About a year ago, we experienced the now infamous "flash crash." You might recall that the stock market suddenly plummeted one seemingly arbitrary May afternoon, with the Dow Jones Industrial Average quickly shedding nearly 1,000 points for no apparent reason. We eventually learned that high-speed computerized trade functions exacerbated a software error, which caused the market to briefly hiccup. Since then, high frequency trading has been in the spotlight. This week, we learn that Senator Chuck Schumer (D-NY) wants to tax these transactions to pay for the additional regulatory oversight that they would require. Is this a good idea?
Here's the news blurb, via Jacob Bunge at the Wall Street Journal:
"In the aftermath of last year's Flash Crash, the need for more coordinated market surveillance has never been clearer," Mr. Schumer wrote in a letter to Securities and Exchange Chairman Mary Schapiro, a draft of which was reviewed by Dow Jones.
The SEC desired such a "consolidated audit trail" even before the market plunge of May 6, 2010, but its high price tag--estimated by Ms. Schapiro in December at around $2 billion up front--and other priorities like implementing the Dodd-Frank financial law have held it up.
It's the SEC's job to understand what's going on in the markets. So its surveillance function is vital. Without it, the regulator can never hope to effectively catch the problems that may arise quickly and deal with them effectively. So if the SEC lacks the ability to oversee high frequency trading, then this needs to be corrected.