I misspoke – what I meant to say that high speed trading reduces the costs associated with normal investors participating in the stock market.

The largest cost that nearly all investors face is the bid/ask spread. High speed traders reduce the bid ask spread for almost any exchange transaction that you or I would be party to. Crossing the bid/ask spread is a real cost. Usually, this cost is far higher than the brokerage cost.

High speed trading does not reduce the price of the shares, it reduces the “price” of participation.

The bid/ask spread in illiquid products contributes greatly to the profits of the banks.

Yes, they make lots of money in high speed trading. However, this money used to:
1. be much greater
2. go to different people.
3. and now goes to fewer people

Look up the history of Knight “Trading”. Really, high frequency trading should be called high frequency market making. That is the function they are providing. Yes it is lucrative – it has always been extremely lucrative. My boss made several 10’s of millions as a market maker in the trading pits of Chicago. But really, these “traders” in chicago were not really traders – they were largely market makers.

Today, the same function is provided by computers and high frequency computer trading. Less money is being made overall – probably by a factor of 2 or so because of competition.

But, the money is concentrated in far fewer hands. There are only a few 10’s of good market making firms out there, whereas during the heyday of the human market makers, there were thousands at the CME alone, much less the CBOT, NYSE, CBOE, Philex, Comex, NYMEX, Liffe, LSE, and so on.

Now, you have firms like Getco, Goldman (former Hull Trading, purchased for $900M or so back in 2000), Citadel, Timber Hill, and a few others making markets in hundreds of stocks and commidites at the same time. You learn how to create the infrastructure and trading programs, then you can deploy that same idea across any liquid market internationally over the course of 3 years.

I know this because I’ve lived it. Also, I’ve talked to these people over beers and dinner, coffee and had my kids at their houses. Two of my good friends entire job is to seek out relatively liquid international markets, so these companies based out of Chicago can take their existing knowledge of technology and algo trading and deploy it within a period of a year to entirely new markets.

These are companies who go trade significant percentages of the NYSE volume. They go home with almost no positions every day. You would not recognize their names, and they really never have on huge positions. They just make $100-200 at a time, hundreds of times a day.

I doubt increased volumes have depressed equity values but they’ve certainly shrunk the bid/ask spreads on listed equities (1/8th in the 70’s ,1/16th in the 80’s , 1/100 today). Won’t a Tobin tax just be baked into the dealer’s spread? How will this liquidity charge not be passed through to (eg) pension fund investors?

Campaigners for a “Robin Hood tax” watched with alarm as thousands of votes poured into their website, rejecting their proposal for a levy on City wheeler-dealing, to raise money to fight poverty and climate change.

After a bit more investigation, though, the unlikely backlash against the rob-the-rich plan – almost 5,000 no votes against the Robin Hood tax within 20 minutes – turned out to emanate from just two computer servers, one of which was registered to the investment bank Goldman Sachs.

http://www.guardian.co.uk/business/2010/feb/11/goldman-sachs-tobin-tax

(to dsquared: the idea as I understand it is to slow down short term speculation, the fact that the money that does get through is used for this or for that is accidental and it is not helpful to lump all of the lefty wishes together; it blurs the argument that’s there)

…decade, actually.

Which decade? 2001-2010? 2010-2019?

I think that the evidence shows that this statement is itself a bit Worstall; in fact he’s entirely given to calling people “Economic Idiots”, writing pissy obituaries etc.

with 33, which opposes a transaction tax because it lowers stock prices:
and what is the incidence of that tax? The IFS says it depresses the value of UK listed shares: making capital-raising more expensive.