Has technology helped or hurt markets? That’s the question Rana Foroohar examines in The Financial Times. She writes:
First, consider the asymmetry of power. We have no idea of the true value of the personal data that is sold by platform giants like Facebook or YouTube to advertisers as the hidden charge for the supposedly “free” services we enjoy online. In the same way, the users of Robinhood have no idea that the reason that they and their fellow retail bros can trade “free” online is that their order flows are being shared with bigger, richer fish.
They are, meanwhile, being induced to trade as much as possible, as fast as possible, via digital nudges designed by behavioural scientists whose job it is to create the most addictive interfaces. Just as digital “loot boxes” keep children playing online video games and in some cases spending real money on things within the game, so the nudges on trading platforms — push notifications, happy reward icons, hot stock lists and such like — are about getting the endorphins going and the money flowing. Nobody gets a special reward for buying and holding an asset. Is it any surprise that Robinhood’s growth is led by the trading of complex and speculative assets like options and NFTs?
More trading is, of course, correlated with more losses for individuals. But even for those who aren’t engaged in this kind of gamified trading, there is a downside — bizarre market swings that are driven in part by this new crop of small-time speculators (consider not only meme “investing”, but the role of retail platform traders in major commodity price swings last year).
One can make a case that it’s unfair to stop the little guy doing what the professionals do. But there are also questions to be asked about the social value of high-speed trading across the board. “It’s all just so wasteful,” says Hilary J Allen, a professor at the Washington College of Law, who specialises in fintech regulation. Not only gamified trading, but “also the idea that we’re boring holes through mountains to run fibre to shave a millisecond off somebody’s trade time. I mean, come on!”
All this underscores how far our market system has come from what it was originally designed to do, which is to intermediate between savers and borrowers by funnelling money to where it is most productive. Investment apps such as Robinhood are the opposite of this. They aren’t about real investing, or even gaming the financial system. They have turned the system itself into a game.
Technology has made markets faster, but arguably not better. It certainly hasn’t made them cheaper. As academics such as Thomas Philippon have shown, none of the many technological “innovations” in the financial markets since 1880 has actually lowered the cost of financial intermediation. Someone is making as much money as ever. Fintech just makes it tougher to see who.
Read more here.