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April 11, 2014

Sacrificing Sense for Speed in Markets

“Rube Goldberg: A comically involved, complicated invention, laboriously contrived to perform a seemingly simple operation.”

“— Webster’s New World”

“Dictionary”

“Stock markets used to be relatively simple operations. People interested in buying or selling shares gathered in a particular place and traded with one another.”

“Those days are long gone. Now, in the United States, the markets are amazingly fragmented, but they are all tied together electronically in ways that are supposed to protect investors. The markets operate differently. Some offer rebates to certain traders, while others pay brokers to bring them volume. Some — called “dark pools” — seek to persuade investors that secrecy is the key to buying or selling large blocks of stock without causing prices to move against them.”

“Institutional investors can see the prices that are supposedly available in numerous markets, but when they try to trade at those prices, they sometimes disappear in a flash. The computers make decisions in nanoseconds, which usually works well but can lead to disasters if the programmers did not foresee a possible problem. A nanosecond is a billionth of a second.”

“Rube Goldberg, the newspaper cartoonist who gave his name to foolishly complicated machines, died more than 40 years ago. He did not get to see how Wall Street, aided and abetted by regulators, brought his inspiration to the stock market.”

***

Read full New York Times article here.

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