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High-Frequency Trading Pioneer: Today’s Trading ‘Has Absolutely No Social Value’

By Travis Waldron on August 28, 2012 at 6:10 pm

"High-Frequency Trading Pioneer: Today’s Trading ‘Has Absolutely No Social Value’"

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Thomas Peterffy, who pioneered the computer-based high-frequency trading that generates millions of dollars in profits for big banks, said in an interview with NPR’s Planet Money that speed trading has gotten so fast that it now “has absolutely no social value”:

Peterffy says automation has done some very good things for the world. It’s made buying and selling stocks much much cheaper for everyone.

But Peterffy thinks the race for speed is doing more harm than good now. “We are competing at milliseconds,” he says. “And whether you can shave three milliseconds of an order, has absolutely no social value.”

When Peterffy first began using computers to trade, high-speed trading was rare. Now, as the Huffington Post noted, it makes up more than half of the stock market’s volume. This interactive chart from Nanex, a markets research firm, shows how high-speed trading has exploded:

Tho address this problem, Peterffy told NPR that a regulatory structure that slows down trading is necessary. Though he didn’t mention it specifically, one way to achieve that goal would be a financial transactions tax, a small levy on trades that would slow down markets while barely affecting normal traders. The European Union has considered a transactions tax in the wake of the financial crisis, and Rep. Peter DeFazio (D-OR) and Sen. Tom Harkin (D-IA) have proposed one here in the U.S.

That tax could raise $35 billion annually, according to DeFazio, but more importantly it would remove volatility from the markets and make the entire financial system safer. Cries from industry insiders that a transactions tax would hurt economic growth, DeFazio told ThinkProgress earlier this year, are simply false. “For 50 years we had a tax that was about seven times larger than this when the country was seeing the greatest growth in its history, post-World War II,” he said. “So we’ve proven this will not have a detrimental impact on growth. In fact, it perhaps is beneficial to growth. It’s not necessarily beneficial to salaries of hedge fund managers on Wall Street.”

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