Stiglitz Calls High-Speed Trading ‘Front Running,’ Suggests Tax

Columbia University Professor and Nobel laureate Joseph Stiglitz said high-frequency trading gives an unfair advantage to a select group of investors and could be taxed as a way to discourage the practice.

High-speed trading “results in sophisticated versions of front running” and “has resulted in an unlevel playing field,” Stiglitz said in a paper to be delivered at the Federal Reserve Bank of Atlanta’s financial markets conference at Stone Mountain, Georgia.

High-speed trading is facing unprecedented scrutiny following Michael Lewis’s latest book, “Flash Boys,” which argues that the practice has helped rig the U.S. stock market. Lewis, an author who also writes for Bloomberg View, argues that the U.S. stock market favors of speed traders, who he says prey on slower investors by getting early access to nonpublic information. The book and the media attention it has received have revived and magnified concerns that have circulated for years.

“It is mostly a zero sum game -- or more accurately, a negative sum game because it costs real resources to win in this game,” Stiglitz said. While proponents say active markets and financial innovation can be good for the economy, U.S. growth in recent decades, when markets have been most active, “has been slower than in earlier decades,” he said.

Tax Policies

Prohibiting the practice of high-speed trading might “entail considerable complexity,” Stiglitz said. At the same time, “tax policies can be effective in discouraging these activities.”

“Less active markets can not only be safer markets, they can better serve the societal functions that they are intended to serve,” Stiglitz said.

The FBI had already been probing potential criminal activity associated with high-speed trading. On April 4, U.S. Attorney General Eric Holder said the Justice Department is investigating whether the strategy violates insider trading laws. So is New York Attorney General Eric Schneiderman. In a March 31 interview on Bloomberg Television, Schneiderman urged the U.S. Securities and Exchange Commission to speed up its review and quickly issue new regulations.

One criticism of speed traders is that they use sophisticated algorithms to detect the moves of big institutional investors and then jump in front of their large orders. Speed traders can then profit from buying and then quickly selling a stock for a slightly higher price to the bigger, slower investor.

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