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I feel sad that so much brain power goes into market arbitrage. They produce nothing usable by anyone else. Imagine if these people built companies that made ne

• imaginenore 10y ago
  At the very least, they produce liquidity. If you saw someone selling a brick of gold for a dollar, wouldn't you buy it to resell it?
  • osrec 10y ago
    Liquidity that brings with it random, often unexplained volatility... But yes, I would probably buy the brick, and can understand why people lucky enough to have colo servers do this.
    • imaginenore 10y ago
      Volatility hasn't changed much since the 70's: https://qph.ec.quoracdn.net/main-qimg-62a6ee89ddc1c930de9afb84fe5ccf62?convert_to_webp=true https://qph.ec.quoracdn.net/main-qimg-62a6ee89ddc1c930de9afb...
      • cmdrfred 10y ago
        That chart is net volatility over 12 months and ends at 2014. I wonder how more recent and granular data would look.
        • osrec 10y ago
          I was going to make the same point. At lower timescales, things look very different. Also the number of orders, cancels and corrects has exploded in the last couple of decades, purely because of algorithmic speculation. This makes the market significantly less transparent, and the weird and wonderful matching algorithms employed by exchanges often get gamed by colo'd traders with the relevant knowledge.
    • usefulcat 10y ago
      Regarding colo servers, there's no luck involved at all, just a price tag.
      • vostok 10y ago
        And, at least in the US, a fairly low price tag at that.
    • gumby 10y ago
      I don't understand what you mean about "lucky". Anybody can. I have had a rack of colo servers which I use for personal stuff for the last 15 years. In an AWS world it's in some ways absurd, but some things are easier this way. Perhaps I missed the point you were making?
      • deleted 10y ago
        [deleted]
      • georgiecasey 10y ago
        I think he's referring to traders paying for colocation in the exchange data centre.
        • osrec 10y ago
          Precisely, and money isn't the only factor here. Your contacts, your firm's contacts and your trade volumes (amongst other things) can get result in you getting preferential treatment.
        • gumby 10y ago
          Thanks, I could not see that implication. I guess it shows what field I do not work in :-)
  • keyle 10y ago
    That volatility is deadly to the retail speculators. They get wiped out, off the markets, by this 'false' liquidity, which literally wiggles them out.
    • vostok 10y ago
      As someone who works in the industry I've found that analogies are distinctly unhelpful. That's not really unique to finance [0]. Can you explain what you mean by "literally wiggles them out"? I cannot say that I have observed a phenomenon that I would describe with those words, but I'm always interested in learning more. [0] http://dl.acm.org/citation.cfm?id=801816 http://dl.acm.org/citation.cfm?id=801816
      • keyle 10y ago
        That increase in volatity pushes prices up and down without real logic behind, in the short term, causing the small retail pundits to hit their conservative stop losses and take them out of the market. That's what I meant by "wiggle them out". Does that make sense?
        • deleted 10y ago
          [deleted]
        • harshreality 10y ago
          The terms people are likely to understand are "short squeeze" and "long squeeze".
        • Godel_unicode 10y ago
          Another way to say that is the market allows people to do things they don't really understand the consequences of, which can be expensive.
        • vostok 10y ago
          Thank you for clarifying. You're talking about retail speculators getting "stopped out". Do you have a reference showing that is happening with increasing frequency due to HFTs? It runs counter to my intuition because HFTs lead to less "gappy" markets and markets that respond to news events more quickly. For the purposes of this comment I will assume that this is true. Is the amount that retail speculators lose to increased frequency of getting stopped out greater than the amount they gain from tighter markets? I don't have a clear opinion on this. Is the net loss to retail speculators greater than the net gain to all other market participants? I suspect not because retail speculators are such a tiny portion of the market. If this kind of volatility has increased with HFTs, it's caused by an overly small tick size. Markets will go back to how they were if you increase the tick size back to 1/16 of a dollar. This wouldn't help price takers other than retail speculators, but that's how you fix it if it really is a problem.
• vostok 10y ago
  I feel sad that you think this about finance. I believe I've done a lot of good for the world and have gotten the opportunity to work with some very smart people along the way. I first started working in finance because it was one of the few industries that paid engineers a fair salary without trying to trick us with monopoly money. Of course, the world has changed and now tech companies are doing the same.
