'Flash crash' arrest sets off alarms: Our view

The Editorial Board | USATODAY

Once upon a time, stocks were traded on stodgy exchanges run by non-profit institutions. Investors made money by buying the right stocks. Companies attracted the capital they needed. And — apart from former New York Stock Exchange CEO Richard Grasso, who was forced to resign in 2003 over his $187 million pay package — the people who ran the exchanges could make a legitimate case that their main interest was to advance capitalism.

Since then, the world has changed, and not for the better. Today the bulk of shares are traded through for-profit exchanges and trading platforms. Though this has greatly increased trading choices, it's hard to say the new system is an improvement.

This was brought home Tuesday, when the Justice Department filed criminal charges against British trader Navinder Singh Sarao. The complaint alleges that his manipulation of markets in 2010 was a major part of that year's "flash crash," when the Dow Jones industrial average plunged nearly 1,000 points in a few minutes.

The implications of that plummet are chilling: If a lone trader, operating out of his London home, can temporarily bring down markets, imagine what a rogue nation or well-financed criminal syndicate could do to cripple the financial system.

More broadly, the episode shows how exchanges are not in the business of underpinning capitalism; they are in the business of boosting trading profits.

They care less about money managers entrusted with trillions of people's hard-earned dollars than they do about traders who will buy and sell a stock thousands of times in a split second. These "Flash Boys" account for the bulk of trades, and the bulk of fees paid to exchanges.

Sarao, 37, is accused of using "spoofing" to drive down stock prices so he could buy on the cheap. The same practice, which involves placing an order and then withdrawing it a split second later, is used by traditional high-frequency traders.

This lets computers gain intelligence into who's interested in buying or selling a given stock, and at what price, which in turn gives the traders an advantage they can exploit.

Five years after the flash crash, it's time for Congress and regulators to impose a tiny transaction tax that would make high-frequency trading unprofitable. Too many people are making too many trades — legal or otherwise — that have nothing to do with fundamentals and that leave the rest of us vulnerable.

USA TODAY's editorial opinions are decided by its Editorial Board, separate from the news staff. Most editorials are coupled with an opposing view — a unique USA TODAY feature.

To read more editorials, go to the Opinion front page or sign up for the daily Opinion e-mail newsletter.