On his afternoon show Tuesday, MSNBC host Dylan Ratigan explained why he believes the usual explanations given in the media for why the stock market went up or down on a given day are nonsense.
"Seventy percent of the volume [of trades on the stock market] is computers that are run by the banks playing ping pong with stocks for 10 seconds at at time," Ratigan said.
"The stock market at this point, which used to be a reflection of the future value of actual businesses in this country, has been turned by our government and our banks into little more than a paper shredding facility [about which] we can make up reasons why it goes up and down," Ratigan said. "But when the computers ... at the banks are controlling the action, most everything else is kind of silly."
Ratigan concluded that it's time to create an "alternative investment structure" that would allow people to invest their money without putting it "into the obviously corrupt stock market in this country."
Ratigan was referring to the relatively new phenomenon known as high-frequency trading: High-speed computer programs that are able to "peek" at stock trades less than a second before the trades are made. If the computer sees that a trade about to be made will raise the price of a particular stock, it can purchase the stock in the split-second before that trade is made.
Many market observers say this "games" the entire stock market in favor of the large banks that practice high-frequency trading. Indeed, there is evidence that HFT has made the large investment banks much more profitable. As Ratigan mentioned, HFT is estimated to account for 70 percent of all the trading on the New York Stock Exchange.
Mike Konczal at the Atlantic offers an analogy for high-frequency trading:
Imagine if eBay had a rule where you could cancel your bid within 1 second. I put up some stuff on ebay, and you place a bid for it. Then I place a bid that is higher than the current bid to see if that becomes the new highest bid. If it is, I cancel it within milliseconds. Remember, I don't want to buy the product -- I just want to drive the price higher! This is similar to what critics of HFT think is going on; HFT is able to ping prices with bids that exist for only milliseconds to see how much other buyers are willing to pay to squeeze out the maximum profit.
On May 6, 2010, when the Dow Jones unexpectedly plunged nearly 1,000 points, some observers blamed the sudden collapse -- which saw some companies' shares plummet to nearly zero within seconds -- on high-frequency trading. Among those advocating that theory was Larry Leibowitz, COO of NYSE Euronext. But some other observers argued that the HFT programs had nothing to do with it, because they were shut down when the market panic set in.
Among the leading voices opposing HFT is Sen. Chuck Schumer (D-NY), who last year called for restrictions on the practice.
Ã¢â‚¬Å“The hallmark of our markets are that they are open and above board and the little guy has as much of a chance as the big guy,Ã¢â‚¬Â Schumer told the New York Times. Ã¢â‚¬Å“This takes a dagger to the heart of that concept.Ã¢â‚¬Â
Earlier this month, the Commodity Futures Trading Commission announced that it's looking into placing restrictions on high-frequency trading.
The following video was broadcast on MSNBC's The Dylan Ratigan Show, June 29, 2010, and was uploaded to YouTube by MoxNews.