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Rule 1: Power finds power

There is a natural tendency for people who have power to join with others who have power to increase their collective influence. That's why the world has always had military alliances, such as NATO. Corporate mergers are another example of power joining with power, and it's the reason monopolies are illegal. And powerful people tend to hang around with other powerful people. Brad Pitt and Angelina Jolie come to mind. In many different ways, power finds power.

That's the first rule. I'll turn this into a fascinating point after the second rule...

Rule 2: Technology Concentrates Power

Whenever there is an improvement in technology, you see a concentration of wealth and power. This comes in many forms too. The most obvious form is that technology company founders sometimes become influential billionaires. But more generally, wherever there is new technology there is a consolidation of power by someone. Here are some more examples:

The government of the United States becomes more powerful because technology allows it to monitor our financial patterns, phone calls, Internet use, and more. And the government can grow ever larger because technology allows all of its parts to communicate and to be fed by taxes.

Terrorists become more powerful because technology allows them to do more damage with less.

Small armies can beat large armies by using technology to increase their power.

Of course, technology can also transfer power from a dictator to the people, as we saw in the Arab Spring, albeit with mixed results. But dictators are the exception to the rule. Dictators don't do well when technology enters the pictures.  Eventually technology will transfer power from dictators to plain-old-billionaire industrialists.

And now to my fascinating point. . .

Our financial markets are a good example of the two rules I just described. Powerful (rich) people will, quite naturally, look for opportunities to collaborate with other powerful (rich) people to benefit their collective interests. So let's agree that powerful people are, in general, looking for ways to join forces to increase their personal fortunes. They compete when they need to, but often they would prefer collaborating for mutual benefit.

Now add technology to the mix in the form of impossibly complicated financial instruments that only computers can "understand," high-speed automatic computer trading, 24-hour financial news, and the ability for anyone to communicate with anyone else in less than a second, and you set the stage for technology to concentrate power with the rich.

It has always been true that power finds power. The rich have always looked for ways to work together to get richer. But now technology has the potential to accelerate the consolidation of power.

Earlier this week, I wrote a post saying that billionaires are probably manipulating financial markets because they have the motive, opportunity, and a near-zero chance of getting caught.  In response, some people said it was crazy to think a few players could manipulate a multi-trillion-dollar market and not be detected. I have an appreciation for that point of view, but I think technology has recently made it possible for the few to manipulate the many. That's a new development.

Allow me to describe a scenario in which the few could manipulate the entire market and still have a near-zero chance of being detected. I want to be clear that I'm not suggesting this specific scenario has happened. I offer it as a thought experiment to demonstrate the feasibility of collusion in a general way.

For starters, we know the stock market is jumpy and volatile, in part because of automatic high-speed computer trading that is based on "secret" algorithms. These computers do so much trading that they act as a giant lever on the market. If one knows how to trip the algorithms, it doesn't take much to send the computers into a buying or selling frenzy. And when the computers go nuts, the individual investors start chasing the movement, accelerating it even more.

Now add to the mix the impossibly complicated financial instruments that are growing like viruses on Wall Street. These too act like force multipliers. A savvy billionaire could learn how to tweak the exotic financial instruments just right to cause an outsized reaction that also spooks the market.

Now consider the financial news markets. There are probably a few dozen financial pundits in the United States who can move markets. And there is usually some sort of near balance between bears and bulls. That means moving the consensus opinion from "mostly bullish" to "mostly bearish" is a matter of changing the opinions of just a few influential people. You only need to move a few from one camp to the other to change the balance. And when the balance shifts, the 24-hour financial news organizations will exaggerate the change and transform it into news. Here again, small changes get magnified thanks to technology.

Now imagine a gathering of some of the most powerful financial people in the world. Surely some of them get together socially, because power finds power. But they don't entirely trust each other, so no one suggests an outright illegal manipulation of markets. That wouldn't be smart: too many witnesses. Instead, they listen to the host of the gathering describe which specific financial indicator he would use to decide whether to sell his holdings. Everyone in the room listens and nods. Months later, when the indicator goes negative, everyone who was in the room knows what to do, and none of it is illegal. They are simply looking at the same financial indicator, nothing more.

The brilliance of pegging collusion to a particular financial indicator is that it adds a perfect cover story to sudden massive selling. The financial news folks will report that the indicator went negative, and that is the reason for the selling. The billionaires get out at the top of the market, spook the high speed computers and trigger a selling avalanche. After the drop, they buy back in. It's completely legal.