  • chii 10y ago
    > I believe I've done a lot of good for the world I genuinely want to know what you think the good you did for the world is in investment/trading. I really don't believe that the amount of money the financial industry is making is commensurate with its value provided to society.
    • vostok 10y ago
      > I genuinely want to know what you think the good you did for the world is in investment/trading. My job has literally been to ensure that, out of every invested dollar, more money goes to the investment and less money goes to traders and other intermediaries. It may not sound like a big deal, but this is literally billions of dollars a year that are invested in productive industries instead of going to someone's bonus or, worse yet, just vanishing due to lack of care. > I really don't believe that the amount of money the financial industry is making is commensurate with its value provided to society. I don't know if it's because I'm uninformed, but I would agree with you. It's not really clear to me why investment bankers earn such huge fees. I suspect that it's because they're basically able to pay their friends with shareholders' money. I don't remember where I first heard this idea, but I can't help but think that it rings true. My hope is that some day we'll be able to do to banking what we've done for trading.
      • lucozade 10y ago
        > It's not really clear to me why investment bankers earn such huge fees You can think of investment bankers as salespeople. They sell very high value products in very competitive markets. Whether you think that salespeople do an important job and/or a job that should be paid commensurate with the value of the product is a matter of opinion.Having spent a lot of time with salespeople when I was last in a startup, I have a lot of respect for folk who could do a job that I would most definitely, spectacularly fail at. YMMV.
• retube 10y ago
  They generate returns for their investors, which are generally institutionals such as pension funds and asset managers. How is that not providing value?
• pedalpete 10y ago
  I completely agree with you, but think your comment should be moderated down from 'They produce nothing usable', to 'They are paid exorbitant amounts compared to the value the produce for society as a whole'. "but they manage your retirement fund", really? do they? last I checked there are algorithms running the entire show and making sure I and every other little investor get screwed for every 10th of a cent so that a few investors at the top who already have loads of money can have more. They've made a game out of moving money and skimming a bit off the top all the time. Let's not forget that they are actually taking money from your 401k every time they make these trades. Let's not pretend the financiers care about you, the little guy. Another comment mentioned that YC is in finance, but let's be clear, YC is financing start-up businesses and helping them to grow. They're small finance. When I buy a share in Facebook, I'm not helping it grow, I'm betting on it's growth and the big finance industry is just the casino.
  • vostok 10y ago
    > making sure I and every other little investor get screwed for every 10th of a cent so that a few investors at the top who already have loads of money can have more. Do you have a reference for this? It runs counter to my intuition.
    • zdkl 10y ago
      Wells Fargo's product-per-client quota springs to mind
      • vostok 10y ago
        I think we're discussing trading here. I'm not prepared to give anyone financial advice, but I'm probably not personally a huge fan of retail bankers, investment bankers, wealth management, expensive mutual funds, and so on.
    • pedalpete 10y ago
      This is actually how algorithmic trading works. Computers are committing multiple trades in a fraction of a second in order to skim the tiniest of profits thousands of times. https://www.bloomberg.com/view/articles/2014-03-31/speed-trading-in-a-rigged-market https://www.bloomberg.com/view/articles/2014-03-31/speed-tra...
• kriro 10y ago
  I find it only natural. The free-ish market is one of the greatest things about humankind. I find the complexity, information movements etc. highly fascinating. Trying to beat the market essentially means that you're very interested in how mankind works at a core level. Academically that's very interesting and it's nice that the tokens you use to keep track of how successful you are happen to be money. Additionally at least in theory they do help allocating capital to better uses which has giant leverage effects on the economy as a whole. I'd argue more efficient capital allocation and innovation (in the Schumpeterian sense) are both very valuable. I couldn't make a value judgment of what's more valuable tbh
• nickonline 10y ago
  You could make a similar argument about a lot of the social media sites, there are engineers at Facebook making huge money, just to work out how to make you spend an extra 1-2 minute a day on their site. Sure they were originally doing something of value with that, but now days they're just trying to make people more addicted.
  • lvs 10y ago
    Yes, so they're both unproductive pursuits.
