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Market Movers

Solution Without a Problem? A Tax on High-Frequency Trading

Credit...Tamara Shopsin

If there’s one thing that the Democratic presidential candidates can agree on, it’s that high-frequency traders are a problem. Hillary Rodham Clinton has now followed Bernie Sanders and Martin O’Malley in calling for a tax on the traders who, they complain, use their high-speed computers and expensive data lines to pick the pockets of ordinary investors.

The odd thing about all this concern is that most of the investors who are actually facing off against the high-frequency traders — often on behalf of retirement savers — don’t see this as anything like the most costly problem they are facing, even in the arcane realm of trading mechanics.

The most commonly cited statistics suggest that high-frequency traders are making, at most, a few billion dollars a year in the stock markets. That take has been shrinking steadily in recent years, according to research from the Tabb Group, and is much smaller than what was captured by the old middlemen in the stock markets whom the high-speed traders largely replaced: the bank and brokerage employees on the floor of the New York Stock Exchange.

Academics and regulators, meanwhile, have pointed to several other, less automated financial markets, where middlemen are taking significantly more money from ordinary investors on each trade. The cost of buying and selling municipal bonds, for instance, a popular investment for ordinary savers, is at least five times the cost of trading a stock, and usually much more than that.

Brandon Becker, a former chief legal officer at the big mutual fund company TIAA-CREF, is someone no one could confuse for a high-frequency trader. But at an event earlier this year called to discuss potential fixes for the stock market, he said regulators should be spending less time worrying about stock markets and more time on problems like the cost of trading bonds, a market about twice as big in the United States as the one for stocks.

“If I were looking to save money for investors, I would be looking at the fixed-income markets,” Mr. Becker told the roundtable at the Securities and Exchange Commission, using the industry jargon for bonds. Another bigger problem area, he said, was the availability of “retirement advice for people with less than a million dollars.”

It is a curious phenomenon: the politicians calling for a crackdown on a problem in which the ostensible victims seem relatively unconcerned. One possible explanation is that the stock market and its occasional breakdowns are simply more visible — showing up on the news every night — even though Americans have more of their savings in other markets.

What’s more, high-frequency traders have the quality of a villain we already know, the cunning but soulless robot. It is easy to imagine that these robots injected themselves into a pure ecosystem in which investors were trading with one another without any middleman. In fact, most high-frequency trading firms were small start-ups that set out to offer better prices than what the banks and Wall Street firms were previously charging as middlemen in the stock market — generally the sorts of upstarts we root for in books by authors like Michael Lewis.

Terrence Hendershott, a professor at the University of California, Berkeley, whose research on trading costs is frequently cited by critics of high-frequency trading, said he has a hard time understanding why the issue had garnered such attention, particularly given his findings.

“These guys barely make any money compared to the old specialists,” Mr. Hendershott said, referring to the floor traders. “I can tell you who I’d rather trade with.”

Mr. Hendershott said he thinks high-speed traders cause concern because they “make money in ways that people don’t understand.”

In fact, Mr. Hendershott and other market analysts say, other markets should be made to work more, not less, like the supposedly broken stock markets.

In bond trading, for example, there are generally not exchanges where investors can check the most recent prices. Investors have to rely on their broker or bank to give them a fair price without having an easy way to determine what a fair price looks like. Not surprisingly, in this setup, the brokers and banks charge a lot for their services — often around 3 percent of the transaction price for municipal bonds, as compared with the few tenths of a percentage point that investors pay for a stock trade.

When the banks had to start giving some information about the recent trades they had done in the corporate bond market a number of years ago, the prices for investors swiftly went down.

None of this means that there aren’t potential problems in need of fixing in the stock market.

Even some high-frequency traders worry that the fragmented, automated nature of stock trading has made the markets more fragile and liable to disruptions like the so-called Flash Crash of 2010, when stock prices cratered in a matter of minutes for reasons having little to do with the value of the underlying stocks. After that crash, though, prices recovered quickly, and the same has happened after more recent market mishaps.

There is also evidence that the presence of high-speed traders has made it more expensive for big investors trying to buy or sell multimillion dollar blocks of shares.

David Lauer, a co-founder of the Healthy Markets Association — an advocacy group that has been critical of high-frequency traders — said that while the automation and race for speed in the stock market had generally been a good thing for ordinary investors, it had turned into an arms race with little societal benefit.

But if the pendulum has swung too far in the stock market, Mr. Lauer said, “the pendulum hasn’t even begun swinging in other markets.”

Even regulators have taken to complaining about how much time they are spending on the stock or equity market rather than on other topics that are costing investors more.

“We spend a lot of time on equities, when there is a greater amount of efficiency,” Stephen Luparello, the Securities and Exchange Commission’s director of trading and markets, said at a New York event in February.

As to what might happen if the trading tax that Mrs. Clinton proposed is enacted, perhaps the best indication comes from Canada, where a fee aimed at high-speed traders was put in place in 2012.

Researchers at the University of Toronto found that the fee did push out the high-frequency traders, but had only a modest impact on the cost of trading. The effect was to push up, just slightly, the cost of trading for investors both big and small.

A correction was made on 
Oct. 16, 2015

An Upshot article on Tuesday about proposals to tax high-frequency trading misstated the given name of an executive as well as his place of employment. He is Brandon Becker, not Brendan, and he is no longer employed as chief legal officer at TIAA-CREF, having left that job last month.

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A version of this article appears in print on  , Section A, Page 3 of the New York edition with the headline: Are High-Frequency Traders Really Such Villains?. Order Reprints | Today’s Paper | Subscribe

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