I should note that on any given day you can find a dozen financial indicators saying the stock market is sure to keep rising, and a dozen that say it has already peaked. The scheme I described works no matter which indicator you use, because the indicators tend to be volatile and unpredictable themselves.

I'm not suggesting that the scenario I described has ever happened. I'm just painting a word picture in which a few big players could use technology to manipulate trillion-dollar markets. My best guess - based on my assessment of human nature - is that market manipulation is already happening on a massive scale, although I probably have the mechanism wrong. But if it isn't happening yet, the normal evolution of technology will guarantee it happens later.

 
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Mar 6, 2013
What you are describing is simply the group-think which is common to any human endeavor. The problem with talking about it as if it were market manipulation is that the super-rich tend to believe the hype and get caught too - for example in the financial crisis the banks were repackaging junk mortgages and selling them as if they were prime, but they kept a lot of these products on their own books and took the hit when they went bad.
 
 
+2 Rank Up Rank Down
Mar 6, 2013
The rules sound kind of intuitive, but they also rely on too many generalizations, which undermines their usefulness in modeling the dynamics of power.

I think its more like a manifestation of humans' nature to establish pecking orders. The powerful are followed by the less powerful. Technology can upset or consolidate the balance by giving either the powerful or the less powerful (or both), more leverage.
 
 
+1 Rank Up Rank Down
Mar 6, 2013
Actually, the speed of light is about a foot a nano-second, so it must have been 4 milliseconds that I meant, but the point remains the same.
 
 
+2 Rank Up Rank Down
Mar 6, 2013
I think it's common knowledge that the computers that buy/sell stock manipulate the market (50-70% of the market is dictated by these computers). They will sell a specific stock in hopes of getting other algorithms to jettison their stock, then buy back 10x the stock at a lower price. Granted, this nets fractions of a penny in stock savings, but when done thousands of times a day with millions of shares, it adds up.

There was a great RadioLab podcast a few weeks back that touched on this topic. These algorithms act so quickly that trades happen in a matter of nanoseconds. There is a company literally blowing up mountains to establish a faster connection between the commodities market in Chicago and the stock markets in New York. It will save them 4 nanoseconds (from 13 to 9 ns) in the time it takes information to get from Chicago to New York, and this is worth the ~$200 million the company has invested in the project.
 
 
Mar 6, 2013
As with most clever ideas anyone can come up with, it seems a good portion of the time, you google that good idea to find that someone out there is already doing/making/working on it.

Thus it follows, given human nature, power and money being in the mix, there is likely someone doing some form of market manipulation as described here.

We have Homeland Security pulling regular citizens over and asking them for proof that they are citizens, asking for permission to search their vehicle, etc, as regular checkpoints on our roads.

If the goal is to make our country more secure, I would think they'd want to install similar harassments for those who participate in our financial markets. I will go ahead and guess there is not, though.
 
 
Mar 6, 2013
The whole opening of this is plausible but weird. NATO is hardly an example of power finding power -- we learned in Libya that England anf France between them will apparently run out of ordnance fighting a small developing civil-war-torn country. NATO was formed with one power, and a whole lot of weak an battered small powers, _against_ another power -- which is how IR theorists have figured power works since Thucydides. So I think the whole opening is interesting and smart but wrong. I mean, "small armies can beat large armies by using technology to increase their power?" I think that ought to be true, maybe it is in theory -- but, example please? In Iraq and Afghanistan, a large _and_ technologically sophisticated power is getting pummeled by the backward tech of IEDs! This is stuff that sounds good but is at least in many cases wrong.
 
 
Mar 6, 2013
Can we get off this topic now Scott? This is the third blog in a row you've done about this topic and as far as Im concerned you made your point well enough in the first one. For five days Ive been nodding my head saying that you're more or less right and doing that is getting boring.
 
 
Mar 6, 2013
Minor glitch, I know what you're trying to say, but tech doesn't concentrate power. Power is not zero sum, tech multiplies power meaning that there is more overall power once invented.
When tech is useful to a few (trading algs, warfare), that results in more power being concentrated in those few.
When tech is useful to all (cars, social networks, bitcoin) that results in more power being distributed among the populace.
 
 
+12 Rank Up Rank Down
Mar 6, 2013
Given that some of the people on Wall Street are among the most brilliant, driven, greedy people on the planet, and spend the bulk of their time sitting around with one another plotting ways to manipulate the system to their best advantage, I sadly have to agree with you 100%. They look at the rest of us as ignorant sheep/slaves with no other purpose than to be fleeced on a regular basis. And they use congress as their most powerful tool to accomplish that fleecing. Technology is allowing them to commit their atrocities on a scale never before witnessed in human history.
 
 
 
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