Another day in the life of a stock trader; but the death of innocence..?
August 1998

The Atlanta massacre in July neatly summed up all of the ills facing the US in one brutal swathe of carnage, as a distressed victim of stock market hype discovered that stocks can go down as well as up, without him being tipped off first. So exactly how did this macabre event become to typify the malaise of the US?

Here’s how: 

1. Guns are easily obtained in the US. Forget controlling them now, with more than one for every US citizen, the chance of recalling them is non-existent – ask Tony Blair about decommissioning a “tiny minority” if you don’t believe. The only answer the US can come up with is asking every citizen carry one all the time so that the chances would be that the loonies would be taken out before they got too far. And after 10 years of prcatise on Doom-like games, the upcoming Playstation, Nintendo and PC owning generation probably now has fast enough reactions to take out the entire James Gang before their trusty 45s are two inches out of their holsters. 

2. The stock market is a double victim of technology – firstly the companies developing and marketing (old fashioned “selling” for money and profit is hardly an issue at present) technology has become the subject of unbelievable ratings in terms of traditional price/earnings terms.  

3. And secondly, the emergence of electronic share trading for the masses has taken the once revered process of managing the Capital Markets from the hands of brokers and bankers - their traditionally well heeled clients, and put it in the hands of many of the same punters that play the lottery. These are the so-called “day traders” because they don’t buy stocks for long term growth, they buy frequently for hours in case they thing that they can play a trend and make a fast buck. 

Apart from being rich in irony (and thus sailing over the heads of the average US citizen) this means that thanks mostly to the level playing field of the internet, the US has transformed itself in the space of 24 months into the nearest thing to a genuinely communist country where information is shared equally, there is no class struggle, but absolutely everything has become a function of money. Even the failure to remove their philandering president for perjury was a function of the needs of the economy, nothing much to do with ethics. Jonathan Aitken was in the wrong party and in the wrong country. 

Once upon a time, a business was rated as being worth around 10-15 times it’s projected annual earnings (after tax) for the next year. So a business that was going to make £1m net would be worth – yes, you got it - £10m. Added to which, crusty old bankers sitting in their oak-paneled boardrooms would expect see something called a track record of the business performance over the past 3 years at least. Times change.

The rise of the US stock market accelerated from its already brisk pace between the start of the year and May, and this was attributed the awakening of the US financial scene to the reality that over the preceding Christmas period, people did indeed buy things over the internet. Up to then, many of the out-of-touch the bankers still believed their patent old nonsense about insecurity of credit card fraud etc.

So then the issue became one of audience eyeballs, and the thus the potential to corral customers in the long run, because there is no time in these days of frenetic change to wait for track record to emerge. In the philosophy of legendary currency speculator George Soros, a bandwagon identified, is no longer a bandwagon.

And now even the Brits are going mad. Dixon’s FreeServe made no money in 9 months, and immediately after it’s public share offering, the market rating suggested that the business was worth £2bn.  Which means that each fickle user is regarded as a potential £1500 asset, since to be frank, there are no other “assets” of such a business. 

However, please don’t imagine this means that this is the same as people and institutions paying £2bn cash for FreeServe. It comes about because as little at 20% of FreeServe was offered for sale, so people have actually paid only (only?) £400m thus far. If Dixons was pop down to its local share shop tomorrow and attempt to unload the other 80%, the market price would collapse, such are subtleties of High Finance.

If you suspect this is all a Confidence Trick on a massive scale, you are right. In Threadneedle Street and around the City, they prefer terms like “sentiment” to “con trick”, but the net result is the same. Stock prices are buoyed on rumours, and rumours are – by definition – insider information, that legally ought not to be leaked. In the days before photocopiers, email and floppy disks, this was containable. Now it simply is not. 

But  the technology that exists in any US (and many) UK high tech businesses means that the preservation of secrecy is now down to nil-minus. Day Traders in the US are sufficiently outraged when they can’t get inside information in time to make many or avoid losses, they shoot people. So just as some brave sports administrator suggested calling off the unequal struggle between the governing body, drugs and cheats, it may be time to accept that there is no such thing as “insider information” and then maybe fewer naïve traders will get reamed, and fewer US citizens murdered.