So today we have two items tangentially related to All Things Auditing, but they’re interesting and potentially extremely important to larger society as well, so here goes…
Ever heard of Apache Hadoop? Me neither, until last week’s completely unsurprising revelations that the NSA knows my Amazon.com wishlist and that I like to watch cat videos on YouTube. At any rate, Andrew Leonard over at Salon has written a revealing and somewhat terrifying piece detailing the prevalence of this open-source software ecosystem and the potential implications for those of us who are affected by big data. In other words, everyone:
The other noteworthy item this week is an ongoing media brou-ha-ha centering around our machine friends, specifically the High Frequency Trading Platforms that are now used to buy and sell the majority of equities in the global financial markets.
I gotta say, when even notorious corporate shills CNBC has reservations about you, you just MIGHT be evil (see above link). This week’s controversy centers around the fact that many market research organizations are now selling their data to the HFTs ahead of their release to other paying customers/the general public. And when I say ahead, I mean often only a second or two ahead of everyone else.
Why is this a big deal, you ask? Well, because the HFTs consist of enormous arrays of concentrated computing power that are programmed to analyze enormous amounts of data input and make trading decisions on that information in time increments that are measured in picoseconds. Therefore, a two second jump on the rest of us is more than enough time to front-run us mere mortals and place massive, market-moving orders on either side of any given entity (from http://www.seekingalpha.com):
How Two Seconds Can Be Worth Millions – The WSJ shines a light on the high-speed traders who receive access to various non-government economic reports two seconds before everybody else, allowing them to make tens of millions of dollars through algorithmic trading. When a recent University of Michigan consumer report came in below expectations, for example, various firms bet nearly 7M shares that stocks would decline, which they did. And it’s all perfectly legal.
On one hand, the owners of the various HFTs (investment banks, hedge funds, this guy, this other guy, etc.) argue that sure, they gain an advantage from the early access to economic data, but they pay a private company for it, no harm, no foul.
I see their point, but there are a couple of issues here that trouble me: First, as an average-joe investor, it seems to me that no matter what, I’m going to be front-run by the machines no matter how quickly I make a move in the equity markets. Then again, how is that any different than things have always been? As George Carlin said, to paraphrase, “It’s a big club, and you ain’t in it.”
The other thing that bothers me about the HFTs is that, as an auditor, how can I even come close to effectively auditing these behemoths? I’m glad I don’t work for the SEC, because I might end up becoming so disillusioned and frustrated that I give up and just do this all day. Is anyone really surprised that a hedge fund or Wall St. investment bank is able to invent and deploy a money-making apparatus that is fundamentally opaque and appears to be impossible to effectively regulate or oversee?
On that happy note, have a fun weekend!