Modern brokering

Why do people pay big bucks for a "seat" on the NY Stock Exchange? One of the reasons is that there is money to be made in brokerage -- and it sure helps to be located where the trading action is.

Brokerage also reduces price spreads and facilitates more accurate asset price signals available to the rest of the world.

And arbitrageurs make some money -- and they pay some of that for their privileged location. That's access cost plus location rent which describes the use and the price of every site in every city on Earth.

Don Boudreaux writes about the NY tunnel that Michael Lewis (and many others) have recently discovered -- which serves about the same function (updated) as a "seat" on the NYSE.  Some people have paid a lot of money to be the quicker broker. Location rent all over again.

But Burton Malkiel and Arthur Levitt ("We Are All High-Frequency Traders Now") comment on the inevitable new front-running ("scalping"). This refers to large buy or sell orders that are detected before they can be executed. They write:

The answer is not to set a speed limit to slow down to the pace set by those unwilling or unable to compete. Instead, solutions should be directed toward fixing problems inherent in the system such as front-running. 

Identifying "insider" trading has always been perplexing and difficult. "Solutions" are hard to come by. Defining and identifying wrongdoing has never been simple. It will be at least as challenging here.  There is no such thing as an "even playing field." If there are clear rules of the game that are broken, we hope that impartial enforcers are on the case.