• fsloth 10y ago
  "I feel sad that so much brain power goes into market arbitrage. They produce nothing usable by anyone else." The simplest description of the financial sector is that they ensure that money is invested and reinvested. In general, this is good for the economy, and helps everyone. This pays for peoples wages etc. Let's imagine a situation without financial services. All money just sits on a bank account. That's it. No return of investment. Zippo. Nada. Now, imagine that money is reinvested - now the money flows into a company, that can use the money to hire someone... etc. The world with finance is a much more rich and varied world than a one without finance. The fact that it plays such an important role, and that it's not immune to human fallacy, leads to the pathologies we've sadly all become familiar with. Basically, if we look this from a historical perspective, a world without finance is a world without industrialization. That's not to say finance (or industry for that matter) is always fair.
  • cmdrfred 10y ago
    How do you use money to hire someone when you only have it for a few minutes or seconds?
    • krit_dms 10y ago
      What do you mean? Finance allows companies to do IPO's, raising money to fund growth and employing people.
      • cmdrfred 10y ago
        Wasn't the discussion about high frequency trading?
        • fsloth 10y ago
          I think it's hard to say what exactly is the specific sin of high-frequency trading, and that it appears as an indistinguishable part of the current market. Thus critizing high frequency trading appears of critique in general of parties who merely leverage the existing information disparity in the market to the fullest. The main benefit of the market is that it removes transaction costs. Money has lower transaction costs than barter, bank transfers have lower transaction costs than coffins of money, etc. Inducing some mechanism that would guarantee full information parity between all agents in the market sound to me like it would eat up lot of the benefits of the lowered transaction costs. Although, I'm not an economist and can be persuaded with better information.
• verbify 10y ago
  They provide a price-finding mechanism, and finding the price of goods helps create value.
  • lvs 10y ago
    Snore. We can find the price without them, and so much of that function is fully automated anyway.
    • verbify 10y ago
      If it's automated, why do people bother paying these people? And even if it is automated, someone has to write the algorithms, no? And how do you propose finding the relative value of different companies without these people?
• banach 10y ago
  "Imagine if these people built companies that made new advances and new products." Or stayed in science and advanced knowledge without having economic returns in mind.
• alpeb 10y ago
  The finance industry is indeed one of the top scourges of humanity. Hopefully decentralised money à la bitcoin would some day replace it.
• solotronics 10y ago
  technically they are providing value. they have better knowledge to more accurately price assets, therefore through buying and selling they are correcting the pricing of real companies.
• pasbesoin 10y ago
  As far as I'm concerned, markets should be put on a stepped clock with randomized queue processing. Said queue blind until processing. Then put the resources spent chasing the clock to better use. A one minute interval seems appropriate. Plenty real-time enough to deal with most real world events and needs, while eliminating arbitrage based upon momentary, naval-gazing analysis. Markets already belie the trope of an (entirely) "free market." At least level the playing field between moneyed quants and the rest of the world.
• credit_guy 10y ago
  I for one don't feel sad, I feel good about that. I loved the movie "Good Will Hunting" and that's the message I got from it: the pursuit of the personal happiness trumps petting your mind to work for the greater good. Let's imagine, just as you said, that these brilliant mind did work towards the new advances and new products. We would get the new generation of smartphones one year sooner, and we'd be so moch richer for that, I guess. But if that comes at the expense of these people being one epsilon less happy than they currently are, that's not a trade off we as a society should be willing to make.
• erikpukinskis 10y ago
  I have been thinking about the "we provide liquidity and accurate pricing services and that's good" argument in the context of housing costs and gentrification. The housing market is very illiquid—it's much harder to buy or sell a home than to rent a place to stay for the night. In the context of gentrification, though, this seems to benefit the preexisting landowners: the difficulty of moving provides downward pressure on supply, increasing prices, and also makes it less likely that longtime residents will sell before prices peak. But, as a thought experiment, imagine if there was perfect liquidity: you could buy and sell a house at any time at the click of a button with ready financing and (somehow) free moving services, etc. If that were true, many more residents would sell much earlier in the gentrification wave, to slightly richer people, who would sell to people slightly richer than that. This would result in the original landowners only getting a tiny fraction of the peak land value, and most of the returns going to the richest people. This makes me wonder if this isn't generally true: that high liquidity primarily benefits the capital class at the expense of small asset holders. There's probably also a corollary about late stage VCs here somewhere.