An article in the NY TImes today reports ((Regulators Examining Early Sales of Financial Data http://nyti.ms/12hDF3t )) that NY Attorney General Schneiderman is pursuing various information providers, Thomson Reuters in the immediate case, for their practices of selling market sensitive information preferntially. Those paying a premium get information several minutes before its release to the general public. This is more evidence that Wall St (standing in here for the financial sector as a whole) is largely a fixed gambling racket. Not much different than a casino.
Now you might be wondering what the big deal is? A couple of minutes?
Over half of all the trading in markets today is done by high speed traders who can jump on a gap in the market in milliseconds, thousandths of a second. The Chicago Mercantile Exchange even sells a preferred service that guarantees a 2 millisecond advantage in market updates for a mere $20,000 per month. An earlier posting here from March 27, 2012 provides more detail about HFT.
Wall St has from its beginning offered devices for gambling. Options are just a basic gambling tool amongst the ever expanding herd of derivative products. So the tools to make money from knowing something before others know it have been around for a long time. The high speed traders brought more speed to the gambling process and the trading houses themselves are deeply involved in aiding this push for speed. The earlier mention of the service offered by Chicago Mercantile Exchange is built in a microwave based technology that gets the information to the gamblers with that 2 millisecond advantage.
Schneiderman’s concern is that these preferred information services create a situation in which the general public, at this point you would have to say any fool amongst the general public who is playing in these markets as an individual investor, is not on a level, fair playing field. This is certainly a worthy concern. As a general principal transparency and fairness are a good thing.
There is a deeper systemic problem here.
Why do we allow this kind of business to go on at all? How is it helping us to develop a more robust economy, innovate, solve problems, employ people productively? How does all of this high frequency trading contribute to the allocation of capital to its best uses? The average length of time a stock is held is under a minute. ((There is a lot of controversy about the actual length of time. I found none more than 30 seconds so I rounded up)) Clearly this is not investing it is gambling. ((You might find the word gambling a bit rhetorically loud. Find another works just don’t call it investing))
This gambling activity, like all gambling, is a zero sum game. It is adding nothing to the social economic pie, just moving money from the losers to the winners. Given the purchase of insider information plus the illicitly got insider information and the speed war, the losers are more than likely the small investor.
We should move these activities to Las Vegas or other gambling centers. The media should treat the players as gamblers not titans of industry worthy of note. Lets have financial markets where real economic activity that picks real winners and losers occurs, where our capital is allocated to the “best and highest purposes”.