The Last Temptation of Price

Assume that a stock is trading on 25 exchanges worldwide, and the price varies ever-so-slightly for ever-so-short a time, a tiny fraction of a second, between and among exchanges. Assume you are imbued with omniscience and omnipresence combined with the fastest reaction time on earth. Your mind could micro-process those minute discrepancies in a billionth of a second. Assume you can trade free and clear of any broker’s commission as often as you like… because you are a broker. Add either a cash balance sheet with billions to play with or one of the highest margin accounts on earth… but you really don’t need that. In that short span of time, repeated all day and all night, you could buy and sell on those discrepancies… knowing that every decision would produce profits without risk. Buy low and sell high… even if the discrepancy is small, if enough stock is at stake and the trades are repeated, you would be filthy, stinking rotten rich!

Yet according to Hard Talk on BBC World (September 7^th), precisely that kind of high frequency trading, implemented by linked supercomputers strategically placed near the exchanges in question, accounts for 60% of all global stock market activity. Big financial institutions with a global presence connected to these exchanges through their proprietary software to implement these automated programmed trades via their mega-expensive supercomputers. Doing what individual traders can only dream about. Creating not one red cent of true economic value for the world, not one penny of capital to employ the unemployed or fund the new next great invention… nothing but profits without any redeeming social value to anyone but themselves. Day in and day out. Because they can.

The traders who even have enough of a moral backbone to address the question of what use is this activity to society admit lamely, “it creates balance and synchronicity in the markets,” as if that result had the slightest value to humanity at any level. For all those who argue that regulation depresses the capital marketplace… and can say that with a straight face… simply do not want you to look at those aspects of their work that benefit no one but themselves. They don’t want you to think that fixing Libor rates or leveraging beyond any prudent ratio of debt to hard equity or using cheap Fed money that was supposed to be used to encourage lending in the open market is instead being diverted to bank’s trading arms to play with is wrong or should be limited.

The capital markets benefit society, theoretically, by fueling innovation, job creation and corporate growth. They are supposed to be honest and transparent, but every attempt to create that honesty and transparency is met with SuperPac furor at how such requirements are impairing America’s ability to fund that growth. Honesty and transparency are bad for us? Huh? Oh, if you call the requirement a “regulation,” you can convince those who cannot peer beneath the headlines that regulation is “mmm… bad, okay?” And that is the problem. Too much money funding campaigns provided by people with an agenda that has already proven toxic to the American economy able to fool vast pools of voters with catchy slogans that carry lies imbued with benefits only for those who envision trading without rules, profits with tax loopholes, and ill-gotten benefits without any possible threat of responsibility, civil or criminal.

How stable are these flash trades? “The May 6, 2010 Flash Crash also known as The Crash of 2:45, the 2010 Flash Crash or just simply, the Flash Crash, was a United States stock market crash on Thursday May 6, 2010 in which the Dow Jones Industrial Average plunged about 1000 points—or about nine percent—only to recover those losses within minutes. It was the second largest point swing, 1,010.14 points, and the biggest one-day point decline, 998.5 points, on an intraday basis inDow Jones Industrial Average history.”

“[The Securities and Exchange Commission and the Commodities Futures Trading Commission investigated and issued a report.] The joint report ‘portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral,’ and detailed how a large mutual fund firm selling an unusually large number of E-Mini S&P 500 contracts first exhausted available buyers, and then how high-frequency traders (HFT) started aggressively selling, accelerating the effect of the mutual fund's selling and contributing to the sharp price declines that day.” Wikipedia.

We seem to be a nation of fools sometimes, believing lies that are embossed in fancy ads, repeated often enough by actors and politicians (who can tell them apart?) with passion and seeming moral conviction that they are believed by enough gullible people to believe that these recommendations are pure and good for America. Maybe that is why those with financial power want to continue to cut educational budgets… Stupid voters are a fundamental necessity for those who hate rules that benefit anyone but themselves.

I’m Peter Dekom, and I’d say it is poetic justice that it is precisely this pool of voters who get slammed the most from stupid financial tricks… but there are too many other innocents who get slaughtered along the way.