Speed Reads


Charles Schwab: 'High frequency trading is a growing cancer'

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Leading retail stockbroker Charles Schwab has followed up on the release of Michael Lewis' compelling Flash Boys book on high-frequency trading with a statement that strongly condemns high-frequency trading as a "cancer":

High-frequency traders are gaming the system, reaping billions in the process and undermining investor confidence in the fairness of the markets. It's a growing cancer and needs to be addressed. If confidence erodes further, the fuel of our free-enterprise system, capital formation, is at risk. We can't allow that to happen. For sure, we still believe investing in equities is a primary path to long-term wealth creation, and we believe in the long-term structural integrity of the markets to deliver that over time for individual investors, which is all the more reason to be vigilant in removing anything that creates unfair advantage or undermines investor confidence.

What to do about it? Charles Schwab thinks that the practice should be banned altogether:

There are solutions. Today there is no restriction to pumping out millions of orders in a matter of seconds, only to reverse the majority of them. It's the life-blood of high-frequency trading. A simple solution would be to establish cancellation fees to discourage the practice of quote stuffing. The SEC and CFTC floated the idea last year. It has great merit. Make the fees high enough and they will eliminate high-frequency trading entirely. But if the practice is simply a scam, as we believe it is, an even better solution is to simply make it illegal.

But actually, it seems to me like Charles Schwab is a bit late to the party. High-frequency trading profits have collapsed to just an estimated $1 billion in 2012, down from $5 billion in 2009. What was a powerful predator in 2009 seems considerably less powerful — and dangerous — today.