Skip to main content

Wall Street Arms Race Makes for a Shoddy Infrastructure Plan

Felix Salmon finds an interesting fact:
File under “unexpected societal benefits of high frequency trading”: it’s doing wonders for building IT infrastructure. Sebastian Anthony and Jeff Hecht both have good overviews of the three — count ‘em — fiber-optic cables being laid deep below the arctic sea floor, all in a $1.5 billion attempt to shave 60 milliseconds, or less, off the amount of time it takes to get digital information from London to Tokyo.
Ok, fair enough, that's pretty cool. But one wonders if this is really the best way to go about this. To clarify, if a trader hears a bit of public information about a stock, and executes a quick trade or two before it's widely known, then she can make a quick buck. That's been true since the dawn of stock markets. But now that we have computers, people have been writing programs that do this automatically, and buying big servers to run the programs as fast as possible. The obvious result of this is that Wall Street and its equivalents across the world now involved in a massive IT arms race to win at this "high-frequency trading."

The thing about this is that it's zero-sum. There's only so much information out there, and every bit of increased money derived (groan) from increased trading speed on one side necessarily comes out of the profits of the other firms. It's a market failure, in that everyone would rationally prefer if someone could put a hard limit on this practice because it's pointless, but will never stop absent some kind of outside force coming in.

In addition, there are enormous opportunity costs here. Not only is the financial sector sucking up huge gobs of IT equipment, they're sucking up huge gobs of the smartest engineers and programmers, who are doing the social equivalent of trying to beat each other at Tetris. (Not to mention the fact that these programs, which do most of the trading these days, can create near-instantaneous stock market crashes before the traders can even reach the off switches.) If that gets some cables built between continents, that's a nice benefit, but it seems to me the optimal policy would be to clamp down on this market, like with a financial transactions tax, and use the proceeds to just build the cables ourselves.

Comments

Popular posts from this blog

On Refusing to Vote for Bloomberg

Billionaire Mike Bloomberg is attempting to buy the Democratic nomination. With something like $400 million in personal spending so far, that much is clear — and it appears to be working at least somewhat well, as he is nearing second place in national polls. I would guess that he will quickly into diminishing returns, but on the other hand spending on this level is totally unprecedented. At this burn rate he could easily spend more than the entire 2016 presidential election cost both parties before the primary is over.

I published a piece today outlining why I would not vote for Bloomberg against Trump (I would vote for Sanders, Warren, Buttigieg, Klobuchar, or Biden), even though I live in a swing state. This got a lot of "vote blue no matter who" people riled up. They scolded me and demanded that I pre-commit to voting for Bloomberg should he win the nomination. The argument as I understand it is to try to make it as likely as possible that whatever Democrat wins the nomi…

Varanus albigularis albigularis

That is the Latin name for the white-throated monitor lizard, a large reptile native to southern Africa that can grow up to two meters long (see pictures of one at the Oakland Zoo here). In Setswana, it's called a "gopane." I saw one of these in my village yesterday on the way back from my run. Some kids from school found it in the riverbed and tortured it to death, stabbing out its eyes, cutting off its tail, and gutting it which finally killed it. It seemed to be a female as there were a bunch of round white things I can only imagine were eggs amongst the guts. I only arrived after it was already dead, but they described what had happened with much hilarity and re-enactment.

When I asked why they killed it, they said it was because it would eat their chickens and eggs, which is probably true, and because it sucks blood from people, which is completely ridiculous. It might bite a person, but not unless threatened. It seems roughly the same as killing wolves that e…

The Basic Instinct of Socialism

This year I finally decided to stop beating around the bush and start calling myself a democratic socialist. I think the reason for the long hesitation is the very long record of horrifying atrocities carried out by self-described socialist countries. Of course, there is no social system that doesn't have a long, bloody rap sheet, capitalism very much included. But I've never described myself as a capitalist either, and the whole point of socialism is that it's supposed to be better than that.

So of course I cannot be a tankie — Stalin and Mao were evil, terrible butchers, some of the worst people who ever lived. There are two basic lessons to be learned from the failures of Soviet and Chinese Communism, I think. One is that Marxism-Leninism is not a just or workable system. One cannot simply skip over capitalist development, and any socialist project must be democratic and preserve basic liberal freedoms.

The second, perhaps more profound lesson, is that there is no socia…