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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

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.

yummyfajitas 16y ago
In the case of HFT the number of actions has grown only because there was alpha sitting on the table, but it wasn't worthwhile for human market makers to chase it. Think about a strategy which generates $100/day trading OTSS (Obscure Thinly Traded Symbol), a security with a $0.25 bid/ask spread. No human will waste their time on this strategy, so $100/day of alpha is left sitting on the table. HFT allows a computer to chase after this $100, $50 on some other stock, etc. This is simply a case of 3 programmers + computers doing work which was unprofitable for humans to do. Similarly, twitter didn't exist before the internet because no human would be willing to earn $0.0003/day hand-delivering short messages to anyone who cared to listen, being paid to verify that "yes, this message really came from Mallika Sherawat". Once the market becomes saturated, the bid/ask on OTSS will shrink to $0.10 and the algorithm will only generate $40/day. We are already approaching that point in HFT. As for margins, they may grow if demand increases. I was really speaking about a situation of increased competition with all else held equal.

yummyfajitas 16y ago

In the case of HFT the number of actions has grown only because there was alpha sitting on the table, but it wasn't worthwhile for human market makers to chase it. Think about a strategy which generates $100/day trading OTSS (Obscure Thinly Traded Symbol), a security with a $0.25 bid/ask spread. No human will waste their time on this strategy, so $100/day of alpha is left sitting on the table. HFT allows a computer to chase after this $100, $50 on some other stock, etc. This is simply a case of 3 programmers + computers doing work which was unprofitable for humans to do. Similarly, twitter didn't exist before the internet because no human would be willing to earn $0.0003/day hand-delivering short messages to anyone who cared to listen, being paid to verify that "yes, this message really came from Mallika Sherawat". Once the market becomes saturated, the bid/ask on OTSS will shrink to $0.10 and the algorithm will only generate $40/day. We are already approaching that point in HFT. As for margins, they may grow if demand increases. I was really speaking about a situation of increased competition with all else held equal.