Since the industrial revolution, we've had an irrational fear of technology. Despite its undeniable ability to make life better, many of us remain paranoid that technological advances will end up destroying or replacing us. From "Modern Times" to "The Matrix," we're all familiar with this scary scenario.
It's also evident in the stock market, where not too long ago orders on the floor of the New York Stock Exchange (NYX)
Just as in every other aspect of life, technology has revolutionized markets for the better. It's now hard to imagine paying $90 in commissions to buy a stock, not to mention waiting 10 minutes for a call back confirming the trade. But while investors have come to expect the immediate transactions and liquid markets that technology affords, we also worry that technology might be rigging, or ruining, the market itself.
Take high-frequency, or computer-driven, trading, which analysts, news anchors and even investors themselves routinely blame for creating volatility in the market. May's "flash crash" was roundly pinned on high-frequency-traders, along with more recent swings in the market. The growth of such trading has prompted the Securities and Exchange Commission to discuss adding an even more disarraying prescript of limits and controls, the existing slate having already halted trading in a dozen stocks last week alone, including Exxon Mobil (XOM)
But high-frequency-trading is trading, not a smash-and-grab robbery. Whether it's humans executing orders face-to-face or computers acting on the instructions of humans is irrelevant: Investors buy and sell securities based on their own strategies and outlook, all with the intention of making a profit. It doesn't matter if you're trading with a five-minute outlook or a five-year outlook; with a little old lady in Shelbyville, Mo., or a server farm in Secaucus, N.J., computerized trading facilitates liquidity, price discovery and more productive markets.
And as a recent study from researcher Bespoke demonstrates, wild gyrations existed in the stock market long before high-frequency-trading. Over the past 50 trading days, the average daily percentage move in the Dow Jones Industrial Average has been around 0.90%., not far from levels seen over much of the past 111 years. Spikes in volatility have always been present in markets, and with the exception of the 2008 financial crisis, the biggest and longest lasting jump came in the early 1930s, long before the ballpoint pen, let alone computers and high speed trading, were even invented.
Similar fears about technology's impact on the stock market were voiced back in the mid-1990s, when "SOES Bandits," traders using a then-rudimentary electronic trading system, began providing liquidity in Nasdaq (NDAQ)
I've written before about how market regulations, from trading halts to artificial price limits to bans on short selling and derivatives have a demonstrably negative impact on markets, making them more volatile, illiquid and prone to outright collapse.
Scapegoating high-frequency trading will undoubtedly lead to more such controls, creating precisely the market dislocations regulatory public servants aim to end.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.