Money for Nothing

The other day we alluded to the fact that we have little interest in the world of high finance. We should amend that: We have an interest in everything. What we have for high-finance falls more neatly under the heading of contempt. We were reminded of this today when we read an article dealing with the phenomenon of "high-frequency trading" ("Arrest Over Software Illuminates Wall St. Secret").

Now, be advised, the Solipsist is no Master of the Universe, so he could be woefully misinformed about everything he's ranting about here. Bear with us.

Our basic understanding is that the stock market works something like this: A company sells shares of itself to the public. The price of these shares moves up or down based on how well or how poorly investors think the company is doing or will do. So, let's say shares of Solipsist, Inc. (SPSI), cost $20.00. If The Wall Street Journal announces that our humble blog is about to be bought out by, say, CNN, the price will probably shoot up--maybe to $25.00 a share. If, on the other hand, SPSI was bought out by some shaky or shady outfit like Enron or General Motors, our stock would move in a downward direction. This much we can understand.

Things get strange when stock movements become self-perpetuating--basically all the time. In this phenomenon, one person decides that a stock is extremely desirable (or undesirable) and buys (sells) many shares. Someone else sees this person buying shares and decides he, too, must get in on the action. But because the first person has bought so many shares, the price of remaining shares has gone up. Which, of course, makes the first person happy because he has just made a (paper) profit, but the second person is in a slightly less enviable position--though not as unenviable as the third, fourth, fifth--and so on--investors, who will pay ever greater sums for this ever-more desirable stock. But the whole movement started with one person who, for all we know, knows nothing about the stock's inherent value. This is what is known as a "bubble."

Now, "high-frequency trading" really sleazes things up. As far as we understand, HFT works like this: A bunch of computer geeks devise algorithms to enable computers (often independent of people) to spot very small movements in stock prices. These computers then execute very high-volume trades in very rapid succession--far faster than any human trader could. To illustrate, a program may execute a purchase of 10,000 shares of Widgets, Inc., at a dollar each and then, within fractions of seconds, when the price goes up to $1.01, sell those shares and make a quick $100 profit. Not much in absolute terms, but when you consider that these algorithms allow firms to execute hundreds or thousands of such trades at a time, you realize we're talking about a lot of money.

Traders argue that this improves efficiency, but it sounds kind of sketchy. After all, wouldn't the very act of buying so many shares so quickly cause the price to rise and thereby virtually guarantee a profit for the algorithm-user, irrespective of anything like the actual value of the stock in question? And, if other traders pick up on the apparent "volatility" of the stock, might they not flee the company in panic--even though the volatility is completely artificial?

The Solipsist is no communist (although socialism looks better and better every day). But isn't this kind of pointless, non-productive capitalism-for-the-sake-of-capitalism exactly the kind of thing Marx was talking about when he called for the workers of the world to unite? Can anyone defend this kind of pointless greed?