Reading Andrew Carnegie’s autobiography this morning, I came upon this passage. He argues that owning shares is a monstrous distraction from the more important ways in which we can earn and accumulate wealth – notably by working. His point could be applied more broadly to the insanity of letting the stock market dictate any analysis of the health of the economy. The stock market has become like some aging Vegas hoofer gyrating ever more preposterously to seize our attention, while deserving ever less.
I have never bought or sold a share of stock speculatively in my life, except one small lot of Pennsylvania Railroad shares that I bought early in life for investment and for which I did not pay at the time because bankers offered to carry it for me at a low rate. I have adhered to the rule never to purchase what I did not pay for, and never to sell what I did not own. In those early days, however, I had several interests that were taken over in the course of business. They included some stocks and securities that were quoted on the New York Stock Exchange, and I found that when I opened my paper in the morning I was tempted to look first at the quotations of the stock market. As I had determined to sell all my interests in every outside concern and concentrate my attention upon our manufacturing concerns in Pittsburgh, I further resolved not even to own any stock that was bought and sold upon any stock exchange. With the exception of trifling amounts which came to me in various ways I have adhered strictly to this rule.
Such a course should commend itself to every man in the manufacturing business and to all professional men. For the manufacturing man especially the rule would seem all-important. His mind must be kept calm and free if he is to decide wisely the problems which are continually coming before him. Nothing tells in the long run like good judgment, and no sound judgment can remain with the man whose mind is disturbed by the mercurial changes of the Stock Exchange. It places him under an influence akin to intoxication. What is not, he sees, and what he sees, is not. He cannot judge of relative values or get the true perspective of things. The molehill seems to him a mountain and the mountain a molehill, and he jumps at conclusions which he should arrive at by reason. His mind is upon the stock quotations and not upon the points that require calm thought. Speculation is a parasite feeding upon values, creating none.
A profile of Stephen Colbert in the Chicago Tribune, marking his appointment to succeed David Letterman, noted that when he was at the Second City improvisational comedy troupe in Chicago, he proved a great salesman.
According to Second City’s CEO Andrew Alexander: “He was working in the box office and became the highest-selling T-shirt salesman we had. I suspect he was very focused, and it sort of speaks to his mentality: ‘This is my job and I’m going to do it well.’” Alexander described Colbert as the “quintessential Second City player.” “That axiom of working at the top of your intelligence was a mantra for Stephen,” he said.
The playwright Israel Horowitz, 75 years old, the author of more than 70 plays, winner of numerous prizes, on selling his new movie “My Old Lady”, the first he had ever directed because he wanted “to do something terrifying”:
“At Festival de Cannes, I had 15-minute meetings with potential distributors, one after another. At some point, I felt like a storm door and window salesman. I had to keep reminding myself that if I wanted to have a movie, I needed to go with it.”
I also recommend reading Ian Leslie’s new book Curious, which I just reviewed for the WSJ. It’s a very well put together inquiry into the value of deep, engaged curiosity, and how the easy answers we can all summon up using technology is jeopardizing it.
I have a piece in the NYTimes today about soccer – my own memories of the game vs. the way it’s seen today, its not so distant grim past vs. the game for brainy parents and kids who know tapas.
Also delighted to say I’ve written another thriller, Black Edge, under my pseudonym of James Welsh and published it using the excellent Creatavist. You can read it online or on your phone once you’ve downloaded the free Creatavist app. For now Black Edge is free. I’d like to think that Welsh is to me as Robert Galbraith is to J.K. Rowling, with the only difference being a slight gulf in our sales figures. Nor have I ever written about wizards.
All three of my thrillers are now available here at Creatavist.
Do let me know what you think.
My defense of high-frequency trading in todays NYTimes is here.
Had I another couple of hundred words, I’d have elaborated on the fact that HFT can be viewed as the revenge of the sell side. After years of being condescended to by the buy side, regulated and having their margins squeezed, the sell side has found revenue in HFT. It’s still not an easy way to make a lot of money – it’s highly competitive and takes a lot of investment in infrastructure – but given the beating the sell side has taken in recent years, it’s not surprising they’ve been happy to make money of HFT.
