What happens when you buy shares on the stock exchange? Probably not what you expect. The moment you click “buy” on your broker’s website, you think that the computer sends your order to the exchange with the cheapest seller, thus finding you the best available deal. You think that the broker has your best interest at heart. They are, after all, working for you. You are paying them a commission. And you are living in America, the land of “everyday low prices.”
But you have been misled.
You are not the only one competing for the broker’s attention. Every exchange wants their business. There are multiple exchanges — the New York Stock Exchange, Nasdaq, BATS, Direct Edge, and a handful of others — and almost every stock trades on all of them. So your broker can find a seller for the shares you want to buy on any one of them. Some of them charge the broker a fee for using their exchange, and some of them, like BATS, actually pay the broker. If you were the broker, where would you want to do business?
The only problem is, the exchange that the broker wants to use may not have enough shares to fill your entire order. So you may want to buy 1,000 shares at $30 apiece, and the New York Stock Exchange may have a seller who’s offering 1,000 shares at $30 apiece, but instead your broker goes to BATS, where they get a kickback. This is a problem because BATS only has 100 shares to sell. By the time your broker goes to another exchange to fill the rest of the order, the other traders in the market have seen your first transaction, and they’re guessing that you’re coming back for more, and so they buy shares on the other exchanges before you get there, and they sell them to you at a higher price. These guys are called “high-frequency traders,” and they’ve rigged the market so they see what happens a fraction of a second before the rest of us. Maybe you got 100 shares for $30, but the next 100 cost you $31, and the 100 after that cost $32. It’s as if you walked into Wal-Mart, saw hot dogs for $3 apiece, and by the time you got to the register, they changed the price to $4, and it was too late for you to put them back.
This is the story of Flash Boys, the latest blockbuster book by Michael Lewis, the writer who brought you The Blind Side and Moneyball. Like his previous books, this story is true, and Lewis has the interviews to prove it.
This stuff is no better than the traders who manipulated the market with inside information and collusion tactics in the 1920s. Back then, that kind of behavior wasn’t illegal, just like high-frequency trading isn’t illegal today. Back then, it took a Congressional investigation to show the public how the wealthiest among them were defrauding the masses, lying about the investments they were selling and reaping a handsome bonus before it all came crashing down. Today, all it takes is an intrepid reporter with an Internet connection, but the revelation is the same: The market is rigged, and the public has been lied to about the investments they’re making.
Flash Boys is part of a larger story. It is only one of many ways that the richest among us have been siphoning an increasing share of wealth from the masses since at least the early 1980s, if not earlier. It is confirmation of the argument I made in my book Letter to the One Percent, that the “financialization” of America has not been beneficial to most of us, that on the contrary it has taken advantage of our ignorance and our weakness, and that the economic troubles that plague our land — everything from slow growth to low savings to frequent crises — will not stop until the balance of power shifts away from the plutocrats who prey on average Americans like you.
January 14, 2011. That’s when Stanford economist John B. Taylor made the following arguments:
- Higher government purchases, as a percent of GDP, are associated with higher rates of unemployment. Therefore: “There is no indication that lower government purchases increase unemployment; in fact we see the opposite…”
- Higher levels of investment, as a percent of GDP, are associated with lower rates of unemployment. Therefore: “Encouraging the creation and expansion of businesses should be the focus on government efforts to reduce unemployment. The recent compromise agreement to prevent the increase in tax rates on small businesses and the move to lighten up on the anti-business sentiment coming out of Washington are two steps in the right direction.”
And with that, I lost all respect for Taylor. Continue reading “The Day the Economics Profession Lost Its Last Shred of Dignity”
Everyday, the hedgehog walks through the forest. And everyday, the fox comes up with a new way to attack him. (Foxes are clever that way.) And everyday, the hedgehog rolls into his protective shell, and the fox fails. “The fox knows many little things,” concluded the ancient Greek poet Archilochus, “but the hedgehog knows one big thing.”
In this example, which philosopher Isaiah Berlin made famous in a 1953 essay, the hedgehog is superior, at least in a survival-of-the-fittest sense. But according to social scientist Philip E. Tetlock, in the human world, it’s the reverse.
Berlin used the two animals to classify great thinkers. Plato, Dante, and Hegel were hedgehogs. They each centered their philosophies around one big idea. Aristotle, Shakespeare, and Goethe were foxes. They saw the world in a more complex light — or, alternatively, they plucked insights from many different fields.
Tetlock used Berlin’s classification system to test today’s “experts” in his 2006 book Expert Political Judgment. He found that, while most experts are poor predictors, the “foxes” were correct more often. If you’re trying to predict the future, it turns out, you’re better off knowing many little things, rather than one big thing.
Now for the apology. Continue reading “The Ethical Investor: December 2010”