Part of a dialogue with a friend who asserts that large scale program trading is causing havoc and ruining the markets:
"Michael, let me focus on this part of your excellent letter:
"'Assert the original purposes of the market. Suppliers of investment capital generally do not need to trade in milliseconds. Buyers of capital certainly do not benefit from program trading in their stocks. The general notion that efficient market theory needs to support vast trading flows in micro-time is nothing but the swill of perversion merchants.'
"Asking anyone to forego the reality of the ability to trade in milliseconds is equivalent to asking Tim Lincicum to slow down his fast ball to 50 mph. Never happen, nor should it. Isn't the real culprit the trading in indexes and other abstract entities that, however well intentioned as legitimate hedging devices at the outset, are now merely entities that facilitate gambling on a vast and often harmful scale? As a long-standing contrast, the laws governing insurance in California and elsewhere for decades have prohibited insuring any objects or situations that did not have an "insurable interest." For exanple, you can sell insurance covering the probability of an accident to a particular auto (that auto being an "insurable interest"), but you can't issue an insurance policy against the probability that some percentage of autos will be involved in accidents this year. In the insurance world, the latter is termed a gambling contract and is illegal. There are too many gambling contracts being issued in the markets today, and, while I am generally against any regulation whatever (most people should recognize that they are fools and should just not play), this would be a regulation I would strongly consider. I think it would take care of most of your problems."