I’d also not that IEX, the platform described by Lewis in Flash Boys is not the first to try to offer a cleaner platform for institutional traders. Pipeline Trading Systems, which existed from 2004-2012, offered an exchange for large investors to trade away from the high-frequency traders. It leased software from Fidelity and declared itself “predator proof.” Unfortunately, Pipeline could not drum up enough natural buyers and sellers on its exchange, and was found by the SEC to be illegally funneling them in from a trading affiliate.
Liquidnet is another platform which has struggled to become more than a marginal player. The biggest traders have been reluctant to antagonize the investment banks by using alternative exchanges. IEX’s solution of delaying trades so they hit the exchanges simultaneously may prove to be the solution to the market inefficiency the block traders have discerned. Time will tell if they’re really onto something.
And finally, investors I’ve spoken too seem very mixed on this. Some say, if you’re sweating fractions lost to HFT, you’re not much of an investor. Others that’s it’s a real and considerable cost on their trading. Others say that the real rigging of the system is in favor of short-term traders, who are rewarded with low commissions for trading a lot, and long-term traders who pay higher commissions because they trade less often. Yet for the health of the economy, who’d you rather have in business?
My friend Mungo Wilson at the Said Business School pointed me to this wonderful piece by Brad Barber and Terrance Odean from the Journal of Finance, April 2000: Trading is Hazardous to your Wealth. If you find HFT such a nuisance, perhaps easiest to avoid it altogether as well all the other frictional costs of trading, by trading less.
A great book on all kinds of levels: a takedown of high-frequency trading; a Dirty Dozen yarn of outsiders taking on the Wall Street establishment; a righteous tirade against the excessive complexity and insanity of the financial system; a cry for finance to stop sucking money and smart young people out of the rest of the economy. (There is even a wonderful echo from Lewis’ previous book, The New New Thing. On one side of the HFT industry, building a fiber-optic line from New York to Chicago to carry financial data, is Jim Barksdale, the former CEO of Netscape. On the other, backing an HFT-proofed exchange, IEX, is Jim Clark, Netscape’s co-founder. These guys never go away. They are always there applying technology in new, disruptive ways.)
My only caveat is that Lewis may be over-stating the villainy and importance of HFT. Long-term investors don’t worry about a few fractions of a cent when they buy or sell a stock. And even short-term investors may not either. Then there’s the ever rising cost of building the infrastructure for HFT, paying to see order flow etc. This is not a cheap business to get into and sustaining healthy margins is a sweat.
(I note in the review that there are reasonable arguments that the HFTs provide liquidity and greater price efficiency. You don’t have to agree with them, but here’s one, a paper published by the European Central Bank last fall.)
More convincing to me was Lewis’ point that all the frenzied HFT activity renders the exchanges unstable, and has already caused flash crashes and other market spasms. But again, how much of this is due to the simple onward march of technology vs. HFT? Standing athwart progress and shouting “stop, it’s all getting too complicated for the human mind” doesn’t seem the right answer.
Regulators are already all over HFT. I wonder if they’ll find any evidence of actual criminality. Even Lewis concedes the HFTs’ actions are legal. Not pleasant, but legal, the result of a regulatory loophole.
Flash Boys provides yet another cudgel for those who loathe Wall Street and blame it for all the economy’s ills. HFT will likely now be squeezed out of existence. I never thought I’d say this, but I hope this marks a temporary end to this recent era of Wall Street bashing. What’s transforming economic life in America isn’t Wall Street anymore. It’s the vaunted technology companies of Silicon Valley. They are rightly admired for their innovation and daring. But they’re also draining the economy of jobs much faster than they create them. And their revenues dwarf any made on Wall Street. They represent the toughest paradox in the US economy today. Taking them on will make HFT bashing look as one-sided as seal-clubbing.
Late last year, I finally became an American citizen. It was long overdue. At one point in the process, an immigration official had to test my spoken and written English, though it was clear both were adequate. “What do we pay the United States government?” he asked me. “Taxes,” I replied. “Correct. Now please write this sentence. ‘We pay taxes'”. And with that, I passed.
When I started the process, it felt merely bureaucratic. But by the end, as I raised my hand in a New Haven court house to swear the oath of citizenship, it felt like far more than paperwork. I describe it in the Wall Street Journal today, in a piece Why I Chose the Red, White and Blue.
The other night, my neighbor and most excellent friend Visko Hatfield, appeared at my door with a box. In it was a flag flown over the Capitol to mark the occasion. Must now find a Marine to teach me to fold it properly.