24th
NYTimes Throws Darts
It’s good to know the NYTimes can still treat as news a story where the reporter’s ignorance is compensated for by his own views. Luckily, this article about high-speed trading (an issue I’m slowly forgetting but in which I have a few years’ experience) is scornful in the right direction.
There are two points the author is making, but because they’re treated as one the effect is to obscure what’s important. First, and most complex is that innovation in equity trading over the last twenty years (from manual to electronic trading) lowered transaction costs for everyone (a good thing) but also created an arms race where only the biggest banks and hedge funds could compete (a bad thing). It’s a complex balancing act: while investors still pay more to trade than those of us who aren’t in the inner circle, any serious discussion must point out that relative to previous generations of equity trading, everything is cheaper.
Most important, however, is that along with all this automation came an enormous amount of noise in the system: many players, and not just those in the inner circle, trade for the point of trading, and have absolutely no interest in investing. One can honestly debate whether this type of trading has any systemic benefit, but it clearly has occasional cost. A strategy that makes money without investing isn’t actually doing anything useful except making money for it’s creators. Put another way, it hard to see how this kind of trading directly serves the market’s goal of allocating capital.
The second issue, which is entirely separate, is that aside from a technological advantage, in some circumstances the inner circle gets information about trades in the market before everyone else. Any lead on information lets you beat your competitors to the punch, which is fundamentally what this game is all about. It’s also an illegal practice, and the “loopholes” that allow it are both new and already under investigation by the SEC. If I understand these sources correctly, basically the SEC created the problem they’re now faced with fixing.
This article is justifiably cynical about how the likes of Goldman make all their money, but the issues raised aren’t actually advanced by a poorly explained roundup of the situation.
I suffer from my own biases. My starting position (yet to be argued with by any of my friends who still work on Wall Street) is that 50% of the jobs on Wall Street could be lopped off and it wouldn’t make any difference to anyone, except in freeing up a generation of well-educated people to do whatever else it is most of them want to do anyway. Once that’s done, the process could probably safely be repeated a few more times.
Update 8/4: Both of my points above have since been addressed by people who, you know, still do this stuff for a living:
Paul Krugman writes:
… What both say is that private information — the kind of information you get by, say, using supercomputers to place trades 30 milliseconds faster than the hoi-polloi — can be privately profitable but socially
usefuluseless, maybe even destructive.
The SEC is making a big deal about how they’re now looking into “flash orders”. Here’s Chuck Schumer (via the WSJ):
We salute the SEC for moving forward with this ban that will restore integrity to the markets. The agency is absolutely making the right call by stepping up and ending this unfair practice…
