Capitalism is great. When it works, it transfers money from people willing to take risks to people who have risks worth taking. Sure, the eventual payoff to both is in proportion to the risk, and the risk is in proportion to the vision, but the overall purpose is to move idle money to the places that can put it to use. Capitalism is great. When it works.
And then there are the parasites.
In Flash Boys, Michael Lewis tells the story of a bunch of regular guys who decided to drag one group of parasites into the light so the markets could understand how and why they had become hosts. The parasites had a simple business model. Someone sends out an offer to buy United Widgets at $1.00, the parasite would see his offer, and go buy the available shares at $1.00. Then he’d offer them to the buyer for $1.01. A penny a share of pure profit, no risk, no real value added. But how did he see the spread between the two?
He figured out that placing his computer server just a little closer to the server that executes trades would buy enough lag time that he could spot the opening and get the jump on real investors. The smart guy and his cronies started at milliseconds and wrung every angle until they were down to beating legitimate investors by nanoseconds. These weren’t the small-time investors, either—institutional investors managing billions of dollars couldn’t figure out why they were constantly paying higher prices when the computer said right there that they should have gotten it for less. They’d scratch their heads and pay the higher cost.
But there were people in the system who caught on to the parasites. Instead of cashing their knowledge in for a few million bucks, these regular guys decided they were going to put the markets back on an equal footing. (Well, as equal as it could be.) There are too many for me to credit in this post, but basically they were organized and inspired by Brad Katsuyama, a low-key guy working for the low-key Royal Bank of Canada. For my money (what’s left of it after the markets got hold of it), he should be recognized as a genuine hero. But his discovery about lag time was only the tip of the fraud, and his real courage came out when he brought his findings and his solutions to those institutional investors. Their reaction—and the way he finally convinced them that he had a viable solution—shows that sometimes heroism doesn’t happen in a flash. Heroism takes work.
As for the parasites? A friend once told me, “Bulls make money, bears make money, pigs get slaughtered.” When I look around, it seems that the parasites, and the pigs, are actually doing better than everyone else. Capitalism is great. When it works.
Check the WRL catalog for Flash Boys