Apparently, the Securities and Exchange Commission (SEC) may start charging fees to curb high frequency trading. In this Wall Street Journal article, Mary Schapiro said the following:
...a large portion of equities trading has little to do with "the fundamentals of the company that's being traded." She said it had more to do with "the minuscule aberrational price move" that computer-assisted traders with direct connections to the exchange can "jump on" in fractions of a second.
In addition to forcing traders to pay for cancelled trades (it turns out cancelled trades make up something like 95 to 98% of orders by high-frequency traders), the SEC may impose a requirement on high-speed participants to maintain competitive buy and sell orders throughout most of the trading day.
According to this article, Schapiro's concerns were sparked by the "flash crash" back in May of 2010.
That article points out that the SEC's mission is to "maintain fair, orderly and efficient markets" and to "facilitate capital formation." It seems to me that most high-frequency trading activity adds little value to the capital formation process and, if anything, might be one of the reasons we've seen record volatility.
In it's current form, whether high-frequency trading somehow helps "maintain fair, orderly and efficient markets" seems at least debatable.
The article points out the crash is a challenge to the SEC's stated mission.
...to "maintain fair, orderly and efficient markets" and to "facilitate capital formation." If investors are afraid of a market crash, in other words, they won't provide the capital that public companies need to expand their businesses.
According to Schapiro, the SEC has implemented some fixes since the flash crash including:
-Circuit breakers for stocks that have large moves in a short period of time.
-A ban on stub quotes (offering to buy/sell far from what most investors are willing to pay...a contributor the the flash crash).
Some questions come to mind:
Will the fees on cancelled trades be substantial enough to actually change high-speed trading behavior?
Will the requirement to maintain competitive buy and sell orders for a certain percentage of the trading day change behavior?
In what time frame will the changes be implemented?
Are other solutions being considering to curb the influence of high frequency trading?
Just a guess but those involved in high frequency trading will likely not think these fees and other changes under consideration are such great ideas since, of course, they'll have adverse effects on "liquidity".
Well, I think we can stand for a bit less liquidity and a bit more actual investing. Charlie Munger said it best. He doesn't see much benefit to the massive amount of trading between computers that goes on. He also doesn't seem to think the energy expended and talent utilized writing algorithms (that ultimately the rest of us pay for) provides much social contribution.
"...why should we want to encourage our brightest minds to do what amounts to code-breaking and electronic trading? No I think the whole system is stark-raving mad. Why should we want 25% of our graduating engineers going into finance?" - Charlie Munger
Munger: Cut Banking Sector 80%
The economics of high frequency trading will have to be fundamentally changed for this to work in the long run.
It's not like this is static.
In other words, adjustments by high-speed traders will naturally be made to try and thrive under whatever the new rules end up being.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
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Applying Newton's Fourth Law
Origin of Newton's 4th Law?
"Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases." - Warren Buffett
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This site's emphasis? Put simply, it's on finding and buying -- with the long-term in mind -- good businesses at a plain discount to conservatively estimated value; it's on selling shares of those well-bought high quality business reluctantly. The view here is that selling makes sense only when core economics become permanently impaired, prospects have been misjudged, market price not just somewhat but, instead, meaningfully exceed per share intrinsic value, or opportunity costs are high. Buy/sell decisions aren't just an opportunity to increase returns; they're also an opportunity to make mistakes. It's easy to overemphasize the former and forget the latter. The focus here is on minimizing trading, frictional costs, and errors of all kinds; it's on staying comfortably within realistically assessed limits. First and foremost is the view that an investor should never make a specific investment based upon what someone else thinks. In other words, what makes sense to own is necessarily unique for each investor and it'd be unwise to not act accordingly. So, more generally, this site simply attempts to better understand some useful principles and ideas in context of investment. It's about, in a practical sense, what tends to work over the long haul as well as what, at times, gets the investor into trouble. It's not about grand theories in finance and economics. These too often distract from what matters or, worse yet, lead to costly misjudgments. As a result, they are mostly viewed with a healthy dose of skepticism here. Otherwise, the best thinking across disciplines should be learned well then put to good use in a way that's uniquely suitable.
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Notable Quote
"Warren and I have not made our way in life by making successful macroeconomic predictions and betting on our conclusions.
Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.
I recommend to all of you exactly the same attitude.
It's kind of a snare and a delusion to outguess macroeconomic cycles... ...very few people do it successfully and some of them do it by accident. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?" - Charlie Munger
Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.
I recommend to all of you exactly the same attitude.
It's kind of a snare and a delusion to outguess macroeconomic cycles... ...very few people do it successfully and some of them do it by accident. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?" - Charlie Munger