I agree liquidity is important. But do we really need the amount of liquidity being provided by the HFT and other technical traders? All the HFT people go around emphasizing how much more liquidity they are providing to the stock market. But the volatility was probably much lower before the HFTs and computer based algos came in. The market was much more stable, and the volume of investing was much higher than trading based on technicals. If you sell a million shares, you are indeed weighing in with your opinion. You are depressing price by a significant margin. This results in a reduction in the bank balance of the other major share holder, who then affect a change in the management or the direction of a company. Buying and selling a stock should be like the steering wheel of a big ship.
In a bull market, everyone is happy. Everyone is called an investor. Speculators do not exist. In a bear market, everyone is depressed. Everyone is called a speculator and blamed for creating the bear market.
If you and I are the only holders of a stock, and I sell my stake because I think management is corrupt, all that happens is you lose money. Management has no incentive to change unless you get mad at them.
While I am very new to investing/trading, the above statements shows a basic misunderstanding of what Wall Street/trading/investing industry stands for. As I said earlier, the trading/investing industry as a whole is supposed to produce value by directing funds to those areas which will produce the highest growth of the US/World economy. That is the fundamental reason why fund managers get paid. The alpha that fund managers produce is a result of the growth of the economy that the trading/investing industry produces. Would you continue to pay say the shoe industry when it doesnt produce shoes for 2 years at a stretch? Why wont people be angry. (For full disclosure, I have never traded/invested before..so I dont have any bias..and have just been studying the stock market for a couple of months) Boom and bust cycles of the stock market results when the fund managers/traders as a group direct the funds to those areas which they wrongly presume will provide growth or provide too much capital to those areas which may provide growth while ignoring other basic industries. Boom and bust cycles are essentially results of emotional price action based investing, without a good understanding of the fundamentals. Fundamentals of an economy dont change as rapidly as the stock market does. Did the economy really change so dramatically during last august that the stock market had to correct by such a large margin? This is where I think eliminating short-time trading would help. It will make investing more rational. The longer time frame would mean that people would have to take into consideration fundamental factors to a significant extent while deciding where to invest/trade.
You can say it all you want, the plain reality is that you are wrong. The trading/investing industry exists for exactly one, and only one, reason - to generate fees for itself. Until you understand that, you will understand nothing. That is delusional, and it doesn't take more than a cursory walk through market history to see it has never been like that.
Price discovery is one of the major functions of the "trading" industry and it can only occur in an active, liquid market. One of the reasons why modern economic crises take much less time to resolve is because of the presence of active markets that are ready to express opinion on the economy in real time rather then in years of stagnation. This said, a lot of current activity is to price discovery what masturbation is to sex. While I have nothing against HFT and they are, in large, liquidity providers rather then liquidity takers, something like "a quote has to be good for 1/2 second (or can only be improved)" would do wonders to this market.
Yes, the purpose of any industry is to generate fees for itself. But what value does it give in exchange for the fees it extracts? All industries have to justify their fees by giving back some value in exchange.
It's a truism. Any industry exists to enrich the business owners. However, if I were to ask you "what is the reason for existence of the tabloid press?" your answer surely would not be "to sell newspapers and generate cash". The question O/P is asking is a good one - "what is the economic/societal justification for the existence of financial industry?". The answer to that is not as simple as most people would like.
The same that a lottery ticket or Vegas give in exchange for your money - the opportunity to speculate.