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"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

by 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.
      - cmdrfred 10y ago
        My original query was how do you use capitol that you have for less than a second to hire someone (or do anything for that matter). I'm not aware of a mechanism that would allow HFT to create a job. (Except at a HFT firm perhaps)
- fsloth 10y ago
  You don't. You use the profits from the transaction as capital that then eventually funds the operations of some third party, who then uses that capital to hire employees and to purchase services and materials. Now, does it improve liquidity? Investopedia claims so, thus, making capital cheaper and making it (in theory) easier e.g. to hire new people. http://www.investopedia.com/articles/active-trading/050515/liquidity-improved-high-frequency-trading-hft.asp http://www.investopedia.com/articles/active-trading/050515/l... In itself it's not evil and actually beneficial. Lower transaction costs and more liquidity means there are more resources to go around. What people actually choose to do with the amassed capital is another thing then entirely. Does it cure cancer? No. But blaming smart people from not trying to be a superman is stupid. Very, very few alone are that smart that they alone would make a huge difference. It's hard to see why a career in finance would be less ethical all around than a career in some company that just harvests clicks. Science currently, as a career choice, needs burning enthusiasm or it will burn people out - I see no reason to chide people for not choosing it. As a fairly low-income engineer I find it hard to see any other reason than jealousy to bash people in finance in the general context.
  - cmdrfred 10y ago
    From your source: "The opponents of high-frequency trading feel that whatever liquidity HFT creates is superficial because the securities are held for a very brief period (seconds or fractions of a second) before being sold back again into the market. Most of the time, securities are bought and sold very frequently between high-frequency traders until they are bought by an investor. Opponents say there is thus no ultimate creation of liquidity but a mere facilitation for order execution. HFT results in what is called hot potato volume. Positions are being ping-ponged between high-frequency traders and the other marketmakers. Thus there is the creation of great volume and no concurrent depth. For orders to be absorbed, buyers must hold their positions for a longer time than just a few seconds.” And then merely counters that with a argumentum ad populum: "With more than a decade in existence, high-frequency trading is now more or less an accepted part of the stock markets. There is a consensus that, on average, HFT has added liquidity to the markets and reduced trading costs." The evidence appears rather weak for that position.
slv77 10y ago
Money sitting in a bank account is invested via loans and gets returns via interest. If the bank is savvy and makes good investments they keep the spread between the interest paid and the interest earned. From the perspective of the business owner it matters little of the cash comes from a bank or as an equity investment. The cash spends the same and they will prefer whichever they can get that is most favorable to them. Even though public equities get all the news they are a relative latecomer to the party and are frankly a pimple when compared to the bond and cash market. Even if the entire public market disappeared tomorrow the vast majority of companies would have no issue raising cash either through private equity, bonds or bank loans. Almost all (99.999999+%) trades on the public market have nothing to do with raising corporate equity (i.e. newly issued stock) and instead are transmitting price information about the markets current beliefs about potential future earnings. That is valuable in aggregate because it allows good companies with strong prospects to raise funds at a lower cost (if needed). But is transmitting pricing information around the globe via dedicated links to shave off tenths of seconds really necessary? Does any company need to raise funds at a micro-seconds notice? After all the markets close at the end of the day but somehow the world continues to function for the next 16 hours without sub-second pricing information at everyone's fingertips.

by fsloth 10y ago

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.
    - cmdrfred 10y ago
      My original query was how do you use capitol that you have for less than a second to hire someone (or do anything for that matter). I'm not aware of a mechanism that would allow HFT to create a job. (Except at a HFT firm perhaps)
fsloth 10y ago
You don't. You use the profits from the transaction as capital that then eventually funds the operations of some third party, who then uses that capital to hire employees and to purchase services and materials. Now, does it improve liquidity? Investopedia claims so, thus, making capital cheaper and making it (in theory) easier e.g. to hire new people. http://www.investopedia.com/articles/active-trading/050515/liquidity-improved-high-frequency-trading-hft.asp http://www.investopedia.com/articles/active-trading/050515/l... In itself it's not evil and actually beneficial. Lower transaction costs and more liquidity means there are more resources to go around. What people actually choose to do with the amassed capital is another thing then entirely. Does it cure cancer? No. But blaming smart people from not trying to be a superman is stupid. Very, very few alone are that smart that they alone would make a huge difference. It's hard to see why a career in finance would be less ethical all around than a career in some company that just harvests clicks. Science currently, as a career choice, needs burning enthusiasm or it will burn people out - I see no reason to chide people for not choosing it. As a fairly low-income engineer I find it hard to see any other reason than jealousy to bash people in finance in the general context.
- cmdrfred 10y ago
  From your source: "The opponents of high-frequency trading feel that whatever liquidity HFT creates is superficial because the securities are held for a very brief period (seconds or fractions of a second) before being sold back again into the market. Most of the time, securities are bought and sold very frequently between high-frequency traders until they are bought by an investor. Opponents say there is thus no ultimate creation of liquidity but a mere facilitation for order execution. HFT results in what is called hot potato volume. Positions are being ping-ponged between high-frequency traders and the other marketmakers. Thus there is the creation of great volume and no concurrent depth. For orders to be absorbed, buyers must hold their positions for a longer time than just a few seconds.” And then merely counters that with a argumentum ad populum: "With more than a decade in existence, high-frequency trading is now more or less an accepted part of the stock markets. There is a consensus that, on average, HFT has added liquidity to the markets and reduced trading costs." The evidence appears rather weak for that position.

slv77 10y ago

Money sitting in a bank account is invested via loans and gets returns via interest. If the bank is savvy and makes good investments they keep the spread between the interest paid and the interest earned. From the perspective of the business owner it matters little of the cash comes from a bank or as an equity investment. The cash spends the same and they will prefer whichever they can get that is most favorable to them. Even though public equities get all the news they are a relative latecomer to the party and are frankly a pimple when compared to the bond and cash market. Even if the entire public market disappeared tomorrow the vast majority of companies would have no issue raising cash either through private equity, bonds or bank loans. Almost all (99.999999+%) trades on the public market have nothing to do with raising corporate equity (i.e. newly issued stock) and instead are transmitting price information about the markets current beliefs about potential future earnings. That is valuable in aggregate because it allows good companies with strong prospects to raise funds at a lower cost (if needed). But is transmitting pricing information around the globe via dedicated links to shave off tenths of seconds really necessary? Does any company need to raise funds at a micro-seconds notice? After all the markets close at the end of the day but somehow the world continues to function for the next 16 hours without sub-second pricing information at everyone's fingertips.