A More Equitable Way to Trade Stocks? An Arbitrage-Free Exchange

The SEC and CFTC finally released the results of their investigation that the 2010 May 6th “Flash Crash” where the Dow lost 1,000 points in 30 minutes. The report lays blame on one errant firm coupled with the effects of Hyper Trading. This is dissappointingly slow since smart people from Nanex figured that out back in June. Coupled with news of the newest, fastest, trans-atlantic fiber optic cable being installed solely for the purpose of hyper-trading, should we be asking ourselves: Is there where our societal priorities should lie?

I don’t work in the financial industry and I’m no expert on stock trading. I’m certainly not seeing the whole picture. Please leave comments to explain where I’ve got anything wrong. Let’s set aside the question of whether or not hyper trading is beneficial to society. What I want to know is, is it ethical? And is there a better way? While there is absolutely nothing wrong with arbitrage in principle, isn’t their something wrong with firms exploiting the speed at which they receive information and using it to steal from those of us who are buying and selling, albeit in very small increments?

Since we have the technology to analyze trades in microseconds, instead of giving trading firms with deep pockets an unfair advantage, why doesn’t the exchange itself pass the savings onto the trading parties? When a bid comes in higher than asking price, why doesn’t the exchange computer split the difference and give both trading parties a better deal than they expected? Hell, the exchange computer could even remove a very small amount for itself as a “resolution fee”. As I see it, an arbitrage-free exchange is a useful product that should be created by an enterprising organization. What large-volume brokers would not want to trade on an arbitrage-free exchange? They could save millions or billions of dollars (the same massive amount of money that hyper-trading firms are making by quickly leeching from others). I suspect that this idea will never come to fruition because all the people who could successfully change or create an arbitrage-free exchange are making a lot of money from the current unfair system.