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Thursday, May 8, 2014

Paul Krugman, "Now That’s Rich": Hedge Funds Do Not "Speculate"

You will recall that in a prior blog entry entitled "David Brooks, "The Moral Power of Curiosity": Can You Beat High-Frequency Traders?" (http://jgcaesarea.blogspot.co.il/2014/04/david-brooks-moral-power-of-curiosity.html) I wrote:

"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-frequency 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.

. . . .

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."

Or stated otherwise, before your stock exchange instructions are executed, the big boys' algorithms are going to decide whether or not it is to their advantage to allow those instructions to be effected.

You want to buy or sell shares? You might have to pay a little more - something akin to a tax - in order to prevent the hedge funds from acting a nanosecond ahead of you.

In his latest New York Times op-ed entitled "Now That’s Rich" (http://www.nytimes.com/2014/05/09/opinion/krugman-now-thats-rich.html?ref=opinion&_r=0), Paul Krugman writes (my emphasis in red):

"Conservatives want you to believe that the big rewards in modern America go to innovators and entrepreneurs, people who build businesses and push technology forward. But that’s not what those hedge fund managers do for a living; they’re in the business of financial speculation."

Liberals versus conservatives? Angels versus devils? Spare me.

On the other hand, I do believe that high-frequency trading is milking small investors and that there is nothing "speculative" about it. High-frequency trading is guaranteed to make billions of dollars at the expense of small investors.

And what is the Obama administration doing about it? Nothing.

1 comment:

  1. Why call the Obama administration on the carpet? It is the Congress who is in a position impose regulations on Wall Street and and curtail these shenanigans. But wasn't that what Dodd-Frank was supposed to do, at least in part? But as Charles Schumer famously stated, the investment banks "own the place," speaking, of course, of the Senate of the United States. So what we have is the financialization of the U.S. economy--indeed of the world economy in large part. And the tremendous sums generated have undermined the availability of funds chasing the "real economy" and have bought, de facto, the political establishment in the process. So it's not this administration--or indeed past or future administrations. It is the indulgence of greed and the pursuit of great wealth by the most expeditious means available, at the expense of the traditional work ethic or even legitimate entrepreneurialism, the broader economy be damned.

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