The key part of capitalism, the free enterprise system, is the trading of common stock.
Most of us do not realize its importance or what is taking place.
Long ago in New York and London, England, shares were traded literally on the street by buyers and sellers with almost no regulations. Thus, all kinds of abuses transpired.
In the United States in the 1920s, stock trading assumed a disproportionate share of the economy. However, only a small part of the population, about one per cent, owned common stocks.
Stock prices soared and that attracted wild speculation. People assumed the market was a barometer of the economy. People lost sight of the real purpose of the stock market. It was to serve as a way for companies to obtain funds for expansion. In other countries, banks loaned money for that.
It is very important that it works well. The corruption and nonsense led the U.S. government to establish the Securities and Exchange Commission, but more needs to be done. Significant abuses require changes.
Within the trading venue on the six existing exchanges, two crucial activities are adversely affecting this action: namely front running and high speed trading.
Front running occurs when a broker places a personal order before processing one from a client. Thus a broker could purchase shares in XYZ before processing one for a client. Hence, the shares would rise as an order took place from the client and the broker would derive the benefits from that transaction.
Too, brokers are not supposed to capitalize on inside information not available to the general public. Unfortunately, these prohibitions are not rigorously observed, so a client is cheated.
Also, high speed trading has turned the stock market into a gambling casino where traders buy and sell shares for a tiny fraction of a dollar, but make a profit on huge numbers of shares. The general public obviously is not in a position to capitalize on that.
Also, under the specialist’s system, the specialist has room to manoeuvre, often to the customer’s disadvantage. Too many people illegally capitalize on inside information.
Abuses must be eliminated for this very important part of the economy to function properly.