Warren Buffett's folksy ways have briefly slowed the path of high-speed trading. The Omaha billionaire pulled the plug on hedge funds buying a feed of corporate news releases from his Business Wire. Buffett also has expressed distaste for the modern methods of buying and selling stocks. Though they can be parasitic, there are also benefits. Nostalgia is best reserved for Cherry Coke.
Following a Wall Street Journal article earlier this month about how some traders were paying for the same real-time announcements subscribed to by news organisations, Buffett decided "misperceptions" were enough to warrant shutting down access to certain investment firms. Though Business Wire saw nothing wrong with the practice, the chairman of its parent company also has said high-speed trading contributes nothing to capitalism. Buffett is right up to a point. Quote stuffing and front-running, made easier by faster networks and smarter software, can make markets less efficient at the expense of longer-term investors. The enhanced liquidity such trading provides is unreliable. Finding prices a millisecond sooner in secondary markets is also mostly economically irrelevant and carries little direct benefit to the wider world. Yet moving quicker has had its benefits. Markets helped pay to develop networks and news organisations. Financiers were early and heavy users of the telegraph because it could transmit prices nearly instantaneously. Advances by Reuters using carrier pigeons to bridge a communication gap facilitated what counted as higher-speed trading in the 19th century. The benefits of accelerated data movement, however, are hitting physical limits. Fiber links between trading centers have been supplanted by line-of-sight transmission at higher and higher frequencies. It's hard to argue additional spending helps society since there's little need for this sort of speed beyond a trader seeking an edge.
That quest, however, may still be a good thing. Hedge funds are desperately trying to perfect algorithms that can quickly, and perhaps even more importantly, accurately decipher news. Language recognition, for example, has many broader uses. It's hard to beat rivalries and cash as incentives to solve difficult problems. Buffett's old-fashioned approach to investing is in many ways laudable, but the days of open-outcry trading also won't be coming back.
