Demystifying Medicine One Month at a Time

Information Asymmetry

I’ve become a big fan of author Michael Lewis. Through character-driven storytelling, he takes complicated subjects and makes them more understandable. Case in point is his book about the financial meltdown, The Big Short. He explained as well as anybody what the terms credit-default swap and collateralized debt obligation¬†were, and why they were ultimately ‘toxic’ assets that ground our financial system to a halt in 2008-9.

michael-lewis-charlie-rose-showHe’s back at it again, with a new book called Flash Boys. This time he takes an in-depth look at the phenomenon of high-frequency trading (HFT). HFT is the art and science of making huge stock trades in less than the blink of an eye. It may not surprise you to learn that there’s a great deal of gaming that goes on in that world—namely, that trading firms jockey for position to gather information milliseconds quicker than one another to get a fractional advantage over competitors.

Lewis was interviewed recently on NPR’s “Fresh Air” about his book. It’s worth listening to the whole thing (which is embedded below). But what I found really compelling was a part at the end of the interview, where host Terry Gross asked Lewis about his origins as a writer. Here’s the exchange:

GROSS: Part of the reason why you’re so good at reporting on Wall Street as that used to work there, so you were an insider for a while. And this was in the mid-1980s when you worked…

LEWIS: A long time ago. Yeah.

GROSS: Yes. And it’s changed a lot since then but still, you grasp it. So this was in the mid-’80s. You worked at Salomon Brothers. You were there during the crash of October ’87. You say Wall Street firms have grown more concerned than they were in the late ’80s with what journalists might say about them. Why do you think that is? And how did that affect your reporting of this high frequency trading story?

LEWIS: It’s interesting because if you think back what I did with “Liar’s Poker,” I walked out of a job at Salomon Brothers, told my bosses I was going to write a book about Wall Street and they kind of smiled and said go do it if you want to, you’re crazy because you could make a lot more money here. But you know, do your best kind of thing.

If you tried to do that now, well, for a start, the version of me on Wall Street would’ve signed all kinds of non-disclosure agreements when he came into the firm. And you would’ve been hounded by lawyers on your way out the door. The firms have become so concerned about their public faces and so reluctant to share what’s going on inside of them. Now, why has that happened?

I think it’s because Wall Street, to some extent, depends for its profits on people not understanding what’s going on in Wall Street. The firms generate complicated situations, complicated securities, precisely so that other people don’t understand them, creating an advantage for the Wall Street firms. I think that technology has naturally rendered a lot of what Wall Street’s formerly useful function was moot, that you don’t need a human being in between buyers and sellers of stock anymore. It could all be done electronically without Wall Street in between the buyers and the sellers. So Wall Street has been put in a position of having to scramble to find sources of revenues that are just less justified, that are more kind of manufactured.

Subprime mortgage CDOs are one example. The incredibly complicated things they did in the subprime mortgage market were not actually economically useful. They were damaging but they generate a lot of profits for Wall Street. This breathtakingly complicated stock market that’s been constructed is not actually socially or economically useful but it generates a lot of money for Wall Street.

So when you are running one of these firms and you sense that a lot of what you do is not socially or economically useful, it’s just enabling a kind of skim, the last thing you want is transparency or people from the inside talking about what’s going on in the inside. You want to hide what you’re doing. I mean I think they’re naturally kind of more frightened of having the public genuinely understand what their businesses are.

And it’s not that all of the business on Wall Street is bad or not useful, but it’s just an increasing chunk of Wall Street is essentially predatory. So I think that’s what’s going on. And I think that the sort of technology has caused a crisis in the financial services industry and the financial services industry has responded by, you know, trying to defend its profitability and it’s been very good at doing it. But it requires this kind of opacity.

I was really struck by Lewis’ remarks here. Moreover, if you reread the dialogue above and substitute the term “health insurers” for “Wall Street,” and “medical” for “financial services,” only the players would change.

The asymmetry of information is still what drives so much of health care marketing and finance. Even though we all have much better access to actual health information than ever before, health care pricing and the “middlemen” are as opaque as ever.

1 Comment

  1. Paul

    I think there are some parallels between financial industry obfuscation and health industry obfuscation, however, complex financial instruments do a lot a lot of damage because ultimately, their behavior becomes difficult to understand and predict. From my perspective as a non-medical user of healthcare, the complexity arises from an attempt by the insurance industry to create products out of behavior, charging for each measurement and each use of some tool.

    His comment about firms requiring non-disclosures seems weird to me – don’t all drug research firms require them, too? I know software companies do.

    Also, a small correction – HFT is not about making huge trades quickly, it’s about making small trades quickly. The reason Brad Katsuyama was not filling his orders was because he was trying to send large trades, and everyone knows that RBC’s tech is terrible and has been for a long time. It also sounds like the hedge funds he talks to had problems with their terminal providers leaking their information into the market.

Leave a Reply

Your email address will not be published. Required fields are marked *

© 2020 GlassHospital

Theme by Anders NorenUp ↑