April 6, 2014

Tax could limit high-frequency trading

High-frequency trading is finally receiving the regulatory scrutiny it richly deserves. I harken back to a simple solution I proposed to a problem that is now much bigger.

Let’s first describe the phenomenon. While our minds begin to whirl when we speak of milliseconds, high-frequency traders are simply reinventing a wheel of corruption that goes back generations.

Almost since the invention of markets, it has occurred to speculators that they can make easy money in the worst possible way — by doing nothing.

When the railroads sought land to connect our nation, speculators would arrive in town just before the railroad land surveyors. The speculators, often tipped off by their political cronies hoping to cash in on inside information, knew in advance the routes for which the railroads sought approval. These unscrupulous speculators would buy land from unsuspecting farmers and sell it days, weeks or months later to the unfortunate railroads for handsome profits.

Many millionaires were made by such parasitic traders. But, these millions were not earned. No new products were made, the world was not made better off, and no efficiencies were gained. Instead, the immoral became rich on the backs of farmers and the users of the railroads who would have to pay higher rates to cover higher-than-expected construction costs.

We can outlaw such behavior, and some tried, but it is very difficult to prove that someone speculated on inside information. It is possible that some of these land flips were simply the advantage of betting well, if not good. Insiders don’t talk or tell on each other, else they will all go to jail.

There is a special place in hell for those who work so hard to rip off others when the sweat of their brow could have been better employed to truly make the world a better place.

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