A while ago, I discussed the observation that seventy percent of stocks are held for eleven seconds (yes, you read that correctly). It’s absurd, since there’s no way that the status of the underlying companies has changed (and that information has been made public) in an eleven second time span. This is nothing more than speculation which provides no useful purpose. A transaction tax would penalize this behavior and make it unprofitable.
Along come more examples of how this flash trading is leading to more insanity:
BlackBerrys were buzzing inside Progress Energy in Raleigh, N.C.: in a blink, the 102-year-old utility had been virtually wiped out on Wall Street.
For no apparent reason, Progress’s share price had plunged almost 90 percent. In a matter of seconds, a company with 3.1 million customers and 11,000 employees had all but vanished on the nation’s stock market, and Progress executives had no idea why.
In the anxious hours that followed, the answers began to come clear: the harrowing plunge in the early afternoon of Sept. 27 had been a mini flash crash — a small-time version of the stock market’s wild day last spring.
Crashes like this have happened at least a dozen times. Prices of stocks have very little bearing on the underlying financial status of the traded entities:
The Investment Company Institute, which represents investment companies like mutual funds, said it was concerned by the “market inefficiencies” revealed by May 6 and wanted regulators to look at what it called abusive practices, like using technology to detect trading of large blocks of shares by investors like mutual funds and trading ahead of them.
Others are far more blunt. “I am very upset by the flash crash,” said George P. Schwartz, who manages the Ave Maria mutual funds. “I am upset by how high-speed traders have taken over the market. They make a mockery out of capitalism.”
Given that everyone seems to be so keen on closing the budget deficit, a transaction tax would be a really good way to do it: if you’re not flash trading, the costs are minimal.