If you haven’t already picked up Michael Lewis’s “Flash Boys,” please do so: “Now in “Flash Boys,” Lewis reveals how a new crop of investment firms has conspired with the big banks and the stock exchanges to use high-speed computers and complex software algorithms to skim pennies from the real investors who provide equity capital to the economy.” [WaPo] Get that — about REAL investors?
Back in the not so good old days, the function of investment banking was to assist the distribution of capital from areas of excess (savings) to areas of need (loans) to commercial and industrial enterprises.
If we didn’t learn much else from the Mortgage Meltdown in the Wall Street Casinos of 2007-08, or from the Flash Crash of 2010 — we were given a rather stark reminder that the business of Wall Street is now Wall Street.
Note that in Flash Boys, the object of the game is to game the system and make money by skimming from REAL investors. Remember those “job creators?” Real investors buy stock, buy bonds, and otherwise provide the capital upon which our economy rests. Financialists couldn’t care much less if the American Widget corporation makes a dime in profits from the sales of its products — but they do care deeply about the price of AW Inc’s stock.
In the interest of not giving away the story line, I’ll stop here and let you make up your own mind about the depths to which Wall Street has sunk into its own mire of manipulations. Before listening to the chatterati on what passes for business news on cable — here’s some recommended background:
James B. Stewart, “Flash Boys, Gone in 0.001 Seconds,” New York Times, April 11, 2014.
Ted Kaufman, Delaware Online, News Journal, “Flash Boys should and will make your blood boil,” April 12, 2014.
Raju Kane, “Cracking the Money Code,” DNA, April 13, 2014.
Will Deener, “Telling the Ugly Truth,” Dallas Morning News, April 6, 2014.
If you’ve checked out these reviews, and are still inclined to accept the chatterati’s rationalizations for the “front-running” — read skimming — then the best advice might be to have the TV turned off, and consider that the explications tend to run toward vapidity like, “this adds liquidity to the markets….”
Any time you hear the word “liquidity” (a) remember that it just means cash/money, and (b) that it’s the standard line tossed out to the uninformed in the hopes that they will stay that way.
The second way to judge the pontification from the pundits is to ask yourself — Do I understand the point being made? If the answer to that question is “no,” then consider why — most likely because you were inundated in a tsunami of Wall Street jargon, and then told if you didn’t understand the mash-up you are obviously NOT a sophisticated investor and should switch to the Cartoon Network as a venue more suitable to your intelligence.
Another common Wall Street retort is that Lewis’s books are “popular,” as if explaining complicated processes in readable vocabulary isn’t “academic,” and therefore of less merit. This line of petulance is most often associated with faculty commons and the interminable squabbling of the very academics who deplore ‘popular’ writing. Merely because a person doesn’t douse you with algorithms doesn’t mean you aren’t getting the information.
And, when Senator Sludgepump or Representative Quagmire tell you that the Job Creators need Deregulation to enhance the liquidity of the markets and facilitate investment — remember that the deregulation and the gaming of the system by the financial sector are the elements skimming profits from REAL investors.