The Bear's Lair: Technology appears to be wrecking markets

[unhappycamper]

http://www.prudentbear.com/2014/07/the-bears-lair-technology-appears-to-be.html#.U8X8X0DNySo

The Bear's Lair: Technology appears to be wrecking markets
July 14, 2014 posted by Martin Hutchinson

The New York Attorney General's lawsuit against Barclays' dark pool is yet another example of banks' increasing resemblance to asbestos manufacturers. But it also reflects an uncomfortable truth: Whether through "fast trading," through the new area of "crypto-currencies" or through the increasing frailty of bank and corporate security systems, technology is transforming previously well-understood markets into insider-dominated scams. The implications for the future of a free economy are dire indeed.

In a classic free market, buyers armed with a substantial amount of mostly accurate information about a security's prospects compete with sellers armed with similar information, and an open auction decides the price at which the security is traded. Even in the days of "gentlemanly capitalism" this was never quite the way the markets worked in practice. London's jobbers and New York's specialists were often aware of large orders from institutions and were able to manipulate their books ahead of those orders so as to profit from them. This made jobbing and specialist activity nice juicy businesses, blue-collar fountains of profitability in a world where most of the big money had been educated at Eton or Yale.

~snip~

Needless to say, this has not entirely happened in practice. For one thing, the standard rule that all trading had to go through the exchange was relaxed, with new "electronic exchanges" getting their share of the business. Though theoretically bids and offers on the new exchanges were duplicated on traditional exchanges, in practice there were too many ways for insiders to sneak new bids in against trades on a distant exchange.

What's more, "dark pools" emerged, in which trades were matched without ever being shown to third parties. These dated back before true electronic trading, the first having been established as far back as 1971 to allow institutional orders to be matched inside investment bank dealing rooms, with the exchange being informed only afterward. Needless to say, once the principle of all orders being matched in a single arena had been abandoned, the potential for shenanigans was more or less infinite. The eventual denouement was caught by Michael Lewis with his customary elegance in his recent "Flash Boys" earlier this year.

[Demeter]

1. Stupid piratical greed is ruining the markets--technology is just the latest tool

because to steal money in that quantity, you gotta have money to buy the latest burglary gadgets