The Algorithms of Wall Street - Did We Forget How to Create Capital for Businesses
Posted May 09 2010 11:38pm
The article was written by Mark Cuban, owner of the Dallas Mavericks and I have included part of what he had to say here, as we have health insurers right in this game too. In addition to their own stocks, they invest in others and how do they make their money if not all from internal dollars? I think after reading this many would agree, yeah, what is going on up there – it’s those algorithms. I started on my algorithm rants as relates to healthcare and we kind of somewhat have the same type of issue going there too. Insurance was created to bring about a large enough pool to spread the expense over a large group of people so everyone could get care and claims would be paid. Where are we now in healthcare too? Recently in the news, Blue Cross ran the “Breast Cancer” algorithm.
I also like to call the formulas what they are, mathematical formulas or algorithms and when I hear members of Congress talking about “the robots taking over” it sounds like a Sci-Fi movie and gets away from what we really have going on here. I listened to Face the Nation today for a bit and it sounded very non-intellectual in trying to talk about what is happening with the reporter and this is not the Invasion of the Body Snatchers, it is highly complicated technology that runs and gives some “machine gun” artillery to run around with while the rest of us have swords and daggers, a big spread there. I try to offer information on claim denials that are algorithmically created, they have machine gun data and you have a sword and maybe a dagger’s worth of data and technology to battle back with.
We have the same ethics issues in healthcare with data being presented that has been accumulated through years of data input that they assume is the gospel and is 100% correct when it comes to our individuals healthcare, but it’s not 100% correct when you bring in claim information that is years old, so we have a very similar situation here with mathematical formulas being run against a consumer getting the care they need. So back to Wall Street a bit here’s a perfect example with bond issues made from people who have illnesses and sell of their life insurance and cash out, but the policies go on, with investor money, hedging about how long a particular “disease” group of people will live, and if they live too long they lose money, so yes where are some of the ethics here.
We have a tired old Congress of non-participants that let’s this happen as they “don’t get it” as they don’t participate at any or very few levels of technology, but yet today’s laws need to include this.
Do you think the Senate last week could have used some digital technology instead of this mound of paper? It doesn’t work that way anymore. You would have to be “living under a rock” today to not know that digital content is everywhere and this includes saving trees and using devices such as IPads, Tablet PCs, IPhones, Kindles, and so on to read digital material. They use Tablet computers on Wall Street and have for years, but are we anywhere near that in Congress?
I think Mark Cuban has a good point here we are dealing with “hackers”, playing the game and if we don’t have anyone worthy enough with some technology on the other side, who wins all the time.
Earlier this year the House said it was going to take them 3 years to go wireless? See the sense of urgency and non participation. We need full on audit trails and the SEC needs a big kick in that area, people, technology and other items to keep them from sitting around reading porn while at work. We saw that one a couple weeks ago in the news, embarrassing isn’t it.
One more item here too is that everyone is focused on the market trading dollars so if you want to see a potential different view I did a “perfect storm” tech nightmare opinion and who knows it could be right on when they deal out all the cards. Servers go down all the time and they mirror each other, so the average person just thinks of one server up all the time to take care of their needs – not so – let’s not forget the new Intel Xeons that some trading houses put in, with a lot of new power. Increases didn’t use to make a huge difference in design, but today they do as speeds and amounts of data handled has increased tremendously. Everyone lives off of back up to keep a fluent stream of data moving.
As I have said on this blog for the last two years, all the decision making processes come back to the algorithms, it’s all around us everywhere we look as everyone uses them, and their are dirty algorithms too, i.e. Madoff had a bunch of them to help fool everyone with his “desired” numbers shown via algorithmically created reports, look good, but is that the truth printed out there? We know the answer to that one.
We have a bunch of those “hackers” in the healthcare side of business that want your money but won’t stand behind you all the time and will run algorithms to remove you from the insured lists if your health problems stand in the way of profits, they are betting against you in other words.
I’ll close with a post I made a year ago, a Department of Algorithms may be needed soon. BD
My last two posts were designed to stimulate discussion. But lets talk the real problem that regulators, public companies, investor/shareholders and traders face. The problem is that Wall Street doesn’t know what business it is in. Regulators don’t know what the business of Wall Street is. Investor/shareholders don’t know what business Wall Street is in.
The only people who know what business Wall Street is in are the traders. They know what business Wall Street is in better than everyone else. To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible.
The best analogy for traders ? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing. A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it. A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market.
The important issue is recognizing that Wall Street is no longer what it was designed to be. Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings. What percentage of the market is driven by investors these days ?
The Pimco (who I think are the smartest guys on the Street) guys talk about a new normal as it applies to today’s state of the world economy. I think just as important is the new normal as it applies to Wall Street. Wall Street is now a huge mathematical game of chess where individual companies are just pawns. This is money in the bank for the big players like Goldman, Morgan, etc. Why ? Because the game of chess is far too complicated for 99pct of the institutions out there investing money. So to keep up, they turn to Goldman, Morgan and the like to invent products for them. “You don’t know how to play the housing boom, let us show you”. “You think the housing boom is about to crash, let us show you how to play that”. “You think that PIIGS are in trouble because they can’t print money to pay debt holders, let us create a product to allow you to play that game” The big houses have the best hackers in the business and they put together the games and sell them to the many, many institutions managing Billions and Billions of dollars. They are the ultimate Hackers selling their attacks to the highest bidder, regardless of which side they are on. That is a new normal.
Again, I’m not passing judgment one or the other. I’m just recognizing what is going on in the financial world today.
Its primary business is no longer creating capital for business. Creating capital for business has to be less than 1pct of the volume on Wall Street in any given period. (I would be curious if anyone out there knows what percentage of transactions actually return money to a company for any reason). It wouldn’t shock me that even in this environment that more money flows from companies to the market in the form of buybacks ( which i think are always a mistake) , then flows into companies in the form of equity.
And solutions won’t come from bureaucrats trying to prevent the traders from hacking the system. The only certainty when bureaucrats step in is that the law of unintended consequences will smack us all in the head and the trader/hackers will find new ways to exploit the system that makes them big money and even more money for the big institutions that develop products for the other institutions that are desperate to play the game.