Yesterday’s Rogue Algorithmic Trades Intensify Urgency for Financial Speculation Tax
Statement of Micah Hauptman, Financial Campaign Coordinator, Public Citizen’s Congress Watch Division
Wednesday’s computer-driven trading malfunction was a chilling reminder of the May 6, 2010, flash crash and of the persistent dangers that high-frequency trading presents. Knight Capital Group, a Wall Street brokerage firm that specializes in algorithmic trading, placed orders that went “rogue,” causing massive fluctuations in the prices of 148 stocks.
High-frequency trading does not lead to productive long-term investment, nor does it allocate resources efficiently. Rather, computer-based algorithmic trading stresses markets and shatters investor confidence in the economy.
It’s obvious that human oversight is desperately needed to ensure the stability of our financial markets. Yes, people can make mistakes, but they don’t repeat them thousands of times per minute. Computers, on the other hand, operate at lightning speed, and can wreak exponentially more havoc. According to preliminary analysis of the trading debacle, this is precisely what happened. The Knight Capital’s computer program made millions of mistaken trades in just 45 minutes.
This ongoing problem calls for a lasting solution that changes incentives so that short-term speculative trading is diminished and traditional long-term investment is encouraged. A miniscule tax on financial transactions, as called for by the Wall Street Trading and Speculators Tax Act (H.R. 3313, S. 1787), introduced by Sen. Tom Harkin (D-Iowa) and Rep. Peter DeFazio (D-Ore.), would accomplish these goals. It would “throw sand in the gears” of high-frequency trading operations by making their activities less profitable and ultimately removing many distortions in the market. An additional benefit of a financial speculation tax is that it would raise significant revenue, some of which could be spent to improve regulatory supervision and enforcement of trading activities. We urge members of Congress to adopt a financial speculation tax immediately.