Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

In Defense of Flash Trading

InvestorEducation / Learn to Trade Oct 28, 2011 - 08:39 AM GMT

By: MISES

InvestorEducation

Best Financial Markets Analysis ArticleIt's fascinating to watch footage of a trading floor on Wall Street. Here men and women spend hours with their eyes glued to computer monitors while furiously calculating trades that often yield small profits or minimal losses. In the case of Swiss bank UBS trader Kweku Adoboli, it can result in a $2 billion loss and an unfortunate incarceration. The risks run high as trading requires a sizeable amount of dexterity and concentration to be successful in a network of like-minded profit seekers. Still, there is an underlying beauty to the process, as thousands (perhaps millions) of individuals coordinate their knowledge on the allocation of limited resources throughout the world.


Nobel laureate Frederick Hayek dedicated much of life's work (brilliantly summed up in his classic essay "The Use of Knowledge in Society") showing us how knowledge and expertise are widely dispersed throughout society and can never reside in a single mind. That is to say, while individuals may use their own expertise and labor to create, they will never be in full possession of all available knowledge to account for the nuances of market and societal demands. The same concept applies to a government composed of fallible men — much to the dismay of statist ideologues such as Elizabeth Warren.

The limit of individual knowledge is what provided the initial need for social cooperation. Primitive man banded together with others, not under the auspices of creating one great state, but as a desire to utilize more resources and raise their own standard of living. Out of this grew the division of labor and increased sharing of knowledge and information. As Mises said, "one must never forget that the characteristic feature of human society is purposeful cooperation; society is an outcome of human action."

When it comes to the disbursement of information, nothing is more controversial than high-speed "flash" trading. A recent New York Times article documented the trend:

Regulators in the United States and overseas are cracking down on computerized high-speed trading that crowds today's stock exchanges, worried that as it spreads around the globe it is making market swings worse.

The cost of these high-frequency traders, critics say, is the confidence of ordinary investors in the markets, and ultimately their belief in the fairness of the financial system.

"There is something unholy about them," said Guy P. Wyser-Pratte, a prominent longtime Wall Street trader and investor. "That is what caused this tremendous volatility. They make a fortune whereas the public gets so whipsawed by this trading."

The public gets whipsawed by this trading? Funny how those on Wall Street no longer classify as the "public" in the eyes of populism.

What this demonization of flash trading really comes down to is the inability of regulators to monitor and control such a phenomenon. What the state can't control, it exerts more power and authority to tame. Like a vampire to blood, the state never gets its fill of supremacy.

The justification for regulating flash trading comes down to a brief market crash back on May 6, 2010. In the course of just 16 minutes, the Dow Jones Industrial Average dropped 1,000 points, only to rebound to its original level. It was the largest intraday decline in the history of the Dow Jones. Despite the market's quick correction to the crash, a joint panel was created and headed by the chairmen of the Security and Exchange Commission and Commodity Futures Trading Commission to investigate the matter. Their report, which was released back in February, recommended that new rules and regulations be adopted to address flash trading. Considering how successful the SEC and CFTC were at recognizing the housing bubble, it's a wonder anyone still takes their recommendations seriously.

While flash trading can lead to sudden dips in the market, the market has proven to be quick in correcting itself. The rapid disbursement of information that encompasses the stock market becomes its own self-correcting mechanism.

As society and technology progress, the instantaneous sharing of knowledge and information is not something to fear but to celebrate. In a world where, to borrow a phrase from John Tamny, "capital moves at the speed of light," flash trading ensures that resources will continue to meet more deserving hands and be put to more efficient use.

Clamping down on such a practice doesn't just limit capital flow; it limits the market's mechanism by which to progress. Like all government regulation, it will put the brakes on productivity and the achieving of a better standard of living. Attempting to level the field in the name of "fairness" is nothing but a government power grab destined to bring about destructive consequences. As Hayek pointed out in his Nobel acceptance speech, The Pretense of Knowledge,

In the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process … will hardly ever be fully known or measurable.

Knowledge is best utilized when it reaches as many people as possible. Hayek's lesson must not be forgotten as it not only shows the fallacy of central planning but the incredible benefits derived from social cooperation through instantaneous communication.

James E. Miller holds a BS in public administration with a minor in business from Shippensburg University, PA. He is a former staff columnist to the Shippensburg Slate and current contributor to his hometown newspaper, the Middletown Press and Journal. See his blog. Send him mail. See James E. Miller's article archives.

© 2011 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in