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1) There will always be non-professionals/non-quantitative people making trades that create potential profit for those who wish to arb them. 2) You can still m

1) There will always be non-professionals/non-quantitative people making trades that create potential profit for those who wish to arb them. 2) You can still make "good" returns even when you have the worst of the models because of 1). 3) It takes more than N>>2 firms to shrink the profit in a particular model to 0. For evidence, see the large number of high frequency funds that make great returns. 4) The market/world is always changing so the 'best' probabilistic model is always changing. As long as the professionals are moving faster than the non-professionals, they can still extract money. Could you define what you mean by the real economy? Isn't the real economy whatever it is that solves other people's problems that they will pay you for? The fact that "the sector is shrinking" doesn't mean that its not going to grow still larger long term. I would say that we're just on the back side of a bubble. There are many many many people out there who call themselves quants that shouldn't. You're waxing philosophic about a hyper efficient future but I don't think it matters because that future won't be here for a very long time. See 1), 4) and the second to last setence of your allegory (Information only makes a difference if the number of people who have it is small.) for why professionals/someone will always be able to make good returns.

BenoitEssiambre 16y ago
You make some valid points but don't forget that even the non professionals making mistakes will get less losses and a return closer to a long term index when better quant system are betting agains each other and keeping prices close to their optimum levels. It is not certain at all that the worst professional models will make money just because there are non professionals that are even worst. If the better models are aggressive enough, they should be able to take most of what there is to take from the non professionals and also profit from betting against the lesser professional models (to a lesser extent). I still maintain that as the models get better and better while they bet against each other, the margin for profit is reduced and the sector as a whole should shrink and that's a victory for capitalism.
- secretasiandan 16y ago
  "don't forget that even the non professionals making mistakes will get less losses and a return closer to a long term index when better quant system are betting agains each other and keeping prices close to their optimum levels." Do you have an argument/explanation for this? Also, why are the quant systems necessarily betting against each other? "It is not certain at all that the worst professional models will make money just because there are non professionals that are even worst." I didn't mean to imply that its a certainty, only that its a possibility. I mean our whole argument is about some possible utopian future, right? "I still maintain that as the models get better and better while they bet against each other, the margin for profit is reduced and the sector as a whole should shrink and that's a victory for capitalism." Aren't you just saying capitalism works? Can't I say the same thing about all those darn internet startups extracting value from me because they're providing me information? Would you use the same argument to conclude that the space of internet startups will shrink?
  - yummyfajitas 16y ago
    In a completely efficient market, any stock is just as good as any other - you make or lose money solely due to chance. Nonprofessionals will only take trading losses if they are unlucky . (Of course, a non-professional who wishes to treat eTrade as a casino may lose money on transaction costs.) You absolutely can say the same thing about internet startups extracting value by providing you information - but you are incorrect to conclude that the space of internet startups will shrink. In fact, what will shrink is profit margins - as more startups are created, all the easy alpha is off the table. Witness what is happening to newspapers right now.
    - secretasiandan 16y ago
      re completely efficient markets, you're right. My eyes focused on the "making mistakes" part and missed the "closer to" part. I guess I could throw something in there about gambler's ruin, but that would be a little pedantic. re the space of internet startups : To be clear, I wasn't concluding one way or the other, just asking him to apply the same logic to something he might have positive bias towards and see if he comes to the same conclusions. Also, rather than number of companies, I think the market cap/total profit of the companies is a better metric. I'm not sure that company margins in internet startups or quant finance will shrink. I haven't thought too much about it but I think they might even grow as information/efficiency attains greater value. Margins per action done might shrink but number of actions will grow. Isn't this the whole story of HFT? Further, old lines of business will have their margins shrink as the service becomes commoditized. But new high(er) margin lines of business will spring up in their place.
joshu 16y ago
Don't forget the fact that the very, very best funds are often not available to external investors.

BenoitEssiambre 16y ago

You make some valid points but don't forget that even the non professionals making mistakes will get less losses and a return closer to a long term index when better quant system are betting agains each other and keeping prices close to their optimum levels. It is not certain at all that the worst professional models will make money just because there are non professionals that are even worst. If the better models are aggressive enough, they should be able to take most of what there is to take from the non professionals and also profit from betting against the lesser professional models (to a lesser extent). I still maintain that as the models get better and better while they bet against each other, the margin for profit is reduced and the sector as a whole should shrink and that's a victory for capitalism.

secretasiandan 16y ago
"don't forget that even the non professionals making mistakes will get less losses and a return closer to a long term index when better quant system are betting agains each other and keeping prices close to their optimum levels." Do you have an argument/explanation for this? Also, why are the quant systems necessarily betting against each other? "It is not certain at all that the worst professional models will make money just because there are non professionals that are even worst." I didn't mean to imply that its a certainty, only that its a possibility. I mean our whole argument is about some possible utopian future, right? "I still maintain that as the models get better and better while they bet against each other, the margin for profit is reduced and the sector as a whole should shrink and that's a victory for capitalism." Aren't you just saying capitalism works? Can't I say the same thing about all those darn internet startups extracting value from me because they're providing me information? Would you use the same argument to conclude that the space of internet startups will shrink?
- yummyfajitas 16y ago
  In a completely efficient market, any stock is just as good as any other - you make or lose money solely due to chance. Nonprofessionals will only take trading losses if they are unlucky . (Of course, a non-professional who wishes to treat eTrade as a casino may lose money on transaction costs.) You absolutely can say the same thing about internet startups extracting value by providing you information - but you are incorrect to conclude that the space of internet startups will shrink. In fact, what will shrink is profit margins - as more startups are created, all the easy alpha is off the table. Witness what is happening to newspapers right now.
  - secretasiandan 16y ago
    re completely efficient markets, you're right. My eyes focused on the "making mistakes" part and missed the "closer to" part. I guess I could throw something in there about gambler's ruin, but that would be a little pedantic. re the space of internet startups : To be clear, I wasn't concluding one way or the other, just asking him to apply the same logic to something he might have positive bias towards and see if he comes to the same conclusions. Also, rather than number of companies, I think the market cap/total profit of the companies is a better metric. I'm not sure that company margins in internet startups or quant finance will shrink. I haven't thought too much about it but I think they might even grow as information/efficiency attains greater value. Margins per action done might shrink but number of actions will grow. Isn't this the whole story of HFT? Further, old lines of business will have their margins shrink as the service becomes commoditized. But new high(er) margin lines of business will spring up in their place.

joshu 16y ago

Don't forget the fact that the very, very best funds are often not available to external investors.