Missing The Point

The Security and Exchange Commission (SEC) has broad powers to regulate our security markets and those who do business in this arena, commonly known as Wall Street. Last week (2012.10.02) the SEC convened a high-frequency trading panel to review this practice that creates as many as 70% of all investment market trades. We use the term investment loosely, that’s the last thing high-frequency traders practice; they could be more accurately described as pirates.

Using ever more sophisticated algorithms, the high-frequency traders search for various types of large trades, then race ahead of them buying up the target and less than a second later sell, raising the price and essentially stealing from the institutional buyer. That means that your 401K or Granny’s pension fund ends up paying more. While it’s legal larceny it’s neither ethical nor in any way beneficial to society. The traders will claim they have lowered the cost of trading. While that might be true, any savings vanish in the inflated pricing they add to the markets.

Given all the damage the traders flying the Jolly Roger inflict on the markets, there was great hope that last week’s meeting would bring some relief. Kiss that hope goodbye. The panel focused exclusively on the problems high-frequency traders encounter when their computer programs malfunction. In May of 2010 a trillion dollars in market value briefly disappeared. Three computer-gone-wild incidents have occurred this year. On August 1^st Knight Capital lost $440 million in the blink of an eye and the firm nearly went bust. Oh, those poor babies.

That triggered this SEC panel discussion, a discussion that focused on protecting the high-frequency traders from harm. There seems to be a consensus on creating “Kill-Switches” that could cut off destructive (to the Jolly Roger sector) computer glitches. The discussions centered on Kill-Switch access, who can push the button and should they be hair triggered or take a little longer. For its part the SEC has created an Office of Analytics and Research to study the issues. It will take time to get the office set up, hire the geeks to man it and give them enough time to study the issues – albeit all the wrong issues.

The issue the SEC should be studying is how to reign in this useless, destructive  practice. The stock markets exist to allocate capital. High-frequency traders do nothing to serve that purpose; actually they interfere with the underlying purpose of the investment markets. It’s time to send them packing.

Currently capital gains on investments held more than a year are taxed at the 15% level. We’d like to suggest some new tax brackets. For investments held twenty years or more, there would be no tax liability on capital gains. For ten to twenty years, 5%, five to ten years 10%, two to five years 15%, one to two years 25%, one month to a year 50%, one week to a month 75%, less than a week 95%. That will force these pirates to sail off into the sunset; or perhaps to Las Vegas where the odds are not stacked in their favor.