In this post taken from his NYT blog, Krugman takes aim at "Wall Street" for using super computers in the stock market and for speculation. Krugman claims that these are "destructive from a social point of view". This post will explain the fallacies in his reasoning.
Super computers:
Krugman points out that over the last several years large investment houses such as Goldman Sachs have been using supercomputers running complex algorithms to execute trades. Krugman claims that this is unfair to other traders who do not have access to these expensive machines. He claims that this acts as a "kind of tax" that "probably degrades the stock market's function" and therefore decreases "national wealth".
Here, Krugman either doesn't understand how the stock market functions or is intentionally misleading people for political reasons.
First of all, the firms using these expensive computers are market makers. They provide liquidity in the stocks they trade. This means that they are both buying and selling the stock to investors. This is an important function because it ensures that whenever someone wants to buy the stock, a trade will instantly take place with a very low gap between the bid and the ask. What these supercomputers do is give the firms an advantage over other market makers. They can act faster, filling orders quicker and at better prices. So yes, they are able to take profits away from other traders, but only because they are able to do a better job at providing shares at better prices to buyers and sellers. So while the traders competing against these supercomputers are worse off, it is because the investors who they would have been trading with are getting a better deal. This would be analogous to an economist complaining that Henry Ford was using his assembly lines to create cars cheaper and faster because he was acting as a "tax" on his competitors. Rather than acting as a "tax" on society, they are providing a service (better and faster trades) and are creating "national wealth".
