How Your Patient Capital Became Dumb Money
Trillions of dollars became available for investment in 1974 when Congress mandated that pensions be funded in advance. This new, workers’ capital was intended to be “patient” investment to enlarge and make pensions safe for the future. Instead, the workers’ capital was diverted to Wall Street where it became “dumb money” that high- frequency traders manipulated. Their automated programs only skimmed a few pennies at a time but they made up for it with volume. When Warren Buffett recommended buy and hold the average stock holding period was six years. Now in the age of high speed trading, the average is 22 seconds.
Thomson Reuters paid the University of Michigan a million dollars to give the results of a consumer-confidence survey to high-frequency traders, the type of information that allowed them to buy before a price rise. Another group of traders paid a higher fee to get the survey results two seconds earlier. These high–speed market manipulators refer to ordinary people’s investments as “dumb money.” Why not? It’s dumb to allow traders to skim your money thousands of times a day.
When Congress mandated pension funding they failed to stipulate where the money would go, or how much it would cost to get there. Trillions of dollars of workers’ capital should have been the greatest savings-investment opportunity in history. It should have gone into investment in new facilities, new programs, or fixing bridges; instead, it went into trading where a millisecond’s advantage has been estimated to be worth up to $100 million. Some large hedge-fund managers have “earned” a million dollars an hour.
The stock market was founded in 1792 when 24 brokers signed an agreement on rules for buying and selling equity ownership. The NYSE was considered a quasi-utility with a social purpose of efficient investment of the peoples’ money. After providing the opportunity to grow the economy and add jobs for the next two centuries, it is now just a TV prop.
Specialists made markets by shouting quotes in fractions from the pit of the exchange while trading in their own accounts. In 1933, there were 230 of these specialists. By 2001 when the market shifted to electronics and decimals these “market makers” were down to 10.
The exchanges were up in number to 13 plus numerous “dark pools,” private trading systems in which participants transact their trades without displaying quotations to the public. One trade in every three now takes place in these “dark pools” swarming with predatory traders taking advantage of those with “dumb money.”
Founded in 1971, the National Association Securities Dealers Quotation (NASDQ) system, was the first electronic stock market. Forty years later, the technology has allowed the shift from investment to trading. The investment banks shifted from private companies to public to improve their leverage opportunities and reduce personal liability. Traders, not investors, now dominate Wall Street. They “front run” bids by entering, canceling, and entering again at a higher price thousands of times a day. The traders have thus built momentum to sell at a higher price, the lower price was provided by the “dumb money.”
Jack Bogle, the founder of Vanguard, for years had proposed index funds as a relatively safe way to buy and hold stocks at one-tenth the annual cost charged by money managers. But then the concept of index funds was hy-jacked by the HFTs who ignored the “hold” advice and traded massive volumes of exchange traded funds, (ETFs) hourly. Bogle was appalled: “Now, ETFs have become big gambling, speculative instruments that have destabilized the market and are extracting wealth from investors who need to put their hand over their wallets quickly.”
The workers’ patient capital is not safe from catastrophic events such as the “Flash Crash” of May 6, 2010, during which over 20,000 trades of 300 securities were executed at prices 60% of their value moments before. While Proctor and Gamble lost a third of its value, $60 billion, Sotheby’s gained from $34 to $100,000 a share, a $6 trillion value, more than the GDP of Japan. The high-frequency traders bailed out early demonstrating that their claim to add liquidity to keep the market functioning is a fiction. While the market recovered quickly the flash-crash was a structural problem that could be repeated.
Domination of the economy by finance capitalism has caused the greatest mal-distribution of wealth in American history. The people must do the study that equips them to take their country back. It will not be by occupying Wall Street but rather by evacuating it by returning capital to the people. The “too big to fail” banks have become even bigger. They can be “downsized” simply by moving money to small banks and credit unions.