Wednesday, May 12, 2010

Las Vegas is passe; bet on the Exchanges

Last Thursday, something peculiar happened in the US stock markets. The markets were jittery due to the unfolding crisis in Greece. The market was down by some 1.5% or so , but nothing extraordinary. Then at 2.32 PM something happened. It started falling steeply. By 2.42 PM it had fallen by 3.9%. By 2.47 the bottom had fallen out; in 5 minutes the index fell another 5.5%.By 2.49 it went back up by 5%.

Nobody knows what happened. Multiple theories abound. Hacking or terrorist activity have been ruled out. The rumour that a trader keyed in a trade in P&G shares for billions instead of millions by mistake has also not been borne out. The SEC is still investigating.

What triggered the fall is not clear, but what happened next is certain. A lot of trading is computer driven these days. When something happens there are automatic triggers to buy or sell. When the first fall happened, it triggered an avalanche of computer generated trades. Hence the free fall. These days competitive advantage amongst traders is counted in speed of response time. Goldman Sachs famously claims that it has a huge competitive advantage because its computers are a few nanoseconds faster than anybody else.

What has the world come too when computers fight against other computers in speculation and cause spectacular gains and falls. None of this is real They serve zero economic value. The oft repeated argument that speculation ensures liquidity in the market has been stretched to absurd levels when computers are fighting other computers for nanasecond advantages.

This is the United States of America. Where gambling is banned except in the state of Nevada and in some small pockets such as Atlantic City and Indian reservations. Online gambling is completely banned; the US spends a fair amount of money trying to shut down internet gambling. And then they allow stock exchanges to go completely berserk. In pure shotgun gambling that would put Las Vegas to complete shame. The sin city is small change ; its entire annual revenue is probably bet in a day on the exchanges.

Here’s an idea to solve the US deficit. Impose a gambling tax on the exchanges. Because they are nothing but gambling dens. Ignore their bleating of how they serve a useful economic function (99.9% of them don’t). Bite your lip at the huge fall in the Index that will happen immediately. Laugh at threats that they would take their business to other countries.

Some decades ago America cleaned up the gambling in Las Vegas and sent the mob that was controlling it packing. I think attention must now be turned on the Exchanges.