NEW YORK (Reuters Blogs) -- Never mind Michael Lewis. The most interesting and provocative thing to be written of late about financial innovation in general, and high-frequency trading in particular, comes from Joe Stiglitz. The Nobel prize-winning economist delivered a wonderful and fascinating speech at the Atlanta Fed's 2014 Financial Markets Conference recently; here's a shorter version of what Stiglitz is saying.
Markets can be -- and usually are -- too active, and too volatile.
This is an idea which goes back to John Maynard Keynes, if not earlier. Stiglitz says that in the specific area of international capital flows, "there is now a broad consensus that unfettered markets are welfare decreasing" -- and certainly you won't get much argument on that front from, say, Iceland, or Malaysia, or even Spain. As Stiglitz explains:
When countries do not impose capital controls and allow exchange rates to vary freely, this can give rise to high levels of exchange rate volatility. The consequence can be high levels of economic volatility, imposing great costs on workers and firms throughout the economy. Even if they can lay off some of the risk, there is a cost to doing so. The very existence of this volatility affects the structure of the economy and overall economic performance.
The question is: Does the same logic, that traders seeking profit can ultimately cause more harm than good, apply equally to high-frequency trading, and other domestic markets? Stiglitz says yes: there's every reason to believe that it does.