Columbia University Professor and Nobel laureate Joseph Stiglitz said high-frequency trading gives an unfair advantage to a select group of investors and could be taxed as a way to discourage the practice.

High-speed trading “results in sophisticated versions of front running” and “has resulted in an unlevel playing field,” Stiglitz said in a paper to be delivered at the Federal Reserve Bank of Atlanta’s financial markets conference at Stone Mountain,Georgia.

And:

Prohibiting the practice of high-speed trading might “entail considerable complexity,” Stiglitz said. At the same time, “tax policies can be effective in discouraging these activities.”

“Less active markets can not only be safer markets, they can better serve the societal functions that they are intended to serve,” Stiglitz said.

The FBI had already been probing potential criminal activity associated with high-speed trading. On April 4, U.S. Attorney General Eric Holder said the Justice Department is investigating whether the strategy violates insider trading laws. So is New York Attorney General Eric Schneiderman. In a March 31 interview on Bloomberg Television, Schneiderman urged the U.S. Securities and Exchange Commission to speed up its review and quickly issue new regulations.

One criticism of speed traders is that they use sophisticated algorithms to detect the moves of big institutional investors and then jump in front of their large orders. Speed traders can then profit from buying and then quickly selling a stock for a slightly higher price to the bigger, slower investor.

David Fuller's view

Subscribers to this service have been hearing about the threat of high-frequency trading for over five years, including an overall increase in intra-day volatility, scary meltups and meltdowns in seconds, and worst of all, what should be illegal front running which US stock exchange officials shamefully and knowledgeably ignored because of the extra revenue they received.

It took the writer/journalist, Michael Lewis, to expose more fully the damage and costs of HFT.  He deserves every penny that his best selling book is earning.