Anyone hoping to address the stock market’s fundamental flaws has probably noticed that the disarray of symbols, fluctuations, and orders upholding Wall Street all come down to a simple but unfortunate fact: Money is tied to special interest, which creates the money on the market in the first place. It’s a seemingly irremediable and vicious cycle.
Thus, before devising solutions to specific economic processes like High-Frequency Trading (HFT), we should target the market as a whole to analyze how this cycle forms. Considering that economic activities have become almost exclusively digital, I will focus on how new technologies influence modern investing to pinpoint solutions for potentially detrimental processes like HFT.
We should first analyze the advantages that technology brings to the market since most of its flaws emerge when there is an imbalance in these strengths. Peter Cramton, Emeritus Professor of Economics at the University of Maryland, explained that there are four key assets we should look at: efficiency, simplicity, transparency, and equity. The first, efficiency, refers to the maximization of social welfare to create the greatest possible gains from trade. This is followed by simplicity, which streamlines the market as much as possible to help participants become more experienced. Once there are more traders, the market should focus on transparency, which prioritizes removing corruption and making sure that people are on a level playing field. Finally, this leads to equity, or fairness. With equity, there are clear rules about price and trade which everyone understands.
While Cramton sees technology as a “positive force in all financial trade,” he explained that “when we look at the markets today, virtually every market gets less than a perfect score on each of those primary goals.” For example, the emergence of more accessible platforms like Robinhood may be reinforcing the second pillar of simplicity while also decreasing fairness to some degree. “Technology is having a big influence on the decentralization of power and particularly centralized institutions,” said Peter Briger, a principal investor with the Fortress Investment Group. “Investments are more equal and available to everybody today. You don’t want those with power to have better access than the average human.”
If technology has the potential to diminish the economic gap, where are the inequalities coming from? One answer is to address the unwavering ties between market and special interest. Breaking these ties could diminish economic inequality. “There are ways through good regulation to improve the markets but there is a lot of resistance” since regulators like the SEC and the CFTC [Commodities Futures Trading Commission] are “to some extent captured by the special interest of the folks that they regulate,” explained Cramton.
This process has been developing for a significant amount of time, so it’s not enough to just say that regulators must suddenly forgo all special interests. Peter Bowman-Davis ’25, who has researched the market for a few years to make strategic investing choices, affirmed that in recent months he has “anecdotally observed an uptick in misconceptions being spread about how the economy functions as well as polemic statements of how the economy ought to be run, despite the fact that economic decisions are often inherently complex.” Indeed, we must espouse a more gradual, multistep approach that regulators can take to diversify the interests of those who control the market. This might be what saves us from the next economic crisis.
The first solution is to have regulators encourage innovation and competition instead of serving the same investors continuously. The Investors Exchange (IEX) is an example of how reforms have been stymied recently. The firm spent an enormous amount of time and money lobbying against defensive High-Frequency Traders in order to secure a position as an official stock exchange. The reason why it was staunchly resisted by these traders is because IEX intentionally imposes a 350-millisecond delay when executing an order. The difference has almost no impact on the average investor but drastically reduces the power of HFT to rapidly process orders, creating a more equal playing field.
IEX’s story demonstrates that innovation is possible, but that regulators like the SEC are often committed to maintaining the status quo. The SEC is ensnared in the special interests of those who participate in HFT. Thus, one potential solution to reshaping HFT is to have a regulator that acts as a leader by pushing the market in a direction that benefits fundamental investors. The SEC should not be representing special interests. However obvious it may seem, a regulator should never take the side of a particular interest group in the market.
The second part of tackling the imbalance of HFT involves transforming the technologies which produce inequalities. The practices that benefit ordinary traders should be reinforced to provide increased autonomy to anyone who joins the market. “A lot of times technology leads regulation. A lot of things happen that tend to be unfair in the marketplace since [regulators] haven’t had the time to [address] them,” said Briger. As a result, regulators tend to “maintain the status quo until there is a crisis,” added Cramton.
Technology has the potential to reform the market, but it usually stifles change to please satisfied investors. One way in which the technologies of HFT have helped spur economic democratization is by supporting companies like Robinhood which are free of fees. “High-frequency trading is how institutions and platforms like Robinhood make money without charging fees,” said Luis Halvorssen ’25, who will study Economics at Yale. Indeed, in 2019, about 40% of trades on Robinhood were sold to HFT firms which have the capacity to generate gain from a small initial amount. It’s a risky process—high-speed traders can just as easily lose immense sums of money— but it is what has bolstered Robinhood’s returns in recent years, opening up opportunities for young investors to enter the market.
Ultimately, HFT shows us that refined, hyper-developed technologies are not inherently prejudicial, but that we must adjust the design of the market. “Poor market designs…. don’t take advantage of the technologies as well as they could,” explained Cramton. Encouraging a diversity of approaches to the market, as the SEC eventually did with IEX, and putting pressure on regulators to consider interests beyond the one percent is a necessary starting point to reforming the process of HFT.