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High-Frequency Madness: Code Red

Stocks in this article: SCHW KCG

Until Charles Schwab, the founder of Charles Schwab (SCHW), spoke out against HFT in the marketplace to the Wall Street Journal, Mark Cuban was one of the few that stood up and took a stance.

Well, ladies and gentleman, he's right! Cuban, owner of the National Basketball Association's Dallas Mavericks, has laid out several different scenarios that wouldn't outlaw high-frequency trading per se, but rather, highly discourage it.

By enhancing the tax benefits to long-term investors -- such as eliminating the dividend tax for stocks held more than five years and a lower or eliminated tax on long-term capital gains -- it encourages stocks to be held over longer periods of time. He also proposed a per-share tax or fee for positions held for less than 1 hour.

Why would the public have a problem with that? I certainly don't.

I'm an investor for the long term and I'm also a trader. I don't usually hold positions less than one hour, but swing them over days or weeks. For the vast majority of market participants, this would have little to no effect.

Actually, I take that back. It would have a positive effect.

By eliminating taxes on dividends or cutting down the long-term capital gains tax, it allows investors to hold on to a greater portion of their earnings. That "extra" money can be reinvested into something else -- perhaps the same security, if it's a dividend -- and allow investors to have more bang for their buck.

As Cuban said, the equity markets were originally put in place to raise capital for businesses. Now, it's a battleground for algorithms and computers. A nerd wonderland of financially destructive bots. Another "fat finger" incident will happen again; it's only a matter of time.

The circuit breakers are no help either. So they shut the market down for a couple of minutes after a 10% swoon. Big whoop. That's like putting a band-aid over a bullet wound. The government (and many other organizations for that matter) are notorious for coming up with short-term solutions that fail to address the long-term issues.

Let's get something right and discourage high-frequency trading. Outlawing it might be "un-American," but nothing says we can't discourage it.



-- Written by Bret Kenwell in Petoskey, Mich.

At the time of publication, the author held no position in any stocks mentioned.

Bret Kenwell currently writes, blogs and also contributes to Robert Weinstein's Weekly Options Newsletter. Focuses on short-to-intermediate-term trading opportunities that can be exposed via options. He prefers to use debit trades on momentum setups and credit trades on support/resistance setups. He also focuses on building long-term wealth by searching for consistent, quality dividend paying companies and long-term growth companies. He considers himself the surfer, not the wave, in relation to the market and himself. He has no allegiance to either the bull side or the bear side.
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