Once I was an active capitalist. I even traded stock. I bought, I sold, I researched, I tried to turn my savings into investments. I was naive. Three things brought home to me my naivety: the greed of financial advisers, the tax laws and casino capitalism.
At the end of World War II, the average holding period for a stock was four years. By 2000, it was eight months. By 2008, it was two months. By last year, it was 22 seconds. By now it will be as long as it takes to read these first two paragraphs.
The global sharemarket has become less democratic as it becomes more volatile, less ethical as it grows more dangerous, and less stable as it grows more complex. Like tens of millions of small investors, I have abandoned the sharemarket, leaving it to the mutual funds, which have the scale to function in such deep and churning waters.
A leading chronicler of this process is Scott Patterson, a Wall Street Journal reporter who wrote a bestseller, The Quants, in 2010 about the emerging dominance of quantitative analysis on sharemarkets. He has just produced a follow-up, Dark Pools, about a more sinister market evolution since his first book, ''a worldwide matrix of dazzlingly complex algorithms, interlinked computer hubs the size of football fields, and high-octane trading robots guided by the latest advances in artificial intelligence''.
The dominance of computer trading, apart from driving a super-exponential increase in speculative short-term trading, led Patterson to this conclusion: ''With electronic trading, a placeless, faceless, postmodern cyber-market in which computers communicated at warp speed, that physical sense of the market's flow had vanished. The market gained new eyes - electronic eyes …
''Mom and Pop retirement accounts were full of mutual funds handing over billions of dollars a year to the Bots … Regular investors, of course, had little idea about the massive transfer of wealth that was taking place, or that [stock] exchanges, in thrall to the speed-traders' oceans of [trading] volume, were in the game and getting paid right alongside the high-frequency traders.''
Not only are billions of dollars of savings being siphoned off, via less advantageous trading for small investors, by banks and financial institutions using computer trading, but billions of dollars of liquidity have left the sharemarket.
The world's most conspicuous market analyst, Jim Cramer, routinely describes the conditions which forced this retreat by small traders as a ''disgrace''. Cramer, a former hedge fund manager who made millions in the market before becoming a pundit and champion of small investors, has become a cult figure on the financial network CNBC (he also has 566,000 followers on Twitter). His cynicism about the system has fed the loop of public distrust with the global financial market in all its myriad forms.
For all the sophistication of markets and computer systems, the system may be becoming less stable as it grows more sophisticated. The growth in the scale, speed and velocity of financial speculation, as distinct from financial investment, can be seen in the growing prevalence of systemic failure or near-misses. Sharemarket crashes used to be once-in-a-generation events but serious structural failures have occurred five times in the past 14 years:
1998: the collapse of Long-Term Capital Management, a giant hedge fund, saw $5 billion in market value evaporate because of a failure of a mathematical risk model in an industry that was dependent on
2000: the ''Tech Wreck'', the bursting of the dot.com bubble saw the destruction of $5 trillion in market capital in six months.
2008: the global financial crisis, and collapse of Lehman Brothers, caused a fusing of the global credit system that only massive government intervention could override to prevent a financial depression.
2010: the Flash Crash of May 6. The day the Wall Street computerised trading system broke down, markets went haywire, and millions of trades had to be cancelled after computer trading programs revealed their vulnerabilities.
2012: the Libor scandal, this was manipulation of the basic architecture of the financial system. The Libor (London Interbank Offered Rate) is a core interest rate underpinning several hundred trillion dollars in annual derivatives trading. Units within six giant banks were exposed, with Barclays Bank the most culpable manipulator of the Libor rate. Regulators are still formulating a response.
For the past several years there have been warnings from informed bloggers, traders who know the system, that market dysfunction has been taking place on a massive scale. Regulators have been seeking to catch up to the metastasising of computer trading into market manipulation, but regulators are always caught in the wake of technological change. This wake has grown into a froth as the computer age keeps accelerating its own evolution.
This evolution includes the ''dark pools'' that gave Patterson the title of his book. They are giant pools of liquidity which financial institutions use to trade with each other, outside the sharemarkets, to avoid the preying Bots that seek to exploit any large trade. Dark pools are also an attempt to create stability. As Patterson writes: ''Insiders were slowly realising that the push-button, turbo-trading market in which algos battled algos … at speeds measured in billionths of a second had a fatal flaw … a vicious self-reinforcing feedback loop … Because speed traders had pushed aside more traditional long-term market makers … algos could trigger their own form of self-reinforcing mayhem.''
The financial world saw this happen on a large scale on May 6, 2010. It was part of a pattern; spectacular failures in 1998, 2000, 2008, 2010 and this year, caused not by market panic, but by computer panic.