Rent Seeking

Jesse's Cafe Americain points to an excellent piece written by James Rickards, former counsel to LTCM.

Emphasis in the quote below is mine:

Now consider another example of data mining, not done by retail firms, but by giant investment banks such as Goldman Sachs. These banks have thousands of customers transacting in trillions of dollars in stocks, bonds, commodities and foreign exchange daily. By using systems with anodyne names like SecDB, Goldman not only sees the transaction flows but some of the outright positions and whether they are bullish or bearish. Data mining techniques are just as effective for this market information as they are for Google, Amazon, Wal-Mart and others. ...

One need not be a market expert to imagine the power of this information. You can see which way the winds are blowing before the storm hits. ... This use of information is the ultimate type of insider trading because it does not break the law; you are not stealing the information, you own it.

So what do Goldman and others do with this mountain of market information? ...this mountain of immensely valuable market information is used mainly to power their giant proprietary trading desks allowing them to rack up consistent excess returns. Economists have a name for this also. It’s called “rent seeking,” which means taking value from others without any contribution to productivity. ... In nature, the name for a rent seeker is parasite.

The ideal existence for a parasite is symbiosis, or balance, where it offers some minimal service to the host, (some parasites devour insects which annoy the host), while extracting as much sustenance from the host as possible without killing it. But sometimes the symbiosis is disturbed and the parasite takes too much and actually destroys the host, which can end up destroying the parasite as well...

And that is the nature of Goldman. Gather up as many customers as possible, aggregate the available information to achieve a superior market view and then relentlessly extract rents from the marketplace. Better yet, tell yourself you’re smarter than everyone else and you’ve earned the rents from the symbiosis.

Ouch.
It's worth noting that the article isn't meant to just bash GS. Well okay, it mostly is, but does provide some justification:

We actually wouldn’t care about this if we weren’t subsidizing it. If Goldman wants to Hoover up information and their customers are willing to be used, that’s their business. We should mind that the taxpayers are supporting it. We should mind that Goldman has the ability to take government guaranteed deposits. We should mind that Goldman was bailed out in the AIG rescue and never even said thank you to working Americans who paid the bill.