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Everybody knows the dice are loaded, everybody rolls with their fingers crossed.
Everybody knows that the war is over, everybody knows the good guys lost.
Everybody knows the fight is fixed;the poor stay poor, the rich get rich.
That’s how it goes…And everybody knows
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Last week Bill Maher took the Occupy Wall Street movement to task for not getting more directly involved in the political process. Basically, he dismissed the plans that OWS has prepared for this summer, suggesting that they’re ineffective, and a little ‘too last year’ to be of any consequence. In a way, he was echoing the old trope about the movement, that they lack ‘focus,’ and don’t have any demands of substance. While it’s my experience that Maher is pretty well-informed, I felt that he was a little unnecessarily glib in this instance. The Occupy Movement can be forgiven if it’s still marshaling its forces, as they may be fighting one of the most important battles in America’s history. Wall Street is like the Hydra, a mythical beast with many heads; and like the Hydra, every time you cut off one of its heads, two more grow back.
Information on the nuts and bolts of Wall Street activities isn’t widespread; the world of finance is never-ending staccato bursts of numbers that can only be interpreted through complex formulas that layman aren’t privy to wrapped in a lexicon so dense it could be a separate language. Mainstream media rarely gives it the attention it merits, because financial news seldom lends itself to the quick-punch delivery that their medium requires. Even the cable stations that specialize in ‘business news’ don’t dig much past the surface. Players in that world recognize the power of information, and they spend it (legally and illegally) like currency.
Like the songs says, “Everybody knows the fight is fixed,” but that doesn’t necessarily mean that everybody knows how ‘the dice are loaded,’ and very few of us know how many ways the fix is in. For instance there’s a little tidbit I ran across in a weekly column called News of the Weird, which describes itself as being, “The gold standard in reporting the bizarre and the ridiculous.” I’ve followed ‘NOTW’ since its inception, and it’s always good for some laughs, as well as items that make you shake your head at how crazy this world can be. Very often, it will include an item that just give you the chills:
Only about 16 percent of stock market transactions consist of what most people think of as buying or selling of company or mutual fund shares (“real” investors, interacting with actual brokers). The rest, according to analysis by Morgan Stanley’s Quantitative and Derivative Strategies group and covering October to December 2011, were performed by computers acting automatically, at staggeringly high frequency, using software algorithms, buying or selling mindlessly, based on what trading firms needed to fill out their portfolios’ profitably on a second-by-second basis. [Financial Times, 4-24-2012]
Only 16% of all stock market transactions are being made by sentient beings. A staggering 84% of all trading is done by a process known as ‘High Frequency Trading. Three years ago, it was a new innovation that had already raised some concerns about unfair or unethical practices. From the New York Times:
Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.
And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.
Goldman Sachs?! An unfair advantage?!
Unthinkable. Of course at the time Goldman Sachs was registering nearly twice the activity of its closest competitor.
Here, The Times breaks down how high frequency trading works:
…as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.
High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.
Here in 2012, it’s no longer just Goldman Sachs; it’s the way most of the big boys operate. The vast majority of the industry is operated from the top of the mountain, where the air is too thin and rare for mere mortals.
You would think that kind of a leg up on the competition would satisfy even the greediest of Wall Street fat cats, but you would, of course, be wrong. Because at the volume and speed they’re trading, they’re making money whether their properties rise or fall:
High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.
It’s sort of like the man who fishes by throwing dynamite in the lake; he knows he’s going to fill his nets. High-frequency trading fills the nets, but it creates myriad problems for anyone else with a taste for fish.
There are ‘Black Swan Events,’ momentary price crashes, caused by the properties of the systems the traders are using. They indirectly manipulate the fates of companies and billions of dollars in revenue, just in the way their programs operate. There’s no real way to predict how much the U.S. economy can be altered by these ‘glitches,’ but there’s little comfort in this nugget of information:
They also say that the ten stocks most susceptible to flash crashes and rises are international banks. This, they say, “hints at a hidden relationship between these ultrafast ‘fractures’ and the slow ‘breaking’ of the global financial system post-2006.”
Ha-ha ! Whoops! I’m sure if they just clear out their cookies and re-boot…
But that’s not the only drawback, there are also Dark Pools, whole segments of trade closed off to traders left on the outside by the technology. Here’s a link to a site that provides more analysis of the effects of HFT, in case you’d like to delve further.
Me? I’ve seen enough. I will not pretend to any great knowledge of economics, and I understand that there will be ‘experts’ who will mock my rudimentary understanding of the things I’ve discussed here. I tell you now: I don’t get it... And if things were going well, I wouldn’t give it a second thought, probably. We don’t all need to know how a jet engine works to get on a plane. But when I see smoke coming out of the turbine, I know we’re in trouble.
Everybody knows.
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