Flash Boys and the Wolf of Wall Street
Michael Lewis’ latest book, Flash Boys, chronicles the “rigged” market of high frequency trading (“HFT”). Lewis turns over rock after rock to get a look at this data-driven, complex, and highly lucrative world.
High frequency traders use computers to rapidly trade securities and other stocks (in microsecond timescales), usually aiming to capture small fractions of profit on each trade.
Lewis focuses on HFT traders that essentially rigged the market. By having information on trades microseconds before they were executed, HFT could employ various different strategies to generate billions of dollars a year. As Jon Stewart points out, if these were people executing trades it would be illegal; because it is computers, it is not.
HFT is part of a larger “financialization” of the capital markets — a term for the growing scale and profitability of the financial sector, especially relative to the “real” economy. The purpose of financial intermediaries is to get money from investors into investment opportunities. And it has been good to be an intermediary!
Thomas Philippon, an economist at NYU, says that the percent income share of GDP of the finance class has historically been 1.3-2.3%. Recently, however, that rate has been trending upwards: to 5% of GDP in the 80’s, and to almost 10% of GDP in 2010!
In Philippon’s own words:
“…the finance industry of 1900 was just as able as the finance industry of 2010 to produce loans, bonds and stocks, and it was certainly doing it more cheaply. This is counter-intuitive, to say the least. How is it possible for today’s finance industry not to be significantly more efficient than the finance industry of John Pierpont Morgan?”
Wall Street has driven up complexity, driven up their share of the fee, and arguable for little to no social good.
At profits like these, the fact that Hollywood is making movies about scammers such as the Wolf of Wall Street should really come as no surprise.
Enter stage left- crowdfinancing.
Crowdfinancing is the ability for individuals to pool their money, and access investment opportunities that previously were not available. It’s an old concept that has been supersized by the power of networks on the internet.
For example:
· Real Estate — sites like Realty Mogul posit that real estate investing used to be for people in “the know” that could write big checks. Now platforms, like them, are helping investors access specific investment opportunities. Investor à platform à project. Tangible and simple.
· Clean energy — people can select clean energy project investments that are right for them based on interest rates, risk, and community connection, like what CoPower is launching.
Implicit in all these crowdfunding platforms is radical transparency. You can always see exactly the deal you are selecting, what the terms are, risks, and projected returns.
And for facilitating the transaction, curating deals, and managing the transactions, platforms are charging investors as low as 1%! Those are 1860’s rates!
This is one of the incredible power of crowdfinancing. Driving down transaction costs. Recapturing the intermediary ‘rent’ for the investor. And the certainty that you know where you put your money.
