Think for One Second Before You Buy Those Shares: Matthew Lynn
What’s the right length of time to own a share? Ten years, perhaps. Five? Or maybe it depends on the company whose shares you are buying.
But seconds, or milliseconds, or even picoseconds? New trading technologies are making it possible to buy and sell stocks in ever tinier fractions of time.
Trading in picoseconds is madness. It makes the stock market more volatile and less useful for companies to raise capital or for investors to earn returns.
In the U.K. this month, the technology company Corvil, which includes London Stock Exchange Group Plc (LSE) and Deutsche Boerse AG (DB1) among its customers, created a stir by predicting that new frontiers in trading speeds were about to open up.
From trading in milliseconds, to microseconds, to nanoseconds, speeds are getting faster all the time. “There are no technological limits preventing firms from trading in picoseconds,” Chief Executive Officer Donal Byrne said.
For those of us who get our picos mixed up with our nanos, a picosecond is one trillionth of a second. Or, put another way, a picosecond is to one second what one second is to 31,700 years. In less technical language, it’s a really, really brief period of time.
It’s questionable whether it is possible for the buy and sell instructions to move fast enough. Depending on the location of the computers involved in a transaction, the messages may need to travel faster than the speed of light, which is 186,000 miles per second. Albert Einstein would scoff at the idea.
But why would anyone want to trade that quickly even if it can be done? And should they be allowed to?
For decades, there has been a clear trend for trading to become more and more frantic, and for the owners of equities to hold them for less and less time. In 1940, U.S. investors held their stocks for about seven years, according to Andrew Haldane, an executive director at the Bank of England. That figure changed very little until the mid-1970s. By 1987, it had dropped to two years. By 2000, it was less than one year, and by 2007 less than seven months.
Much the same is true of Britain. In the mid-1960s, the average share was owned for five years. It was down to two years by the 1980s. Now it is slightly more than seven months, Haldane said in a speech last year.
Seven months may soon seem like several lifetimes. The technology is available to enable speculators to buy and sell a share within fractions of a second. But is that really progress?
A stock market has two core functions. It exists for companies to raise capital needed to invest in their business. And it should help ordinary people to make a decent return on their savings by investing in those enterprises.
As the length of ownership has come down, have the markets gotten better at that? It is hard to argue that they have. If anything, it has made the markets less stable. Many people blamed high-frequency trading for the “flash crash” plunge in share prices on the New York market last year.
Trading equities in fractions of a second is crazy. What can possibly change about the prospects of Vodafone Group Plc or Nestle SA in the space of a picosecond? Is their business really any different at the end of any particular fraction of a second than it was at the beginning? If you want to change your mind about owning their shares, maybe you should take a second to think it over. Maybe a whole minute -- or even two.
Faster and Faster
In reality, as shares have been traded more furiously, the stock market has become more volatile, more disruptive and less useful. Sure, it might allow one high-frequency hedge fund to steal a march on another one. But at a certain point, you have to step back and ask whether this is a road we really want to go down, and whether it performs any useful function.
Whether Corvil comes up with its picosecond trading technology doesn’t matter much. Someone probably will soon. Information technology makes everything faster and faster all the time. If it can be done, it will be done.
But not all science makes the world a better place -- and trading in picoseconds certainly falls into that category.
Just because we can build nuclear weapons doesn’t make it a good idea for every country to have a big pile of nukes. And just because we can clone ourselves doesn’t mean the world would be improved if we did.
The trading systems we have are fast enough for any reasonable purposes. The stock exchanges should call a halt -- and tell the traders that if they only want to hold their investments for a picosecond, they might be better off going somewhere else. Like a racetrack.
(Matthew Lynn is a Bloomberg News columnist and the author of “Bust,” a book on the Greek debt crisis. The opinions expressed are his own.)
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