5 ms·

"taking real wealth" from whom? It is not a zero sum game.

by sunsu 10y ago

grogenaut 10y ago
If as the GP suggests they're making moves based on certainty of the larger fund's move, they can often be making the larger fund's gains smaller, which is counter to the interest of their customers in the larger fund.
branchless 10y ago
Yes it is when you don't create wealth
- ChuckMcM 10y ago
  Actually, it isn't. I believe you are conflating the concepts of "currency", "wealth", and "value." Here is an example I used with my kids once. Let's say you went the Pittsburgh Pirates game in 1978[1] and you caught the first home run hit by then rookie Barry Bonds. If you sold it in 1978 you would have been lucky to get $50 for it, if you sold it in 2007 when he retired with 762 home runs you could have gotten significantly more for it, perhaps several tens of thousands of dollars, and if you sold it in 2011 after he was tainted by steroids you would get less. But in all that time, the ball was just the ball. It's value went up, its value went down. As it went up and down the value of other home run baseballs also changed in value, but in ways completely unrelated to the value of Barry Bond's first home run ball. If you owned every single home run ball from the major league the value of any one ball was only related to that ball's history and not to the other balls. Quantitative analysis of markets is the art of figuring out how to recognize the value of something is changing before others do, and capture that value by acting on that knowledge. Whether it is offering to buy Barry Bond's first home run ball because your model suggests he could become an all time home run hitter, or selling it in 2009 because your model suggests Barry is likely to be tainted by the steroid scandal in baseball. You didn't steal any money, you didn't change the amount of "value" in the market, and the amount of "value" in the market it not controlled by a fixed number, its controlled by other events completely outside of your control. You bought something before others knew it would be valuable, you sold it before others knew it would be less valuable. Definitely not a zero sum game. [1] http://m.mlb.com/cutfour/2015/06/04/128375782/watch-barry-bonds-first-mlb-home-run http://m.mlb.com/cutfour/2015/06/04/128375782/watch-barry-bo...
  - mockery 10y ago
    If you had a magic oracle and, say, bought a ball for the fair price of $1 the day before you knew it would spike to $100, you are denying the seller an honest opportunity to sell it for $100. It's the moral equivalent of keeping your mouth shut when a clerk rings up an item for less than it costs. It might not be illegal, but it's certainly not "creating value" - you're using an information disparity to create a transaction with someone who wouldn't agree to your terms if they knew what you knew. ("Fools and their money" or something along those lines.) Of course, once you add in the realities of uncertainty and much longer time periods, you can make more subtle arguments about risk exposure, hedging, etc. But in the simplest case, trading on privileged information is absolutely zero-sum, at least in the sense that there's a clear winner and loser (and in the stock market, it's illegal!)
    - branchless 10y ago
      The length he goes to for this thought exercise yet he stikes fresh air.
  - dingaling 10y ago
    > and if you sold it in 2011 after he was tainted by steroids you would get less To extend that analogy the trading company has a tap on the Reuters newsfeed and they sell the ball as soon as the steriod story reaches them, milliseconds before it reaches the newsrooms.
  - cousin_it 10y ago
    > you didn't change the amount of "value" in the market > Definitely not a zero sum game. Grandparent comment is right and you seem to misunderstand the idea of zero-sum. A transaction is zero-sum if it doesn't change the amount of value. The stock market is mostly zero-sum. The only non-zero-sum transactions are when firms sell their own stock to get spending money. The only added value of the stock market is choosing which of these transactions should happen. Since front-running doesn't affect these transactions, I think it's safe to say that front-running is zero-sum.
    - 10y ago

"taking real wealth" from whom? It is not a zero sum game.

by sunsu 10y ago

"taking real wealth" from whom? It is not a zero sum game.

If as the GP suggests they're making moves based on certainty of the larger fund's move, they can often be making the larger fund's gains smaller, which is counter to the interest of their customers in the larger fund.

branchless 10y ago

Yes it is when you don't create wealth

ChuckMcM 10y ago
Actually, it isn't. I believe you are conflating the concepts of "currency", "wealth", and "value." Here is an example I used with my kids once. Let's say you went the Pittsburgh Pirates game in 1978[1] and you caught the first home run hit by then rookie Barry Bonds. If you sold it in 1978 you would have been lucky to get $50 for it, if you sold it in 2007 when he retired with 762 home runs you could have gotten significantly more for it, perhaps several tens of thousands of dollars, and if you sold it in 2011 after he was tainted by steroids you would get less. But in all that time, the ball was just the ball. It's value went up, its value went down. As it went up and down the value of other home run baseballs also changed in value, but in ways completely unrelated to the value of Barry Bond's first home run ball. If you owned every single home run ball from the major league the value of any one ball was only related to that ball's history and not to the other balls. Quantitative analysis of markets is the art of figuring out how to recognize the value of something is changing before others do, and capture that value by acting on that knowledge. Whether it is offering to buy Barry Bond's first home run ball because your model suggests he could become an all time home run hitter, or selling it in 2009 because your model suggests Barry is likely to be tainted by the steroid scandal in baseball. You didn't steal any money, you didn't change the amount of "value" in the market, and the amount of "value" in the market it not controlled by a fixed number, its controlled by other events completely outside of your control. You bought something before others knew it would be valuable, you sold it before others knew it would be less valuable. Definitely not a zero sum game. [1] http://m.mlb.com/cutfour/2015/06/04/128375782/watch-barry-bonds-first-mlb-home-run http://m.mlb.com/cutfour/2015/06/04/128375782/watch-barry-bo...
- mockery 10y ago
  If you had a magic oracle and, say, bought a ball for the fair price of $1 the day before you knew it would spike to $100, you are denying the seller an honest opportunity to sell it for $100. It's the moral equivalent of keeping your mouth shut when a clerk rings up an item for less than it costs. It might not be illegal, but it's certainly not "creating value" - you're using an information disparity to create a transaction with someone who wouldn't agree to your terms if they knew what you knew. ("Fools and their money" or something along those lines.) Of course, once you add in the realities of uncertainty and much longer time periods, you can make more subtle arguments about risk exposure, hedging, etc. But in the simplest case, trading on privileged information is absolutely zero-sum, at least in the sense that there's a clear winner and loser (and in the stock market, it's illegal!)
  - branchless 10y ago
    The length he goes to for this thought exercise yet he stikes fresh air.
- dingaling 10y ago
  > and if you sold it in 2011 after he was tainted by steroids you would get less To extend that analogy the trading company has a tap on the Reuters newsfeed and they sell the ball as soon as the steriod story reaches them, milliseconds before it reaches the newsrooms.
- cousin_it 10y ago
  > you didn't change the amount of "value" in the market > Definitely not a zero sum game. Grandparent comment is right and you seem to misunderstand the idea of zero-sum. A transaction is zero-sum if it doesn't change the amount of value. The stock market is mostly zero-sum. The only non-zero-sum transactions are when firms sell their own stock to get spending money. The only added value of the stock market is choosing which of these transactions should happen. Since front-running doesn't affect these transactions, I think it's safe to say that front-running is zero-sum.
  - 10y ago