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A lot of traders are losing their jobs, and many fear this. As other mention, though, Wall Street makes a lot of money trading the edge cases. For instance, m
by mathattack 10y ago
A lot of traders are losing their jobs, and many fear this.
As other mention, though, Wall Street makes a lot of money trading the edge cases. For instance, many people thought derivatives traders would become obsolete when the Black Scholes formula arrived. In reality, the model grew the size of the derivatives market, and traders made money knowing where the model was wrong. (Example: It assumes constant volatility)
Similarly, many investors use an OAS (Option Adjusted Spread) model to justify prices on one-off Mortgage Backed Securities. This also helps grow the market, as there's more transparent pricing. But traders know where the models are wrong, and make money off of them.
When technology enabled FX trade spreads to be less than a penny, people thought traders were done. But this increased the volume of trading (more hedging became cost-efficient) so while the % skimmed by traders decreased, the absolute $s increased.
Net, as long as the financial pie grows, traders can find ways to siphon money off. That amount may grow or shrink, but generally the story is more technology has helped them.
Perhaps the best analogy is a chess expert paired with a computer can beat either the computer or the expert alone.
- 21 10y ago> Perhaps the best analogy is a chess expert paired with a computer can beat either the computer or the expert alone. This has stopped being true for a number of years. Computers play chess so much better now, that a human will actually impede it. Think this way: could a 12 year old (the human) help a math graduate (the computer) on some problem? Or more likely he will just be a distraction? More elaborations on this from gwern: https://www.gwern.net/Notes#advanced-chess-obituary https://www.gwern.net/Notes#advanced-chess-obituary
- mathattack 10y agoFair enough, it's a weak analogy for chess. [0] The pairing is tighter in financial markets where the outcomes (prices) are not necessarily deterministic and the models are incomplete. [0] http://marginalrevolution.com/marginalrevolution/2013/11/what-are-humans-still-good-for-the-turning-point-in-freestyle-chess-may-be-approaching.html http://marginalrevolution.com/marginalrevolution/2013/11/wha...
- anopows 10y agoKasparov seems to be of a different opinion[0], telling that machine + computer combination is still more powerful [0] https://youtu.be/fiyBJeNBIIA?t=1h27m36s https://youtu.be/fiyBJeNBIIA?t=1h27m36s
- philipov 10y agoA better analogy would be computer-assisted poker. The computer can keep track of the cards and provide probabilities, while the human provides the social computations (figuring out exploits by modelling the opponent's mental state). Computers have been very successful at pure optimization problems like chess, but still lag behind on games of assymetrical information. The stock market is more like poker than like chess, because it is the correct application of theory of mind (Can a computer bluff? Can a computer cheat?) that elevates it above a game of chance.
- jgalt212 10y ago> When technology enabled FX trade spreads to be less than a penny This also created the incentive for collusion/price fixing in the FX market as regular bid/offer spreads became too small to make any money.
- mathattack 10y agoThis is true too. (And perhaps another reason traders don't fear computers!)