Do You Like the Current Internet? Because It Will Be Frozen in Time Now

Well, internet is pretty much fucked. The FCC is adopting new rules that will allow for “high speed lanes” for those willing to pay.

Whatever services you have right now? That’s pretty much all we are going to have. You can argue whether the likes of Facebook, Netflix, Amazon streaming, and others are “good” or “a waste of time”, but the simple fact is they can only exist because of how cheap and easy it was for a company to get on the internet. Without the open internet, those services most likely never would have happened, and we’d still be watching pixelated 320×240 video clips with mono sound.

Any new company that even comes close to doing something interesting that might require bandwidth will now be squashed – the ISP that feels threatened will jack up fees for the service that wants to use any additional bandwidth, which will suffocate it in its crib.

Lest you think I’m being hyperbolic, keep this in mind. The US (FCC) already decided once, in 2002, against treating the internet as an open utility. The thought was that doing so would “regulate the internet”, and thus “stifle innovation”. The thought was that by not regulating how data was brought into your home, the world would open up to all kinds of crazy new ways to get data in. Cable! (Your cable company could provide you the internet). Phone! (Your phone company could) Fiber! Satellite! Wireless! It was going to be a bonanza because the competition would drive speeds up, and drive costs down.

Well, it didn’t work out that way. You pretty much can only get the internet in one or maybe two ways, and you are locked in to that one service. Great Britain, amongst others, went the other way, regulating the pipe, and saying the pipe had to be open for anybody to use. You would get your pipe from, say, the phone company, but you would buy your actual service from any ISP that wanted to provide it. This was more like the high speed version of the old dial-up days of ISPs – you used your phone to connect to AOL, or a local ISP, or another ISP, etc.

The result? Well, there was a really good explanation of it on NPR’s Planet Money podcast “The Last Mile“. (click here for a transcript). Did you look closely at the transcript? Look who was the FCC chairman in 2002 – Michael Powell. Guess where he works now – as a lobbyist for the cable industry, which hey, wouldn’t you know, happens to be “winning” the race to bring internet into your house. Does your head hurt yet?

In most places in the world, you get several choices of providers, at various prices that are lower than in the US, and the speeds are higher.  Here is a handy little chart showing what, on average, people in various countries pay for internet, vs. the speeds they get.

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Look at that. The US gets crappy, slow internet, and we pay through the nose for it. And no, this is not because we are a “large” country or we are “spread out”. A country like Korea is densely populated, but countries like the UK are much more spread out, yet they also get incredible speeds at ridiculously low prices.

And now, its about to get even worse now. Your bill is high, and your speed sucks. Netflix has to pay cable companies in what has been billed a “peering arrangement” to get decent access. Now they can have a formal method of payment thanks to the FCC, in these new “fast lanes”. When Netflix pays, what do you think will happen? The bill will be passed onto you as a Netflix user. So, not only will you have a ridiculously high internet bill compared to the rest of the world, you will have to pay just to be able to use the coolest services on it.

Oh, and Netflix won’t have to worry too much about any new players coming along, so their service doesn’t have to keep improving. Well… actually, maybe it will. Because Comcast is also a content provider, and can also start its own streaming service like Netflix (they have one now, it’s just not very good). If they aren’t getting the kind of buy-in for their Netflix-like service from consumers? Well, they can just charge Netflix a little more, and then offer you their service “for free” as part of your internet/cable/phone package. So, unless Netflix continues to be “awesome”, you might dump it for the freer, crappier, Comcast service.

“Oh, no I won’t! I won’t stand for crappy service. I will keep Netflix!” Really. Huh. OK. Have you used your cable box recently? Do you see how crappy the user interface is? Do you see how slow it is when you do something like bring up the guide, or the pay-per-view, or the OnDemand menus? They suck…. they suck terribly. You don’t have to use one of those boxes. In most places, you can buy a box online that uses technology that will allow you to connect to your cable provider. And the interface will be better. But, realistically, nobody does that. Because it is a hassle, it is expensive, and, for the most part, since people don’t know they can get something better, they just assume this is how TV has to be.

The internet in the US is going to get shittier. That’s just the way it is. And since most Americans don’t travel abroad, we aren’t going to know how shitty the internet became. I’ve seen friends tell me how “cool” it is that they can watch Netflix or other TV type services on their phone. Guess what? That new thing was new in South Korea, too. In 2000.

Our internet is terrible, and the FCC has just decided to make it worse.

sigh.

We should all realize – if the government doesn’t regulate something, it doesn’t mean “freedom”. The thing will get regulated… by a for profit company.

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The Coming End of Right Wing Economics? We Can Only Hope

The new column today out from Paul Krugman, about Tom Piketty’s new book got me to thinking.

It must have been very, very difficult to be a Keynesian economist in the late 1970s in America, Europe, and England. Unemployment was high, inflation was staggering, and growth was stagnant. The ideas on the left edge of the economic spectrum seemed to have run out of gas. Taxes on the wealthy? High. Welfare programs? There were a lot. Economic stimulus? We did it, yet inflation was still high.

