Tuesday, February 21, 2012

The Insanity of Stock Trading in the 21st Century

As anyone who's read my blog or otherwise knows me is aware, I have more than my share of criticisms of capitalism. I am not sure it is possible to come up with a better economic system than one that is market-driven. I am very certain, however, that our political system - whose sole purpose should be to protect and improve the quality of life of its citizens - must put boundaries around the behavior of capitalists.

In other words, the political system must taken priority over the economic system.

OK, well, let's put that aside for the moment. Let's just focus on the concept and then the current reality of the stock market.

The fundamental point of a stock market, from what I understand, is to provide a way for companies to obtain investment - and, closely related to that, allows an individual to make such an investment, to both express support for a company and benefit from its success.

That all sounds good to me, and I have certainly participated in the stock market over the last few decades. Now, my wife and I are contemplating selling any and all stock we have and avoiding the stock market like the plague.

Why? Because the entire system seems so fundamentally corrupted, so deeply oriented towards speculation (legalized gambling), so out of control, that it is now a destructive force in our society. And the aspect of the stock market that I think most clearly demonstrates all of this is computerized trading.

Here are a few quotes and links to articles that really drive this home for me:

Nanosecond Trading Could Make Markets Go Haywire

"It’s as if computerized trading has created a new world, one where the usual rules don’t apply, populated by algorithms and only dimly understood by the people who made them...."There’s this whole world below 650 milliseconds. It’s like landing on another planet,” said Neil Johnson, a complex systems specialist at the University of Miami and co-author of the study, released Feb. 7 on arXiv. “It’s an enormous part of the market which is out of human reach."

Yes, that's right folks - an "enormous part of the market which is out of human reach."

"One new computer chip built specifically for high-frequency trading can prepare trades in .000000074 seconds; a proposed $300 million transatlantic cable is being built just to shave 0.006 seconds off transaction times between New York City and London.)"

Think about this: a company spending $300 million to lay a cable across the Atlantic just to make stock transactions .006 seconds faster! Blows my mind to think about all the effort, all the money - and perhaps one or persons will die in accidents laying that cable? - just so some Wall Street and London firms can trade that tiny fraction of time faster!

"Verifiable figures are elusive and estimates vary wildly, but it is claimed that a one millisecond advantage could be worth up to $100m (£63m) a year to the bottom line of a large hedge fund."

It is now estimated that some 70% of all stock transactions occur through computerized trading and they happen so quickly and so frequently that they clearly have nothing at all to do with investment and economic growth.

These transactions are all about "gaming" the system, manipulating stock prices (and the conditions that drive stock prices up and down), to extract profit out of that system without providing any benefit to the stock market, the society, the world.

I know, I know - what a whiner. And I will keep on whining - all the way out of the stock market.


Tim... said...


I agree with you completely. It has become totally artificial and is no longer anything to do with "investment" in the original sense of the word.



Tim... said...


I agree with you completely. It has become totally artificial and is no longer anything to do with "investment" in the original sense of the word.



Rob van Wijk said...

Reminds me of this interesting TED talk: http://www.ted.com/talks/kevin_slavin_how_algorithms_shape_our_world.html


Kim Berg Hansen said...

I quite agree.

When it has become a normal phrase that people call it "playing the stock market" just as they would "play poker", then it has nothing to do with raising capital for companies.

And I find it strange when I read "the market reacts to rumors" - I mean, aren't the stock traders supposed to be professional people?

I have often thought two measures might help:

1) When you trade stock you just "place an order" - all transactions are carried out at midnight UTC. You can't immediately re-sell - that will wait until next midnight.

2) You cannot buy and sell through the day and just pay (or get) the difference at the end - you have to pay up when you buy stock.

That way "speculating" would be curtailed, as you would have to raise the money to buy stock first and you couldn't sell it until the next midnight.

The "delay" in carrying out the transactions might also put a damper on the market reacting wildly to rumors.

But it is probably a naïve thought :-)

iudith said...

I am so happy I am not alone with my thoughts about capitalism ...

I often wonder how come that such an infinity of economy professionals were completely enable to anticipate the crisis that the world in undergoing for a good several years by now...
Who did however ?
The socialist thinkers of the 19th century, yes, those blamed ones ...

Regarding the stock exchange, my feeling is that one should be naive indeed to believe that it is a completely innocent game, be it played with or without computers, and its entire purpose is to ensure that the money invested by common people will flow all the time in the same direction, into the pockets of those who already do have too much of it ...

Otherwise no one can explain to me why big economic organisms that are managing thousands of people's pension funds, put aside along many years of working, do invest your hardly earned money in the stock exchange without giving you any chance to decide whether you want to play this game or not.

If everyone were free to decide, then I am sure that most of the rationally thinking people would rather stay far from it.

We are all naive ... let's go back to our PL/SQL Challenge, which fortunately is still under our control :)