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Wall Street 2009: Too Smart for Our Own Good?

Posted by Larry Doyle on July 28, 2009 8:03 AM |

Did the world’s candlemakers openly rail against Thomas Edison and his development of the light bulb? I have to imagine those candlemakers weren’t all that happy at the time. Edison embodied the American spirit. Capitalism thrives on the entrepreneurial spirit. That spirit promotes competition and has propelled our economy, our country, and our world over the years.

Capitalism also thrives on honest, open, and fair markets. Major financial and economic scandals over the years have often centered on self-dealing, abuse of insider information, and some semblance of unfair trade. These practices often capture enormous profits for a period of time but ultimately they kill trade. Why? Profits are a function of increased productivity, increased margins, and increased market share. To the extent that questionable, if not unethical or illegal, business practices initially promote greater profitability at the expense of future business flows, the foundation of that business has serious flaws.

Welcome to the world of finance 2009. In one way, shape or form, we have seen increasingly abusive business practices coarse through our markets and economy over the last few decades. From questionable asset securitizations to various forms of electronic trading, the practitioners have often reaped initial windfall profits while enacting real long term damage. How and why does this happen?

Highly intelligent people who are not properly regulated will drive profits to levels which are initially euphoric but if not properly monitored and managed are ultimately fatal. How so? When market participants feel that playing fields are not open, level, free, and fair, they will take their bat, ball, and capital and go play elsewhere. In so many words, the best and the brightest who implement trade strategies and computer programs are often simply ‘too smart for their own good.’ This scenario repeats itself regularly!

The challenge for business management and market regulators is to embrace the entrepreneurial spirit and competitive drive of great minds while NEVER forsaking the ethics, morals, and values of free and fair trade. Talking about this is one thing, but practicing it is the ultimate test.

I know of no computer program or electronic trading mechanism that has yet been able to replace or improve upon unquestioned integrity and impeccable ethics.

In the spirit of increasing the dialogue and understanding of all aspects surrounding high frequency program trading, please make sure you listen in this Sunday evening, August 2nd from 8-9pm, to NoQuarter Radio’s Sense on Cents with Larry Doyle as I interview Joe Saluzzi of Themis Trading. Mr. Saluzzi more than any other individual in the markets today has highlighted the issues surrounding the questionable business practices connected to high frequency program trading.

You will not want to miss it.

Related Commentary

Governance and Risk Control: Focus Risk Management on Multiple Levers of Control
by Jeremy Hope
CFO Magazine

Despite all the money spent on updating internal control systems over recent years, there are still many ways to cheat systems if people are determined enough. The ultimate shield against excessive risktaking and poor decision-making is cultural: setting the highest performance and ethical standards and abandoning the worst aspects of the fixed performance contract. It also means looking at the whole picture, and not just focusing on a few problems.

Note from LD:  you need to register and login (it’s free) to the CFO site, but I value the insights and perspectives of this article and site tremendously.

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