From the beginning of these difficult economic times, I have been committed to supporting and proposing reforms to ensure that consumers, investors, small businesses and everyday Americans are no longer taken advantage of by the big institutions on Wall Street.
On May 6, 2010, we were again reminded the fragility of the foundation on which Wall Street is built. That day the Dow Jones Industrial Average fell 1,000 points, the largest intra-day trading drop ever on record. What some have referred to as the "flash crash" erased $1 trillion in market value before rebounding. Congress has begun to investigate what caused this sudden market crash and what steps can be taken to ensure it does not happen again.
A central issue before us is whether there is a social utility to high-frequency stock trading. Should it be limited? Should it be taxed? Or do we benefit from enormous quantities of money moving in and out of the market every minute?
We are told that the meltdown will cause no lasting harm. I think this is shortsighted. Investors for many years will be demanding a risk premium for what they perceive as a market that can go crazy, at least for an hour or half-an-hour.
I suspect that we will also be told that, with a few patches, the system will work fine in the future and this could never happen again. I remain skeptical.
In our society, we have allocated some of the smartest business and computer minds to Wall Street. We are told that these people should earn the highest rates of return on their intellectual capital -- more than any other profession -- because they help allocate capital to our real businesses. But what does that argument have to do, if anything at all, with high-frequency trading?
Is high-frequency trading a necessary part of allocating capital to real businesses, or is it a parasitic attachment in which some smart people with some fast computers can take a little piece of the profit that each real investor should get and divert it to themselves? For example, are Accenture and Procter & Gamble and 3M better off today as operating businesses because their stocks are subject to high-frequency trading?
I expect that Congress will patch up the present system and simply tell the American people not to worry. However, I hope, instead, that we will take a look at high-frequency trading and determine whether it should be limited or whether it should be subject to a small tax to recognize that there is a social cost to this activity.
High-frequency stock trading might be something that we want to discourage so that real investors reap the profits on Wall Street, not just a handful of clever and computer-savvy stock traders.