Friday, February 4, 2011

Why Stocks are Acting Like Commodities

Jason Zweig wrote this Wall Street Journal article a few months back on algorithmic trading programs or "algos":

An algo doesn't know or care why two assets are moving together; it merely is programmed to recognize that they are doing so. As soon as a computer places bets that such a linkage in prices will persist, other traders—computers and humans alike—tend to take note and follow suit. That can be true, Mr. Simons says, whether or not a correlation is driven by fundamental economic factors.

Market systems are about effective and timely capital formation and allocation. Making sure dollars meet the best ideas and are there to support/develop productive assets and useful capabilities.

"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." - John Maynard Keynes

Today, a whole lot of brainpower and talent focuses their energy on creating algorithms designed to game the capital development system.

The result is a less than optimal system with increased frictional costs that distracts some of the best and brightest from doing more useful things.


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