While we are fed daily reports of the Occupy Wall Street demonstrations, another Wall Street problem has gone largely unreported. Unchecked, it could eventually destroy the base of confidence necessary for trading to remain viable. It has already cost American investors money and continues to gnaw away at the foundations of our financial system. Unproductive greed will do that.
Today, I’m turning over the blog to Franklin Khedouri, a concerned investor who has far more familiarity with the market than yours truly. I urge you to read and consider his argument. Any comments you make will be forwarded to Mr. Khedouri for his consideration. Any comments you would like to make to your reps in Washington, D.C. would be very much appreciated.
It is easy to classify the current protests against Wall Street as a lot of noise by a handful of people who do not understand the financial markets. But this does not mean excessive greed doesn’t exist.
High frequency trading is perhaps the most egregious example of pure greed with no useful purpose. A handful of hedge funds are tainting all of Wall Street and making huge profits in a way that makes no contribution to anyone but themselves. If you have any money at all invested in stocks, bonds, or mutual funds, high frequency trading has cost you money.
The firms engaging in this practice claim using more sophisticated technology to trade stocks is just the latest means of gaining competitive advantage. Injecting confusion by placing and removing tens of thousands of false buy and sell orders in seconds is just capitalism at work.
In actuality it is an epic abuse. Monopolists like Rockefeller, Vanderbilt, and J.P, Morgan at least built things with their schemes. The high speed traders create nothing for anyone but themselves. For everyone else there is just uncertainty, fear, the sense that logic and analysis don’t count.
Wall Street functioning as intended helps all Americans by forming the capital that fuels our economy. The stock market provides a mechanism for companies to raise money for investment in their business. Investors who provide the money get rewarded with dividends and capital appreciation. The effective companies grow, the ineffective ones fail. This process doesn’t happen in a day or a month.
The stock market was never intended to be a vehicle for people whose idea of long term investment is a minute. High frequency trading makes no contribution whatsoever to the real function of the stock market – raising capital for investment. Indeed it does the reverse – drives capital out of the market. Individual investors have taken hundreds of billions out of mutual funds and stocks in 2011 even though interest rates are at extreme lows.
No capital means no growth, no jobs, no wealth for anyone but the tiny handful of people who engage in high frequency trading.
High frequency trading should be illegal, just like insider trading, because it serves no useful purpose in supporting investment in America and causes harm to millions.
Congress can eliminate it with the stroke of a pen at no cost to anyone but a few hedge funds. In fact, doing so should be cash positive because individuals will pay more capital gains taxes – which is far better than taking losses.
Let your representatives know you care.
Next week: A Comparative Look at the Tea Party and Occupy Wall Street movements and a warning to both about the Two-Party System.