Monday, May 24, 2010

Trading Places

“The Tradeworx computers get price quotes from the exchanges, decide how to trade, complete a risk analysis and generate a buy or sell order—in 20 microseconds,” reported the Times in a piece about the new phenomenon of high speed trading (“Speedy New Traders Make Waves Far From Wall St,” NYT, May 16, 2010). Whether you follow Warren Buffett’s notion of the equity based trade or the Soros model based on reflexivity, everything is a little faster these days. It’s like running on a waxed kitchen floor. At some point you’re going to slip and fall. That’s what happened to the market on May 6, when it fell l000 points in a matter of minutes. Of course, everything’s relative in a multiverse where CERN’s Large Hadron Collider recreates Higgs Bosons and other particles that sprang to life a millionth of a second after the Big Bang. The whole structure of the financial world has changed. Blue-blood families, who might have held stocks in companies like Union Carbide, Exxon or IBM for generations, now pride themselves on holding portfolios for over five seconds. Whether you study a company’s spread sheet and involve yourself in a firm’s business, like Buffett did when he purchased his preferred position in Goldman Sachs, or you deal with currency fluctuations and market forces as Soros has done, in the brave new world of finance your relationship with management will be considered long term if you hold a stock for over thirty seconds. But as seasoned high-speed traders learn in their relatively short half-lives, much can happen in a short period of time, a premise that comes to high finance from pornography, where the short loop in which the beginning, middle and end of a sex act are condensed into a single action long ago replaced the more leisurely story lines of Debbie Does Dallas, Behind the Green Door and Deep Throat. Yes, the old Newtonian trading, where investors purchased stock and actually received certificates that they put in their vaults, is a vestige of an age when people read books like Lady Chatterley’s Lover, Tropic of Cancer and Ulysses.

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