One Way to Unrig Stock Trading
AMERICA’S equity markets are broken. Individuals and institutions make transactions in rigged markets favoring short-term players. The root cause of the problem is that stocks trade on numerous venues, including 11 traditional exchanges and dozens of so-called dark pools that allow buyers and sellers to work out of the public eye. This market fragmentation allows high-frequency traders and exchanges to profit at the expense of long-term investors.
Individual investors, trading through brokers like Charles Schwab, E-Trade and TD Ameritrade, suffer first as the brokers profit by hundreds of millions of dollars from selling their retail orders to high-frequency traders and again as those traders take advantage of the orders they bought.
Market depth, critically important to investors who trade large blocks of securities, also suffers in the world of high-frequency traders. Startling evidence for the lack of robustness in today’s market comes from a 2013 Securities and Exchange Commission report that found order cancellation rates as high as 95 to 97 percent, a result of high-frequency traders’ playing their cat and mouse game. Market depth is an illusion that fades in the face of real buying and selling.
Securities markets work best as a central clearinghouse where all buyers and sellers of stocks come together. Not so long ago, when the New York Stock Exchange and the Nasdaq operated as virtual monopolies, American equity markets were the envy of the world. Until 2000, Nasdaq was wholly owned by a nonprofit corporation; the New York Stock Exchange was nonprofit until 2006. To ensure that they would operate in the public interest, they were treated much like public utilities.
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