From an excellent column by J.W. Verret:
The government policy of promoting long-term profits is bad economics, and even worse, it is engineered to favor incumbent firms and stifle innovation. When the government gets to decide the proper term of your investments, it constitutes the same form of cronyism as when campaign donors are directly given sacks of cash by the government officials they donated to when they were candidates.
A guiding principle in our economy is Joseph Schumpeter’s theory of “creative destruction.” Just as some forests need to burn in order to clear away brush and make way for more robust growth, economic innovation also requires that old and outdated companies be broken up for new replacements to take root. Recently, Americans have received an education in this principle by watching Uber’s challenge to the taxi cab incumbents.
The American capitalist economic system is at its best when guided by the principle that no firm is too big or special to fail. While corporate executives may feel such a jungle atmosphere is harsh and unforgiving, don’t forget that customers who buy products and investors of capital are at the top of the food chain in this jungle. Wall Street banks and corporate executives are the prey! Protecting failing companies and subsidizing politically powerful incumbent firms, under the false guise of promoting long-term value, is simply un-American.
A couple of other points:
-Short-term trading adds market liquidity, which reduces bid/offer spreads. Because of short-term trading, long-term investors pay less to buy and receive more when they sell.
-Liquidity buffers volatility. Wild market swings happen when liquidity dries up. Any trading restriction that reduces market liquidity will increase market volatility.
This stuff is basic. It’s a shame that many people never learn it and are credulous about fairy tales involving evil speculators and high-speed traders in dark alleys. When someone in a position of authority tells you that a particular type of free exchange is bad, it’s usually safe to assume that he has a stake in some crony enterprise that benefits by restricting your choices.
5 thoughts on ““Washington’s war against short-term stock traders””
“it is engineered to favor incumbent firms and stifle innovation”: spot on.
““it is engineered to favor incumbent firms and stifle innovation”….That can also be said of the Capital Gains Tax.
“When someone in a position of authority tells you that a particular type of free exchange is bad, it’s usually safe to assume that he has a stake in some crony enterprise that benefits by restricting your choices.”
This was what was behind celebrity best seller Michael Lewis’ book ‘Flash Boys’. The hero of the story, Brad Katsuyama, is trying to start his own exchange now. His gimmick is there will be a ‘speed bump’ so all the orders getting routed through will move at the same time. This sounds great at first and consistent with the themes of the story.
Except his exchange will not just be a routing platform but also operate its own broker. And (surprise) his broker won’t be subject to the speed bump. In other words his quotes will already be rounding the bend down the stretch while all the others are just getting out of the starting gate.
Instead of a few firms having the speed advantage he criticized in the book, he will now have it. Spreads will be wider and orders filled slower. Great solution.
That’s a good example. I was thinking of the regulators, some of whom are on a revolving door from the securities bar and all of whom benefit by generating regulation.
We saw with Madoff’s niece that the regulators are literally in bed with the crooks.
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