Market Efficiency in Action

17:18 Tue 20 Apr 2010
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It should be clear that having better access to information than others will make it pretty easy to make money in market trading. And:

While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

That seems like quite the loophole.

Predictably, the major players are exploiting it:

The deep-pocket bank/brokerages actually pay the NYSE and the NASDAQ to “colocate” their behemoth computers ON THE FLOOR OF THE EXCHANGES so they can shave off critical milliseconds after they’ve gotten a first-peak [sic] at incoming trades.

The players on Wall Street are not going to stop doing this kind of thing anytime soon. Their entire existence is predicated on finding stuff like this and profiting from it. Call it arbitrage, cheating, deceit, exploitation, whatever, but it’s what makes them hugely rich, and if one avenue is closed off they’ll find another. Regulation would certainly help, but what’s really needed is more direct (and democratic) connections between people and their money—much of the dodgy financial history of the last thirty years is of Wall Street figuring out how to induce the shepherds of other people’s money (pension fund managers, corporate officers, public officials) to make bad bets, and then cleaning up thereafter. This is pervasive enough to have significantly warped the economy of New York’s cultural events, and it’s not getting any better.

The moral hazard in inducements to gamble with other people’s money should be clear. The technology certainly exists today to make concentrations of “public” wealth (as pension funds and, indeed, corporations ostensibly are) much more responsive to that public, but this would require wiping away a large chunk of the entrenched financial interests (and they have the money to fight that, clearly).

It almost goes without saying that cheating, particularly of the kind outlined by The New York Times and Mike Whitney above, should be forbidden both right now and in any future better market arena, but fixing things like that just isn’t enough. The whole thing needs to be changed utterly (note that it would be possible to change it utterly while retaining capitalism and democracy, incidentally—an anarchist revolution isn’t necessarily required here, although hypothetically a true anarchist revolution would solve these and a lot of other problems).

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