Stealing or Merely Profiting from One's Smarts

willy sutton

The news media have been buzzing with stories of the piles of money that some traders have been amassing using the sophisticated method called high frequency trading (HFT). The NYTimes magazine carried a story last Sunday about a small group that discovered the secret behind the success of HFT and set out to defeat it returning sanity and fairness to the financial world. Concurrently, the author Michael Lewis has just published a book on the same subject. I tried to work through the technology involved but got bogged down.

In a nutshell, these traders relied on minuscule gaps in the time between orders got entered into the computers that automatically match buyers and sellers and the time the orders were executed. My first thought on reading about this was that I was getting ripped off as an investor, relying on the earnings and growth of securities for my livelihood now being retired. But that’s not what is happening. The price I pay whenever I make trades (rarely) may be distorted by this practice, but than only imperceptibly. The traders made their money by the huge volume of orders they execute, talking only a tiny amount each time.

The big loser is all of us, that is the US economy and society as a whole. The money taken out of the market goes to the richest people in America and only makes them richer. If they turned around and reinvested the money or spent it, the economy would be the same size as if the funds filtered through the market and ended up providing jobs and growth. (I am not promoting growth as my readers know, but looking at just this peculiar case.) To some extent, this practice contributes to growing inequality. I do not have the data to determine how much this contributed to inequality relative to outrageous wages and benefits paid to CEOs.

From what I read, HFT may or may not be illegal. Only last week, the US Attorney General said that he was going to see if this practice broke insider trading laws. It is immoral whether currently legal or not. It’s immorality has roots all the way back to the Jewish Bible and probably to other even older cultures. The Torah has a strict prohibition against stealing and to act fairly or justly in matters of commerce. One does not withhold the wages of workers.The Talmud says that every fraudulent dealing, every gain obtained by betting or gambling or by raising the price of breadstuffs through speculation, is theft. But what is HFT if it not gambling or speculation.

From the very little I know about securities law, the point of most regulations is intended to protect some investors from being defrauded by others, using practices that give them an unfair advantage. As I noted, HFT has an insignificant impact on my investments, but it is a fraud perpetuated on the whole of American society. The idea of the stock market, a pinnacle if not the linchpin of capitalism, is to provide funds to build and lubricate industry. Those who apply the oil are entitled to profit by their efforts, but only within limits. The moral argument countering the ancient judgments on such activities is that the financial market benefits the whole society and so, on balance, is legitimate.

The money involved in HFT would otherwise be primary fodder for the economic machine that provides goods and services for everyone. It is only that aspect that offsets the old prohibitions against usury and fraud. In the case of HFT, it is quite clear that the money involved has little or nothing to do with lubricating the economy. It is purely money going in search of money without ever leaving Wall Street. These traders are using a morally justified means for immoral ends.

Willie Sutton, the notorious bank robber (pictured), is said to have answered a question about why he was robbing banks with “Because that’s where the money is.” The parallel to HFT is ominously close. If you asked the HFT traders why they are taking money without doing anything to earn it, the answer would be much the same. Is it stealing? If stealing is taking someone else’s property without any quid pro quo, HFT comes pretty darn close. If there is a difference, it is only that the money they extract is doesn’t seem to have an owner. But this is not correct; the money belongs to all of us because, without this skimming, the funds would more directly add to the common pot.

That’s not the end of the story. A democracy like ours relies on a foundation of trust and fairness to function. Inequality is eroding whatever stock of trust and fairness has accumulated over time. Joe Nocera noted this in his regular NYTimes column writing, “The tactic smells to high heaven, creating an unlevel playing field that costs investors money.”

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