So, those right wing ideas of tax cuts were certainly worth a try. Hell, nothing else was working. Why not try all those wacky economic ideas out of the Chicago school being espoused by Martin Friedman’s disciples?

So we did.

Now, the idea that it was Keynesian economic ideas that were failing in the 70s was a bit silly in retrospect. The entire world was still massively dependent upon the strength of the US economy, and US economic policy was a mess due to the Vietnam war. We fought it on the credit card, and like all bills, it was time to pay. Had we not had the Vietnam war, it is entirely possible that the malaise that existed in the mid to late 70s wouldn’t have existed.

But… whatever. We tried right wing policies, and while we also simultaneously doing some left wing things (like Volker radically increasing interest rates to curb demand and thus break inflation’s back), and then the Soviet Union fell apart, and hello there, peace dividend.

In any event, changing from a left-ish style economics to a right-ish style of economics was really only possible because it appeared, right or wrong, that left-ish economics wasn’t working.

I keep hoping, sometimes beyond hope, that we are finally reaching that point with right-ish economics. It is one thing to talk about cutting taxes when the top tax rate is 70%. But when it is 35% for income, and 20% for investment income, that idea seems silly. It’s one thing to talk about cutting spending when the cost of borrowing money is 10%, it’s another thing to talk about cutting spending when the cost of borrowing is less than the rate of inflation, which means the money is basically free.

It does seem like the pendulum is finally, after 30+ years of doing things the right wing way, swinging back to the center. We did actually implement a form of health care that could eventually lead to everybody having insurance, even if it is kind of a mess due to the desires to keep the fantasy of “market based competition” alive. We are pulling back on military spending, even if we still spend way more than the next several countries (most of whom are allies) combined. And the Justice Department is finally looking at our crazy minimum sentencing laws around drug offenses, asking prisoners to apply for clemency, and adding staff to handle the claims. And, as Krugman points out, the rhetoric from the right seems especially hyperbolic and nonsensical.

So, are things turning around? I can only hope. On days like today (Friday), I’m hopeful. I’ll probably be cynical next Monday when I see yet more gobs of money being poured into politics thanks to the Roberts Court.

Review of Michael Lewis Book “Flash Boys”

UnknownThe book “Flash Boys” (Amazon, Apple) by Michael Lewis tells the story of how our current stock market works, how it is being manipulated, and what a group of guys who figured it out are trying to do about it. Like all good Michael Lewis books, it focuses on one central character to provide the narrative structure as he teaches you about what is going on. In this case, the character is Brad Katsuyama, a trader at the Royal Bank of Canada (RBC). By focusing on one character, Lewis’ books become page-turners, though it does tend to leave some of the technical details out in the interest of advancing the story. I find this perfectly acceptable, because it gives you enough of a window into how things work that you can then dive into the deeper, and let’s face it, drier, technical details of the subject if you are so interested. Lewis himself mentions these books in his notes, so you have get a good heads up on where to go for further reading.


While the book focuses on Brad and his colleagues, it gives a fascinating insight to how our modern stock market actually works, and really made me not want to be a part of it at all. As an example, I think we all have an idea that there are these limited quantity of hard, fixed pieces of real estate, called the NYSE or Nasdaq, and there are people running around on the floor shouting at each other as trades get made. If you wanted to trade Apple stock, you went to the NYSE (as that is where it was listed). If you wanted to trade Intel, you went to Nasdaq (because that is where it was listed). Yes, there are computers, and maybe some of this “people yelling at each other” is antiquated, but the NYSE is still a place where this stuff happened. If you turn on CNBC, you see the floor of the NYSE and you see people walking around.

However, this is not how things work anymore. That trading floor you see on CNBC, and the celebrities or CEOs doing an IPO that ring the opening bell? That’s just a set piece, nothing goes on there. And there aren’t 2 or 3 exchanges (Amex being another). There are 12 or 13… and you can trade any stock on any one of them… and those are just the public exchanges. Banks like Goldmann Sachs have their own, private exchanges, called “dark pools”, where their clients can trade. And these new public and private exchanges aren’t loaded with people, but rather are just large arrays of computer servers running algorithms. And you don’t just have trades like “buy” or “sell”, or even things as simple as “limit orders” (buy/sell if the stock hits such and such a price). You have dozens of order types that are complex and hard to describe, because the types are really meant as triggers for the computer algorithms running on the servers in these multiple exchanges.

OK, wait… what?

Exactly!

The world is a much different place, not only from the Wall Street immortalized in the Oliver Stone movie of the same name, but even from the market of the late 90s that you or a friend of yours participated in when they quit their job to be a “day trader”, and even from the market that existed when the financial crisis hit.

Why are things so different, and how come we didn’t know about it? That, basically, is the crux of the book. This change in the market was all transparent to you and me when we go onto our Fidelity web page to trade a stock, because these changes weren’t about you and me. They were about a group of people called “high frequency traders” or HFT. These changes were made to turn the stock market into a complex Rube Goldberg machine, because the more complex the machine is, the easier it is to find inefficiencies in it to exploit. Much like how the financial crisis occurred because people who traded in mortgage backed securities were trading in an opaque market of strange, hard to decipher rules, the new stock market is complex, opaque, and confusing, which allows the people who know how to spot a fissure in the rules to swoop in, unbeknownst to the rest of us, and take some money.

