And as long as their models include logical amusement like "Housing prices fall? That's unpossible!".. I think we'll do just fine.

Now, the real question you didn't ask: Can computers outcompete people who don't want to think? Of course. So Mom and Pop are right out, until they get a copy of the intelligent investor and read it a few times, that is.

What you're talking about Mr. L is a market where humans are ALWAYS outmatched. These systems were created specifically to work in spaces where humans long stayed out of them anyway. Why? Well as you know, it's hard to juggle high order mixed partial differential equations in your head, with 50 different data streams.

The original idea behind stocks was to provide capital for a company to grow in exchange for a share in long term profits. Dividends. My retirement portfolio has stayed flat in this economy because I bought into funds of dividend-yielding stocks that pay into my account even while the value of the stocks has fallen.

Though it makes sense (to the companies) to use the "buy back stock instead of paying dividends to reduce SEC oversight" approach, I agree with you. Stocks that pay dividends regularly are vastly more appealing to me. It provides insurance against sudden price drops.. if a stock starts yielding 40%, not only will I buy more, so will lots of people. Nothing saves a dividend-free stock from freefall unless the company happens to be ready (and willing) with a wad of cash in hand to drive the price back up. Not to mention you get paid to go long.

I'd go much, much further.

A market that allows high-volume, split second trades to be profitable is broken.

What it leads to is machines that notice the trading patterns of the big investment house machines, and arbitrage those patterns, which leads to machines which notice the trading patterns of those machines, which leads to.... madness.

The very idea, in other words, is broken.

It is perpetually amusing, though, to hear the advocates of the "free market" (remember, a truly free market requires perfect information flow) squeal when you threaten to take their arbitrage toys away (remember, arbitrage exploits less than perfect information flow).

Allowing Goldman Sachs to milk the market this way is just plain wrong. If a handful of race-goers betting on a horse race were allowed to place their bets just before the horses passed the winning post we'd cry foul becuase it would impact the returns of everyone else betting on the race. This is no different. It would be much fairer and more transparent to return to a manual stock exchange with brokers and market-makers. Lots more jobs for one and a level playing field for the savvy investor.

To broaden the point, maybe all trading should be manual. It would have been hard for banks to get into the mess they are in right now if they had to trade and settle complex derivatives by hand. They would actually have to understand what it was they were working with!

A good trading platform will cost you, which brings us to the point, in the information age, is it the information that is valuable, or the speed at which you access that information. (see McLuhan for more on this in Macro terms) Goldman clearly has a better connection than joe daytrader sitting around in his or her pajammas. But mostly Goldman has the resources to run the market in any direction they want, and trade in front of it.

Perhaps you recall a few of the scandals. The institution gets a buy order from a Hedge Fund, they pass the word on to the trading desk, and their traders, trade in front of the buy order.

It cuts the other way as well. You just bought 1000 shares of xyz at 20, for a quick turn, maybe a nickel, with a sell stop at 19.90, to protect yourself. This is your whole stash. The bid disappears, the sell stop never hits, and the stock next trades at 19.50, and since you and a whole lot of other fish are on the trade, and there are nowhere nearly enough buyers to buy everyones shares, the selling continues. You sell the first 500 at 19.50, more at 40 and the rest at 19.25. The stock rallies and closes the day at 10.50. You typically make a few hundred a day, so this really takes a bite out of your bank. Now you have less capital to try and make it up. Who pulled the bid?

The interest in share buybacks vs. dividends is the result of gov't policy - since we double-tax dividend payments, we make it more tax-efficient for investors to prefer share buybacks.

Algorithmic trading is just a numbers betting game. Create a new exchange regulated by the Nevada gaming commission and let the programmers play there or require a third tier of investment with different tax and regulatory implications to dissuade any buy/sells within a much smaller hold period than the current capital gains scenario, ie, 30 days.

I suspect the people that get slammed by these algorithms are mostly day traders, people who think they can earn money by paying obsessive attention to C-SPAN. I'm not sure how much money these techniques can take from people who use buy-and-hold strategies and who invest in mutual funds.

Another point is that if you ask Goldman what value these programs have for society as a whole, they'll tell you that by making frequent trades on every security, they help to define a price which increases liquidity and the ability for people to price those securities. I have no idea if this is a valid point or not (Andrew??), but it's interesting...

Geez, I thought the purpose of a stock market was to raise capital to fund productive enterprises, you know, those old fashioned, quaint entities that produce actual things. Boy, have I been laboring under a misapprehension! Consider how much healthier our macroeconomy might be if the intellect, energy and zeal that has been invested in gaming (scamming) the market had been invested in making products that are world leaders in quality and value. Seems to me that our best, brightest and richest have pretty much sold us down the river.