Michael Lewis thinks so.

On 30th March he went on CBS’ 60 Minutes in the US to promote his latest book “Flash Boys” an expose of the the dark world of High Frequency Trading (HFT). There he asserted “the US stock market is rigged”.

I read “Flash Boys” last week. Like other books by Lewis (Moneyball, The Big Short, Boomerang, among others) it’s a great read. Well researched, entertainingly presented. He has a great knack of weaving an engrossing story around serious money subjects. Anyone who owns and trades shares should get a copy.

HFT is the process whereby traders (frequently the big Wall Street “banks”) use their ultra high speed computer systems and close, highly optimised fibre optic network connections to multiple stock exchanges to skim a cent per share here and cent per share there between the genuine sellers and the genuine buyers. Doesn’t sound like much, but done billions of times HFT accumulates billions of risk free dollars into the hands of unscrupulous middlemen.

Some time ago Morgan Stanley reckoned 78% of all trades were HFT trades.

On another dimension, these same middlemen are now diverting a large proportion of trades (40% is suspected) into their own so called “dark pools”. Dark pools are almost totally unregulated and hidden “exchanges” privately run by banks or brokers to execute trades amongst their owns clients. Away from public exchanges (and exchange fees of course) there is no guarantee the price of the trade is the proper market price.

So there you have it. Markets set up by middlemen entirely for the benefit of the middlemen.

Just like a gambling casino really!

And, the regulators have about as much chance of catching up by their conventional processes as authorities have of eliminating Mexican drug cartels. Under pressure this week from the spray of publicity created by Michael Lewis’ book, one Commissioner of the SEC (the US regulator) admitted that hitherto their regulations had been created for people, not for computers.

Oooops … time to catch up, don’t you think?

Flash Boys is the story of a small group who worked hard and long, but finally figured out what was going on and have set up yet another new stock exchange (IEX) to try to break these now embedded unscrupulous practices. We should wish them well.

So what’s the answer to Wall Street greed?

Rather than thousands of impenetrable pages of regulations that well paid lawyers will always find ways past, the solution, I think, is simple.

If you want to be a licenced, Government supported, deposit taking bank, then you can only lend out against deposits taken within historically tried and tested limits and ratios. Nothing more. A boring predictable old style business, but an essential one in a modern economy. You must not indulge in any other business activity.

If you want to be a stock broker, then you must bring all trades to a regulated public market/exchange and settle the trade between arm’s length buyers and sellers. If, as a broker, you want to own shares, you can, but when you sell any such shares you pay an immediate tax on the sale proceeds, perhaps at a declining rate the longer the shares are owned.

If you want to import something, you go to a licenced bank and buy just the amount of foreign currency you need to facilitate the import, no more. (Exporters would sell their foreign currency proceeds to the same banks.) There is no need for foreign currency trading to be equivalent to many multiples of real trade. (In the case of the $A, roughly 50 times!)

Then we have genuine economic risks too great to bear alone: factory burns down, crop fails, etc. You can take it to an insurer, who will collect a fee (premium) and share that economic risk with you. But insurers who want any sort of express or implied support beyond their own balance sheet (AIG bail-out), must be prohibited from taking risk on the value of any purely financial instrument.

That should pretty much cover the legitimate, economically essential capital and risk management markets, necessary to bring together genuine borrowers and lenders, genuine savers and investors, and the risk averse with risk takers.

That leaves the other, totally unnecessary stuff: speculation, derivatives, futures, shorts, wild ideas, the “casino”.

For those that want to gamble in the financial casino, let them. No playing with other peoples money though. If they can win, good luck to them, if they lose, tough.

Then, from a Government and society perspective treat this part of the financial “industry” as we do a casino … Corral it, and tax it.

Governments everywhere need more tax revenue: for them, this approach solves two problems at once.