Tom C.W. Lin, The New Investor, 60 UCLA L. Rev. 768 (2013).
Tom C.W. Lin’s The New Investor is well worth a read. It’s about algorithmic trading, high-frequency-trading, flash crashes, and cyber attacks, and how they happen to be, could be, should be, and shouldn’t be changing our thinking about investment and securities regulation. I picked the paper up from the top of the stack of papers in my office due to feelings of insecurity. Yes, I had read the financial press with more than usual attention in the wake of the flash crash and had done some homework on dark pools, but I still had the sense I was missing something that others had managed to assimilate. So I eagerly accepted this paper’s offer of a knowledgeable overview.
I am pleased to report that I was better informed than I had feared. At the same time, the paper taught me all sorts of stuff I was glad to learn. The lesson was a pleasure. The writing is excellent, the scope broad, the organization intelligent, and the tone measured. But what about the policy bottom line? A full and appropriate range of warnings emerges from the paper’s report of technical shortcomings. There’s also a succinct review of structural regulatory shortcomings. At the same time, Professor Lin likes this stuff more than he fears it. The “new investor” is a function of artificial intelligence, which in turn follows from mathematical inputs. The paper compares the new investor categorically to the rational actor investor of orthodox financial economics and the behaviorally challenged investor of recent academic fashion, and the new investor emerges from the comparison looking pretty good.
I can go along with that. But I balk when Lin concludes: “The new investor is in many ways Graham’s intelligent investor modernized….” These are fighting words when spoken to a financial conservative like me. Benjamin Graham and his early twentieth century contemporaries divided the population of stock and bond holders into investors and investments and speculators and speculation. Investment was always a good thing, while speculation was sometimes a destructive thing. Modern financial economics long ago cast the distinction into the dustbin, but I keep pulling it back out because it retains explanatory power. More to the point, I put algorithmic trading and high-frequency trading on the speculative side of the line. The placement impacts my cost-benefit take, which is less positive than Professor Lin’s.
This is a comment on, not a criticism of, a paper that had the great benefit of prompting some thinking.