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Wall Street reform seems to be surfacing again as a political issue.  Depending on your frame of reference, you probably have strong opinions on how it fails to achieve any meaningful impact.

If you watch MSNBC, you'd probably say it was written by bankers for bankers.  If you watch Fox News, you'd say it is part of a socialist agenda to nationalize the banks.  If you watch CNBC, you'd call it burdensome regulation.

Regardless of what you watch, they are all pretty much irrelevant.  Jamie Dimon can talk as tough as he wants, but he really has little to do with the investment decisions at JP Morgan Chase & Co.  He's just the flesh and bone they call a CEO.

Wall Street is occupied, but probably not by who you think.  Right now, 80% of the trading volume is done by computers.

We've created a mythology around economics and markets.  If someone mentions Goldman Sachs, the image wealthy puppet masters sitting around a long wooden table comes to mind.  There is this belief that individuals are making singular decisions, which control the fate of all the little people.

I'm sure that wooden table exists, but the power of Goldman Sachs lies in cramped server rooms.  Machines are constantly running algorithms, which model markets in terms of various strategies.

Some algorithms try to predict markets.  Some try to drive markets.  Some try to gauge human responses to markets.  Some try to predict what other computers are trying to predict.

Once the bell sounds, the machines start trading at an unimaginable pace.  In a fraction of a second an individual machine will reach for thousands of data points.  The machines can compare these variables to the entirety of any given markets history.

Some machines are bullish.  Some machines are bearish.  Some machines are just trying to create volatility.  Some machines are vultures.

Machines trade stocks, bonds, commodities and derivatives in primary and secondary markets.  They trade in the US and they trade in China.

It is almost comical, when people discuss 21st century regulation.  They say the problem is that we have a 20th century approach to a 21st century problem.  In truth we are trying to build a system, which might be effective in 2007, but is obsolete in the current system.

In another 5 years phds in mathematics and computer sciences will probably be running 99% of markets.  Every economist and MBA will be entirely irrelevant.  As of today, they pretty much are only good for appearing on TV and writing columns.

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Comment Preferences

  •  simple answer is to ban automated trading (2+ / 0-)
    Recommended by:
    greengemini, Dr Teeth

    Ban one algorithm or computer model and they'll just come up with another, and placing limits on computer speed or trading volume is not tackling the fundamental problem.  Instead, ban the whole process of computerized trading.  Go back to 20th Century trading or even earlier with a person at every step, with the machines functioning only as tools as opposed to making decisions or even giving advice.  There will still be plenty of room for mind games and even brute force market manipulation; it's not as though computers invented asset bubbles or bank runs.

    Never attribute to stupidity what can be adequately explained by malice; stupid people couldn't hurt us so effectively.

    by Visceral on Sun Feb 19, 2012 at 11:49:41 AM PST

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