For the past few years, high-frequency trading, in which firms employ massive computing power to make trades within milliseconds, has been a growing profit maker on Wall Street. Computer algorithms discover miniscule pricing anomalies and then hurtle to make those trades instants before humans or slightly slower computers can catch up. High frequency traders shuttle in and out of assets incredibly fast; a day would be an unimaginably long time to hold a share. Right now, high frequency trades account for 73% of all US equity transactions, and as more firms try and get in that number is likely to go up.
There are dangers and potential for criminality in high-speed trading. Although it is not yet proved, many assume that it was involved in the incredibly rapid and otherwise inexplicable “flash crash” of May 6. That certain firms can profit by getting trading data just a tiny bit faster than their competitors certainly seems unfair, but my biggest problem with high speed trading is its fundamental uselessness for anything other than creating trading profits.
Synecdoche is my new favorite literary trope. It means using a part of something to represent the whole, and perhaps the most interesting thing about high speed trading is its utterly self-referential quality, much like the rest of the financial sector. Finance, after all, has a profound societal function, connecting savers and investors so that capital is most efficiently shifted to where it could be most useful. Venture capitalists funding Silicon Valley startups and British bond holders funding the US transcontinental railroad did more than just make money for themselves, they allowed real investment that made land and labour more productive, and thus made the entire society richer.
High-frequency trading does nothing of the sort. Flitting out of assets a millisecond faster than your competitors might make you big money, but it in no way funnels capital to where it is most needed. And that is the problem with much of the financial industry. Arbitrage, mergers and acquisition do nothing to create productive investment. Indeed, for the past generation, because of stock buybacks and increased dividend payments to shore up share prices,…