There’s an interesting article in the Wall Street Journal about the threat index funds are increasingly seen to pose to the global economy. I’d like to understand this more than I do because I’m intrigued by the technological preconditions for this form of investing and the competitive advantage this use of technology offers:
And a group of researchers at the University of Amsterdam in the Netherlands recently argued that the rise of giant index-fund managers, including BlackRock and Vanguard Group, could lead to a concentration of ownership unrivaled since the days when John Pierpont Morgan and John D. Rockefeller controlled vast tracts of the economy.
Of course, those titans primarily represented their own interests, while the index funds are legally bound to act on behalf of the millions of savers who own them.
The machines that run index funds slash the costs of investing by 90% or more by skipping most of the research and trading their human rivals engage in, instead owning essentially all the stocks or bonds in a market basket all the time.
Furthermore, if I’ve understood correctly, index funds are parasitical upon evaluation taking place elsewhere. To use the terms from my recent paper, it opens up the possibility of the algorithmic imperative swamping the curatorial imperative, with potentially catastrophic results for financial markets.