Millions Diverted Into Financial Engineering

Paul Krugman looks at the hundreds of millions of dollars spent to build a tunnel through the Allegheny Mountains “for a fiber-optic cable that would shave three milliseconds — three-thousandths of a second — off communication time between the futures markets of Chicago and the stock markets of New York. And the fact that this tunnel was built while the rail tunnel wasn’t tells you a lot about what’s wrong with America today.”

“Who cares about three milliseconds? The answer is, high-frequency traders, who make money by buying or selling stock a tiny fraction of a second faster than other players. Not surprisingly, Michael Lewis starts his best-selling new book Flash Boys, a polemic against high-frequency trading, with the story of the Spread Networks tunnel. But the real moral of the tunnel tale is independent of Mr. Lewis’s polemic.”

“Think about it. You may or may not buy Mr. Lewis’s depiction of the high-frequency types as villains and those trying to thwart them as heroes. (If you ask me, there are no good guys in this story.) But either way, spending hundreds of millions of dollars to save three milliseconds looks like a huge waste. And that’s part of a much broader picture, in which society is devoting an ever-growing share of its resources to financial wheeling and dealing, while getting little or nothing in return.”

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  • Rick Goddard

    I beg to differ, this ISN’T the problem with our current economy. The biggest problem with our current economy is lack of demand and buying products from companies that off-shore sums of money to avoid taxes. The lack of demand could be improved if more middle class jobs were created (such as infrastructure projects) and an improved tax collection could reduce deficits and not require us to look at spending reductions in the safety net areas. Money going to the wealthy doesn’t stimulate the economy nearly as well as money going to the larger mass of people in the middle.

    On another note, want to end high-frequency trading? Invoke an exchange tax per transaction low enough to not be felt by the primary investors but high enough to discourage HFT.

  • Mike

    Give me a break. The telecom firm building the cable is doing it for a lot more than 3 milliseconds for traders. What a complete BS article.

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