On the Uselessness of the Dow Jones Index

The Financial Times reports on an existential crisis in the modern economy:

[B]logger Dan Mirvish spotted an odd pattern: if [Anne] Hathaway is in the news, Warren Buffett’s Berkshire Hathaway stock jumps too.

“On the Friday before the Oscars,” he wrote, “Berkshire shares rose a whopping 2.02 per cent.” And the Monday after they shot up 2.94 per cent more. Coincidence? Mr Mirvish thought not, and pointed the finger at confused robotraders – the complex algorithms that execute 70 per cent of stock trades, sometimes by scanning news stories for trends.

Just imagine harried executives at struggling motor giant Ford, unexpectedly boosted by news of a new Indiana Jones sequel. Or Rupert Murdoch, pleasantly amazed that, even though Megan Fox turned down Transformers 3, the mere story boosted his holdings….

Ah yes, high-frequency trading, a.k.a. robotraders — the very same ghosts in the machine who caused the flash crash last year, when the Dow Jones dropped some six hundred points in five minutes, only to recover it all in the span of a few seconds. Genius, those strings of code.

It used to be that stock market indices were meant to signify something. The market value of corporations is technically what they were supposed to measure, but in reality they were more an indicator of the direction of industries and the economy as a whole, to the extent that was reflected in the mood of investors. A vague indicator, to be sure, but useful all the same.

But now, as FT noted above, the vast majority of shares traded on the markets are moved around by computer algorithms in split-second decisions no human ever sees (most of those trades carried out on behalf of largely the same financial institutions who nearly ruined the global economy in 2008, before being bailed out by loans underwritten by the people the banks’ actions had thrown out of work).

But I digress. The point here is that, with the work of determining stock value taken almost entirely out of human hands, the stock market’s value is beginning to reflect something, well, inhuman. What can it be said to reflect now? Does it have anything to do with the actual health of the companies being traded, or the overall economy, anymore? Does becoming a billionaire in the markets today depend on nothing more than spotting upwardly-trending keywords on Google and hashtags on Twitter? Is this basic element of our economy — the stock market — nothing more than a lunatic asylum?

Granted, the financial firms can always improve their algorithms, make them smarter, less susceptible to simple-minded linkages like “Anne Hathaway”and “Berkshire Hathaway.” But if that happens, will we have any idea whether or not stock values are once again reflecting anything meaningful? Or will they simply be insane in some other way, one that isn’t so easily detected by a blogger?

Better yet, could we just get rid of high-frequency trading altogether and go back to the days when humans did the actual trading, basing those trades on notions having at least something to do with the companies whose stocks they were trading? According to the banking industry, no we can’t. From Reuters:

Regulators should stem the growing tide of anonymous stock-trading and consider imposing fees on high-frequency traders, said a panel of experts advising how to avoid another “flash crash.”

…Yet many of the ideas issued on Friday called only for “consideration” or “further study” — potentially raising more questions as the first anniversary of the May 6 flash crash nears.

“I don’t think it’s possible to prevent another one from happening,” said Adam Sarhan, chief executive of Sarhan Capital in New York.

No, of course not — robotrading is just a force of nature now, unstoppable, part of the natural order of things, just as it has been for, oh, about five years or so.

U.S. regulators were cautious about some of the boldest recommendations, including new fee structures to encourage liquidity and discourage high numbers of order cancellations.

“I do not know where we as a commission would come down on fees,” Securities and Exchange Commission Chairman Mary Schapiro told reporters after meeting with the panel.

Yes, God forbid we do anything that’s “bad for business.” Never mind that doing nothing allows the stock market to be turned into a fiscal circus, a total fantasy — that’s not bad for business at all, apparently.

Put another way: If we can’t even trust the Dow Jones to tell us anything other than who’s hosting the Oscars this year, then how can we tell how the economy is doing? How do we get out of this mess if we can’t even tell when we’ve gotten out of this mess?