Contrary to what some might think, I’m not opposed to investment bank and bankers, I’m just opposed to the current crop of banks and bankers. But even more than usurious middle men, the guys who really make my head explode are the flat-out speculators–they serve, even on their best days, no useful purpose whatsoever. And thanks to the recent stock market computer glitch that caused the Dow to temporarily dive ten percent, speculators known as high-frequency traders are finally getting noticed (boldface mine):
Depending on whose estimates you believe, high-frequency traders account for 40 to 70 percent of all trading on every stock market in the country. Some of the biggest players trade more than a billion shares a day.
These are short-term bets. Very short. The founder of Tradebot, in Kansas City, Mo., told students in 2008 that his firm typically held stocks for 11 seconds. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said.
But some in Washington wonder if ordinary investors will pay a price for this sort of lightning-quick trading. Unlike old-fashioned specialists on the New York Stock Exchange, who are obligated to stay in the market whether it is rising or falling, high-frequency traders can walk away at any time.
And this is probably one of the most unproductive uses of mathematicians and computer scientists–it probably runs neck and neck with online porn:
The Tradeworx computers get price quotes from the exchanges, decide how to trade, complete a risk analysis and generate a buy or sell order — in 20 microseconds.
The computers trade in and out of individual stocks, indexes and exchange-traded funds, or E.T.F.’s, all day long. Mr. Narang, for the most part, has no idea which stocks Tradeworx is buying or selling.
Showing a computer chart to a visitor, Mr. Narang zeroes in on one stock that had recently been a winner for the firm. Which stock? Mr. Narang clicks on the chart to bring up the ticker symbol: NETL. What’s that? Mr. Narang clicks a few more times and answers slowly: “NetLogic Microsystems.” He shrugs. “Never heard of it,” he says.
This is not entrepreneurial investing. This isn’t even an attempt to find an investor dumber than you and fleece him. Instead, very bright people are spending far too much time trying to game the system–it’s no different than the first wave of day traders who attempted to quickly capitalize on minute differences between markets before everyone else could catch up. There is absolutely no useful economic activity here. And here’s how they
earnextract their money:
Most of these firms typically hold onto stocks for a few seconds, minutes or hours and usually end the day with little or no position in the market. Their profits come in slivers of a penny, but they can reap those incremental rewards over and over, all day long.
What all high-frequency traders love is volatility — lots of it. “It was like shooting fish in the barrel in 2008. Any dummy who tried to do a high-frequency strategy back then could make money,” said Manoj Narang, the founder of Tradeworx.
A 0.1% transaction tax would put a stake through the heart of these parasites, while not overly burdening long-term investors. It would also mean that many of these very technically specialized people–whose educations were subsidized by their fellow citizens*–would actually do something productive: hell, porn would be a step sideways, if not up.
*A while back, I calculated that the cost of training various science PhDs, in terms of cost to the federal government, was comparable to the cost of training a special forces operative (if not greater). As far as I’m concerned, someone who uses that training only for pecuniary gain and also imposes a societal cost is no better than those Blackwater mercenary scum.