New Economics: City Trading

A city trader once told me that they perform an essential service to the economy. It is via the rapid arbitrage of prices, and the speculating on news and views about stock that the market achieves such rapid efficiency.

That is by solely trying to buy things that are perceived as cheap (either because they have an existing customer who will pay a higher price i.e. arbitrage) or by speculating that such a customer will exist, or by deciding that dividends for a stock compensate for risk in owning; through any of these means buy and selling quickly means that prices reflect a "true" value.

However it occurs to me that this is rather self seeking. Why do we need an efficient market? It is so that prices reflect their underlying value. And why do we need that? It is so that we pay the correct amount for things. And why that? It is so that we do not end up paying too much for things. But is also means that we won't ever find a good deal either because all the good deals have been exploited by the city. Indeed the whole point of a free market is that everyone is looking for a good deal. If the city has already taken all the good deals and left us with an efficient market in fact we have lost.

A true economy does not leave all the trading to a specialist group of traders sitting in ivory towers, but rather includes everyone. An efficient market is one where we are all involved in the process of setting prices. Not as we have today the "real economy" of people going about their lives, and then a highly specialised "trading economy" living in the slack that is not exploited by the "real economy".

It is unstoppable that a niche like the City won't be exploited, but the argument that it is an essential part of the economy doesn't make sense. The City exists simply because it can, simply because ordinary people buying and selling as part of their lives and economy don't have the time to exploit every last opportunity. But it doesn't serve any "service" at all. In fact it is quite possibly a detriment to society as the city is very expensive if one looks at the amount of wealth that it extracts in bringing to economy towards efficiency.

What we could have equally is a very smart A.I. computer that works for the state. In bringing prices to efficiency it puts the money it creams off into the state treasury where it belongs, because at the end of the day all it has done is automate the process of people looking for a bargain.