Ultra-Fast Destruction of Real Economy Firms

Around 80% of publicly quoted shareholdings are now controlled by financial institutions, rather than the end shareholders. The traders acting for these institutions have quite different objectives from those of the ultimate shareholders. Members of a company pension scheme, for example, are likely to have a personal desire for the survival and longevity of their employing company. However, unbeknown to them, the investment decisions made on their behalf for their pension fund, are made on the basis of short term gains, which may well be best served by the acquisition and break up of that same company and the redundancy of most of its employees. But it is worse than that.

The system has long been set up which avoids consideration of the social consequences of investment decisions. Computerisation has focused traders’ attention on the simple matter of growing the fund for which they are responsible as fast as possible, so they progress up the fund management league table. Most of these investment decisions are fully automated. This has been the case for years. More recently these automated systems have progressed to a new level of sophistication and at much reduced cost. Reuter reported a few months back that “tumbling technology costs have opened potentially lucrative ultra-fast trading strategies to tiny startup players.” [http://www.reuters.com/article/idUSTRE6363VE20100407]. It is reckoned that ultra-fast trading now accounts for around 80% of the Wall Street trades and London is catching up fast.

These ‘ultra-fast’, or ‘high frequency’ systems, using fast hardware to beat other investors to profitable trades, are now capable of placing trades on the basis of news reports, or rumour circulating in this financial underworld. For the flavour of these systems have a look at the Automated Trader website, subtitled “The Gateway to Automated and Algorithmic Trading” [http://www.automatedtrader.net/algoworld.xhtm]. Readily available, high-tec, low cost, high frequency trading software is encouraging new entrants into these markets. Reuters quote one broker CEO as saying “venture capitalists are giving money to guys coming straight out of MIT (Massachusetts Institute of Technology) and setting up desks.” For venture capitalists read hedge funds, private equity funds and all the usual suspects. A letter in today’s Financial Times (6.10.10) points out that though you have to pass a test to drive a Trabant, driving high frequency ‘trading algorithms’ does not require a stock exchange licence.

These are the ‘shareholders’ that the Business Roundtable in the United States, the Confederation of British Industry, the London based Institute of Directors and many others, are batting for. The CBI, according to its Director of Company Affairs, takes the view that ‘directors’ primary responsibility is to maximise shareholder wealth’, as does the Business Roundtable, while the IoD preaches ‘shareholder primacy’ to its members. Such organisations, and there are many of them worldwide, actively promote Friedman’s famous dictum that directors should accept no social responsibility other than to make as much money as possible for their shareholders.

So, it’s hardly surprising that real Anglo-Saxon industry is being broken so fast. It surely won’t be long before one of the ultra-fast, newly graduated ‘rogue traders’, MIT or otherwise, single handedly destroys GE, Rolls Royce or some other “blue chip” producer. Maybe then, the CBI, Roundtable and IoD might reconsider their position and some regulation might be thought a good thing.

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