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The Wrong Way to Regulate High-Frequency Trading

Last week, Maryland State Senator Delores Kelley said, “[T]he general public is not smart enough to know when they’re about to be fleeced.” She was referring to Uber, but her sentiments are nearly universal among regulators. Yesterday, Scott Patterson in The Wall Street Journal continued his series on high-frequency traders and the supposed threats they pose to the markets. He writes:

Regulators are concerned that less-savvy or less-influential investors aren't aware of the benefits and advantages that exchanges are providing to certain clients, making it difficult for them to compete fairly…

Substitute the euphemistic “less-savvy” for Senator Kelley’s “not smart enough,” and regulators’ condescension toward the average investor becomes readily apparent.

The “benefits and advantages” Patterson mentions are volume discounts that some exchanges provide to their best customers. It is a routine practice that helps reduce transaction costs for the investors who comprise the bulk of the volume for U.S. markets on any given day.

Customers of exchanges -- all of them -- ought to be eligible to receive the type of discounts that exchanges currently offer to those who comprise a significant share of their business. The average investor is smart enough to realize that, just as with any business, when you buy in bulk, you get a discount.

A reasonable debate can be had about high-frequency trading, but attacking exchanges’ customer retention techniques isn’t part of it.