In the olden days, stock trades did happen based upon speed, but it was a regulated speed. You might have a really good stockbroker who has a stacked Rolodex or excellent memory, and when he (or she, but let’s face it, it is mostly he) trades a stock on your behalf, he can get you the best deal because of this. He can find the seller willing to sell for less than he really wanted (so as to get you the best buy price) or find the buyer willing to buy something for more than he wanted to buy (so as to get you the best price) or, perhaps, do great horse trading so that you split the difference.

For example, say you want to buy a stock and make a bid at $10. And somebody else wants to sell the same stock and makes a sale offer for $10.02. A good broker might be able to get you that $10 price because of whom he knows and how fast he works, such that you don’t have to pay $10.02. Conversely, if you were the seller, your broker was so good he could get you the $10.02 price so you don’t have to sell at $10. Or, he works it out such that the stock trades for $10.01. The better the broker, the more you are likely to get your price.

Now, in this old-timey Bud Fox market of guys in rolled up white buttoned shirts and ties yelling on the phone, if your broker instead interjected himself, such that he bought the stock for $10 that you asked for, but turned around and sold it for $10.02 back to you, that would be illegal. He was using his knowledge to make the seller think the only offer for his $10.02 sales price was $10, and to make the buyer think the only stock available for his $10 ask was $10.02. He pocketed the difference. That’s a no-no and a quick ride to jail (well, fines… maybe… depending on how crappy the government feels like operating)

But in the new world order of computer based algorithmic trading, this is not illegal, as long as it is the computer doing it. A computer can make this trade, independently. And the way it works is like this. Your Bud Fox-type broker isn’t getting a phone call… what he is doing instead is taking a bunch of money from an HFT (through fees), which lets the HFT see what the incoming stock price bids/asks are ($10 and $10.02). The HFT sees this information, and has his computer sit closer physically (as in, with shorter wires) to these stock exchanges “matching engines” where the trades occur. Because he is closer, just by rules of physics, he gets to the matching engine before you, and can do the trade with you opposite of the way you hoped. To you, it looks like you didn’t get your price. But the thing is… neither the buyer nor the seller got their price. The seller thinks he had to sell for $10, and the buyer thinks he had to buy for $10.02. The HFT made a 2-cent profit (some of which he paid to the Bud Fox brokerage firm in fees).

Now, that sounds simple and all, and it is. Because, couldn’t the HFT equally “lose” as well as win here? He could, in theory, end up buying at the wrong price and selling at the wrong price, and lose just as easily as he could win. And this would be true, but that gets us back to all those complicated order types. You don’t just have “buy” and “sell” or “limit” orders. You have orders you can make that you can cancel unless certain, wild and crazy and difficult to explain in English conditions are met. And since these orders can be cancelled, they allow you as the maker of the order to tease out what the real buy and sell prices are, which you can use to then cancel the main order, and come in right after it with a “better” order that you do complete. You are thus, in essence, making free money.

Keep in mind, this is all legal. And this legality is not an accident. The people who have made it legal? They made it legal explicitly so they could do this. The “it’s illegal if it is a human but legal if it is a computer” thing is not a mistake – it is part of the plan.

The crux of the story, once you learn this, is what Brad and his colleagues did with the information – they created yet another exchange that can combat these HFT algorithms. Their exchange slows down the orders such that an HFT can’t sneak in. Their exchange has much simpler order types. And finally, they got clients to demand from their banks doing trades (such as Goldmann Sachs) to use Brad’s new exchange when they placed their orders. Like every other exchange, they make money when trades happen on their exchange. They might make less than other exchanges as they aren’t selling access to HFT, but the hope is that by being the “fair” exchange, they will get more volume over time and thus do just fine.

One other fun note… as with the mortgage based financial crisis, Brad didn’t just set out to create his exchange as soon as he figured it out. He went to the SEC to let them know what was going on, with the hopes that maybe this would stop on its own with some rule changes. He was a happy, and rather wealthy man, doing trades at RBC. He wasn’t an entrepreneur with dreams of starting his own exchange. But, just like with what happened in the financial crisis, he found deaf ears at the SEC. They didn’t seem interested in stopping what was going on. Brad’s team did some analysis of this, and as it turns out, the sheer number of SEC employees who later quit the SEC to go work for HFT firms was astounding. In other words, the SEC knows what is going on, but just didn’t care. I know… my head slammed on the desk reading that, too.

As with all Michael Lewis books I have read, this book was very good. Lewis doesn’t feel it is his role to provide answers about how to make Wall Street change, any more than he felt it was his role to make Wall Street change when he wrote “The Big Short”, about the mortgage backed securities fiasco. Lewis instead writes a book that is entertaining as well as educational. It has heroes you root for, and villians you cannot believe exist outside of fiction. As with The Big Short, he succeeds.