Last week I read Michael Lewis's Flash Boys, you know, the book about High Frequency Trading. Like a lot of people I was struck by the way the narrative is all Good Guys versus Bad Guys and Truth, Justice, and the American Way.
I'm no expert on the stock market, but I do know something about Good and Bad -- and even something about Truth and Justice. So let me make a few quick observations.
In case you haven't read it, the narrative goes basically like this. At some point some people realized they could have an advantage in trading if their connections were faster; part of that advantage included "seeing" other people's intended trades before those trades got made; this advantage was exploited in a variety of ways, some of which allowed people with faster connections to wipe the floor with everyone else, and some of which seemed to pit the interests of firms against those of the clients they represented. Some good guys called "shenanigans" on grounds that the system was "unfair," "rigged" against those with bad bandwidth.
1. Fairness? WTF?
I was surprised to see the concept of fairness invoked so often to explain what was wrong with using speed to beat out others. Because fairness is often thought, in economics, to be kind of a mirage concept. Among other things, it's vague and ambiguous, we're told.
The efficiency concepts used in economic reasoning don't appeal to fairness, they appeal maximizing or Pareto optimality -- how things are overall. Efficiency doesn't doesn't talk about how the costs and benefits are arranged, only about how they stack up overall. Even the liberty concepts used in economic reasoning -- the freedom for consenting adults to make exchanges as they see fit -- don't appeal to fairness either.
To see how low in our cultural estimation the F-word is, look at our current discourse about inequality. Even people who are upset about inequality can't bring themselves to talk about fairness. They just talk about "consequences."
Try to use fairness to talk about social justice and Serious People will shut you down. The economic perspective tells you there's no such thing. But now suddenly markets can be unfair?
2. Truth, liberty and efficiency are also vague and ambiguous
A charitable interpretation of the "unfair!" complaints would be something like: "this market isn't working to do what markets are supposed to do."
That seems to me possibly a fruitful and reasonable thing to say about this situation. But if it is, one thing this shows is that despite the assertions we sometimes hear to the contrary, the hows and the whys of markets are not simple or straightforward.
For example, for an exchange to be legitimate, everyone needs a certain amount of true information about what is being exchanged and how it works. But how much information? When is it a duty to disclose and when is it buyer beware? Do banks have to reveal what, exactly, they do with client money at all stages? Can they have no proprietary processes?
Given that opponents of GMO labeling tell us revealing the truth is a grave misstep and contrary to capitalist values, clearly what is required for transparency and truth-telling is non-obvious. You might even say these are vague and ambiguous concepts.
When you get into the possibility of beneficial effects of markets things are even murkier. As Lewis describes, the benefits of HFT are sometimes described in terms of increased "liquidity." Naturally, there's disagreement about what is good about that, when it's good, how much is the right amount, etc. The difficulty of measuring effects might even lead you to say that "efficiency" is a vague or ambiguous concept.
In any case, if the issues are transparency, overall benefits, functioning markets, why use the language of fairness and injustice?
Interestingly, even this article defending HFT says that "flash trading" -- i. e., "trading firms paying money to have their computers and servers right next to those of the exchange" -- is "repugnant."
Repugnant why? If moving your servers makes people better off and there's no rule against it, what's the economic principle under which they're supposed to refrain?
3. H. L. Mencken, the language of honor, and the true goal of lording it over other people
Encountering the moralizing and indignation-oriented language in the HFT debate reminded me immediately of H. L. Mencken's discussion of the concept of "honor" among men. As I described before, in his Defense of Women, Mencken regards with contempt the way men talk of women having "no sense of honor," when they themselves appeal to honor and fair play only in contexts like gambling and games, when nothing meaningful is really at stake. When the chips are down, he says, everyone fights tooth and nail, and honor and fair play go out out the window.
This was, of course, relevant to a Defense of Women in 1918 because women were dependent on marriage for survival. Unlike men, of course they had to fight tooth and nail in the love and romance arena.
The point here, though, is that Mencken thinks concepts like honor and fair play are especially likely to be used in contexts like gambling and games. It is, of course, not news that the stock market can seem more like gambling and games than it does like like engaging in meaningful exchanges of goods.
And here I have to say, from the point of view of a total outsider, the glimpse into the culture of Wall Street of Lewis's book does nothing to dispel such ideas. The way it comes off, the prestige of a bank is everything, more important than even whether money is being made. It's almost like the money is just an imperfect tracker for what really matters to people, and what really matters to people is some vague sense that they can lord it over someone else.
If lording it over someone else is what they're in it for, it's no mystery about the language of injustice. The "advantage" to the speedy would then be analogous to the advantage of a cheater in sports. And we all know what to say about that: it's repugnant.
If you really want to hear indignation and the language of fairness and injustice, forget poverty and war and people dying pointlessly. Because sports is where the REAL action is.
So: as I see it, if the debate over HFT is laden with Big Concept Value words, that's because economic reasoning is shot through with Big Concept Values, even though people don't like to say so. The issue isn't HFT, but rather the nature and justification of capitalism itself.
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