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Thursday, April 10, 2014

David Brooks, "The Moral Power of Curiosity": Can You Beat High-Frequency Traders?

I have yet to read Michael Lewis's bestseller "Flash Boys" - I am mired in a history of the Knights Templars - but I will certainly get to it. High-frequency trading? A friend recently related the following story to me:

"I had placed an order to buy shares of XXXX, and my order had been the bid for quite some time. I suddenly decided that the market was going lower and that I could buy the shares at a better price. Using my laptop, I attempted to cancel my bid, but within a second my bid was hit, and I had bought the shares."

Coincidence? No. Before the cancellation of my friend's order could be effected, this information had been routed to high-speed traders, and they had sold him the shares. Or stated otherwise, their computers had been "informed" that his cancellation was electronically en route, and they beat his cancellation by a nanosecond. Corrupt? Absolutely.

In his latest New York Times op-ed entitled "The Moral Power of Curiosity" (http://www.nytimes.com/2014/04/11/opinion/brooks-the-moral-power-of-curiosity.html?partner=rss&emc=rss), David Brooks examines the market-rigging described in Lewis's book. Brooks writes:

"On Wall Street, as in some other areas of the modern economy that I could mention, this attitude leads to a culture of knowingness. People learn to bluff their way through, day to day. Executives don’t really understand the complex things going on in their own companies. Traders don’t understand how their technological tools really work. Programmers may know their little piece of code, but they don’t have a broader knowledge of what their work is being used for.

These people are content to possess information, but they don’t seek knowledge. Information is what you need to make money short term. Knowledge is the deeper understanding of how things work. It’s obtained only by long and inefficient study. It’s gained by those who set aside the profit motive and instead possess an intrinsic desire just to know."

Information? Knowledge? An "intrinsic desire to know"? Do I care?

The game is indeed rigged, and, with the cancellation of the Uptick Rule (see: http://jgcaesarea.blogspot.co.il/2013/08/maureen-dowd-summers-of-our-discontent.html), small investors are being milked every day by large financial institutions.

Can you still beat the system? I think so. But only with a strong heart, a long-term outlook and sufficient examination of a corporation's innovation, management and value proposition.

1 comment:

  1. I agree that the only way to "beat the system" is as you say. Wall Street is a microcosm for the world's competitive (and somewhat collaborative) system. "Milking" the small guy will come back to bite the big guy who thought himself impervious.

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