodities. That buying and selling takes place at fractions of seconds. When any of those assets move the smallest amount, say even less than a tenth of a point, that triggers an instantaneous reaction among traders.
Massive buying and selling takes place to profit from those tiny moves.
High-frequency traders have almost taken over the investment community. The huge volumes each day represent their activities; so much shares are traded each day than were traded in an entire year some decades previously.
The wide range of high-frequency trading has made tremendous profits for some. However, less adept investors, including many firms run by professionals, such as hedge funds, have been hurt badly by their inability to capitalize on those wild gyrations. The split-second trades serve no purpose and are only a form of gambling.
In general, high-frequency traders benefit from price fluctuations and high volume securities. By quickly moving in and out of holdings, some firms were criticized for making moves that otherwise would have not occurred, and for the mini-panics that have taken place.
The average retail investors are going crazy. They are unable to follow or copy what the high-frequency traders are doing. It occurs to almost all investors that markets are being manipulated for few “big guys,” forgetting the real purpose of markets.
A logical remedy would be to impose a transaction tax, say of 1% of the value of the transaction. Such a tax would have to be international, with every nation agreeing, in order to prevent traders operating in other nation to avoid that tax. Such a levy would greatly reduce the number of trades, provide revenues to governments throughout the globe who would participate in such a scheme, and restores some sanity to markets.
Of course, other new regulations may also be helpful.