Insider Trading: Supermarket Lines, the Stock Market and Chance

The model of insider trading with coins and balls is simplistic and theoretical, but at least has the virtue of being clearly wrong and quite limited. This can't necessarily be said about the proprietary computer code that companies like Goldman Sachs employ to make high-volume trades almost instantaneously. (Goldman is not alone. Renaissance and other high-tech investment groups have their own very fast proprietary code.)

Proprietary Codes and Almost Instantaneous Transactions

If, as the writer Matt Taibbi, the blog Zero Hedge, economics Nobel Prize winner Joseph Stiglitz and others have suggested is a possibility, Goldman were to use its lightning fast programs to carry out its own trades before those of its clients, then it could, in effect, move to the front of any supermarket (or, in their case, super market) line.

By being privy to others' intended trades, and immediately and preemptively acting, it could reap profits that would make inside traders of the past look like underlings stealing pens and staplers from the company storeroom.

However accomplished, Goldman has enjoyed more than $100 million in trading revenue on more days than it hasn't this year.

'Supermarket Cop' Could Prevent People From Skipping the Line

Responding to Zero Hedge, Goldman spokesman Ed Canaday has stated, "Your suggestion that we monitor our Web site to facilitate front-running is untrue and offensive," but even if these unproved suspicions of "front-running" are false and Goldman is only using its extremely expensive, sophisticated programs to swiftly carry out others' trades, these other clients will still move ahead of ordinary investors, who will inevitably find themselves in the slow-moving line.

It's not surprising that Goldman's code (and that of others) is very valuable and jealously guarded, as evidenced by a recent story about the FBI's arrest of an Russian emigrant programmer alleged to have stolen parts of it.

One partial solution may be to randomly impose a one- or two-minute delay on some trades, a sort of supermarket cop who occasionally and briefly prevents people from skipping ahead in line. A reform of this general sort is something that Congress or the SEC should at least consider.

The prospect of thousands of people making billions of dollars not because they produce anything of value or because they efficiently allocate resources to worthy companies, but simply because they have better, faster software is not a pleasant one to contemplate. And it's also a waste of the talents of the very intelligent people who write and implement the software.

John Allen Paulos, a professor of mathematics at Temple University in Philadelphia, is the author of the best-sellers, "Innumeracy" and "A Mathematician Reads the Newspaper," as well as (just out in paperback) "Irreligion: A Mathematician Explains Why the Arguments for God Just Don't Add Up." His "Who's Counting?" column on appears the first weekend of every month.

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