A year or so ago I made some money. It was quite simple really. I noticed that the stock market was going through a period of mild depression. So I bought an investment whose value was defined by the value of leading shares – the FTSE100. Three months later the market recovered, and I sold the shares. I won’t tell you what my profit was, but it was unquestionably worthwhile. I was simply playing the market and, provided that I could choose when I sold them, I was virtually certain to get a good return – at least eventually. It was merely an instance of the advice, anecdotally attributed to Nathan Rothschild: “Buy when the blood runs in the streets, sell when the trumpet sounds.”
I thought back to St Thomas’s view that money should not breed. He was talking about lending money at interest. He used, as an analogy, a man who sold some wine and then charged his customer for using it. That would be to sell it twice and thus an injustice. My little adventure was not usurious, but it was manipulating money for profit. The underlying value of the shares was irrelevant to me; I was only concerned with the movement of them. I was using money to breed money.
The Church’s medieval condemnation of usury is quoted as an instance where the Church was later to change a grave moral teaching. The historian John Noonan paraded this change, but Cardinal Avery Dulles argued that it was no more than a development of doctrine where changed circumstances justified a changed rule. I will examine the principles here on another occasion.
My flutter would scarcely have rocked the universe, but it may be surprising to learn the degree to which big investment houses and hedge funds base their investments on such changes. Here is money breeding money with a vengeance. And similar methodologies are used by banks and pension funds – yours and mine.
In the last 10 years the crowd of shouting stockbrokers on the floor of the Exchange has been replaced by far fewer people working with sophisticated computer systems, housed in row upon row of servers. They are no longer the experts in valuing the prospects of a business but mathematicians and engineers.
The key to their work is the algorithm: decision-making programmes which automatically, not in a second but in milliseconds, buy and sell stocks and shares, according to chosen rules. On some stock exchanges, 70 per cent of the trading is done in this way. It is a little more spritely than me telephoning my broker in order to trade a share. Perhaps your pension fund will have traded several hundred times since you got up this morning.
The operation of these high frequency traders depends on the ability of their systems to note the prices of shares on all the myriad stock markets of the world, and, when a share price differs from one market to another, the computer pounces. It buys on one and sells on the other – and makes a turn. It’s hard to lose. The gain may be infinitesimal, but when it is done at the speed of light, in huge volumes and several times a minute, real money is made. Some idea of the scale may be gauged by the fact that the electronic trading facility of the New York Exchange alone is housed out of town and covers 10 acres.
The computers used by investment houses to make the trades are tended by boffins who moderate their trading activity by tweaking the algorithms and monitoring the degree of risk. And indeed momentary disasters have been recorded. No more than a blip, but it can hazard billions. Note that these boffins – and they are really smart – have no professional interest in the nature of the shares being traded. Only price and difference in price is of consequence: that – and speed. There is a perpetual arms race to get the information first, for winner takes all. For instance, before these developments, it was convenient to route information by a variety of different ways. But at the speed of light, the straightest and therefore shortest route gets there first. The heavy investment in optimal routing is chicken feed compared to the potential profit.
I am left somewhat concerned at all of this. I find that a huge industry based on artificial movements of money very questionable. There is something unhealthy about the way that large individual earnings can be made not by contributing to society, but by the flicker of a computer screen.
But you may disagree. In that case, persuade your children and grandchildren to obtain first-class degrees in mathematics and advanced diplomas in programming. Then let them name their price. But one day they will need to ask themselves in what way their expert manoeuverings have benefited human welfare.
My thanks to Robert Peston of the BBC for bringing me up to date.