5 ms·

This is fearmongering. If the market approached an allocation to index funds that enabled arbitrage, more actors would switch to arbitrage eliminating such arbi

This is fearmongering. If the market approached an allocation to index funds that enabled arbitrage, more actors would switch to arbitrage eliminating such arbitrage. It is a self-balancing situation. A scenario of "oh my god, everyone is just putting their money on index funds" would never happen. Another way to think about it is in terms of evolutionary stable strategy. Index funds and arbitrage-seeking reach a Nash equilibrium at some point (far more index-allocated than today's market) where arbitrage-seekers will reap returns almost equal to index funds, as index allocation starts o not capture all available market information. If the market deviates from that point, forces push it back into that point. If the market starts over-allocating into arbitrage-seeking (like today), returns on index funds will beat arbitrage, pushing capital back into index funds. If the market over-allocates in index funds, index funds will return below arbitrage, pushing money out of index funds. Edit: Right now, the market is still far over-allocated into the arbitrage-seeking side, resulting in a natural shift to index funds.

prostoalex 8y ago
To initiate a transaction an arbitrageur, though, needs a counter-party that's also engaged in arbitraging, but has an opposite opinion. Thought experiment - let's say there's an imaginary country that has 100 companies listed publicly, each floating 1,000 shares. Most citizens prefer indexing so 99,000 shares are owned by a bunch of Country 100 index funds. Those index funds will only trade on inflow/outflow into their own fund, never on corporate earnings, board changes, product announcements or other external event. What opportunities are there for arbitrageurs?
- darawk 8y ago
  Someone has to sell to them when they get inflow and buy from them when they get outflow. Who do you think that will be?
  - fjsolwmv 8y ago
    That would be wage savers buying from retirees who are cashing out, both with market orders, not limit orders.
georgeburdell 8y ago
>It is a self-balancing situation. A scenario of "oh my god, everyone is just putting their money on index funds" would never happen. Such a situation is not stable if the speed of information is not fast enough. If the market is unable to produce information quickly enough, or market actors don't act fast enough, basic differential equations dictate that you will get oscillations. See e.g., the business cycle.
- ucaetano 8y ago
  Of course you'll get oscillations (but the business cycle doesn't have anything to do with it), and you don't even need differential equations. But the point of equilibrium is a Nash Equilibrium, meaning that any deviation from it will create forces that push back to it (you can think of it as a valley). So while there will be oscillations, you won't expect large deviations.
- perl4ever 8y ago
  It seems to me obvious, yet implicitly overlooked, that people who hold stocks and don't trade aren't affecting the price one way or another. It's only the traders that set prices.
  - fjsolwmv 8y ago
    Anyone who holds stocks bought them, and if they are still generating net wage income will buy more, and presumably will eventually sell them when hey retire.
    - perl4ever 8y ago
      All that time, however many years they own the stock, they are putting in neither bids nor offers, so they are completely uninvolved with the price. You put in an order, and it influences the price slightly for a matter of seconds. But if nobody traded, there would be no market price.
tanderson92 8y ago
If you carefully read the article, it is very much not about the "What if 100% of assets were indexed" argument you often see. It's about what happens as more and more assets are robotically allocated via algorithms. Matt Levine is not a clickbait writer, and he deals seriously with the arbitrage-seeking nature of capital markets including robots which will seek to dominate by predicting what the winners will be. I think the article deserves a fuller and fairer reading than your comment indicates you've given it.
- qubax 8y ago
  > Matt Levine is not a clickbait writer Come on. Enough of this. For some odd reason, every week there is a levine article here and every time someone goes out of their way to praise levine. The guy works for bloomberg. Clickbait is part of nature of the beast whether you think levine is great or not. Is levine a writer or a cult leader. What's with all the worship?
  - tanderson92 8y ago
    Maybe he is praised because he is a good and thoughtful finance writer. And if there’s any financial news site which would have an incentive to avoid clickbait it would be Bloomberg because it’s subsidized by the rents it extracts from its terminal and data business, and this is one service they provide to those customers so they have an incentive to provide value.
    - qubax 8y ago
      > Maybe he is praised because he is a good and thoughtful finance writer. Could be. But there are a lot of good and thoughtful finance writers. I don't see their articles spammed here on the weekly like clockwork along with the fawning worship. It's almost like the article is just posted to talk about how great levine is and not the actual article. Just seems odd to me that's all. > And if there’s any financial news site which would have an incentive to avoid clickbait it would be Bloomberg because it’s subsidized by the rents it extracts from its terminal and data business, and this is one service they provide to those customers so they have an incentive to provide value. I'm well aware of what bloomberg is.
brownbat 8y ago
> This is fearmongering. Spoiler, the article is actually a playful response to a fear-mongering article titled "The Silent Road To Serfdom," with a bit of inspiration from Asimov at the end. The title is bait for misinterpretation, because the title is the original article's thesis that Matt is riffing on. Matt Levine is a really fun writer, and I recommend the click to anyone who skipped it because they thought the title was the main and uninteresting point of this piece.
- alexgmcm 8y ago
  Yeah - it took like the first paragraph to realise he was taking the piss... people should really read beyond the title.
  - ucaetano 8y ago
    It isn't just the title, 2/3rds of the article are about index funds: > Are Index Funds Communist? > But when those thoughtful active analysts are replaced with passive index funds, the market stops serving that function. > Indexing is cheaper, yes, but that's because active management has positive externalities, and if no one will pay for it, those benefits will disappear. > But more fundamentally, there is an alternative view that the rise of passive investing will improve capital allocation > The passive investors can't influence relative prices > Their worry is that the growth in passive and quasi-passive products > Or I guess pure indexing -- everyone passively throws money at everything that there is, with no judgment at all -- is an imaginable fourth answer, and is strictly worse than the others.
    - deleted 8y ago
      [deleted]

prostoalex 8y ago

To initiate a transaction an arbitrageur, though, needs a counter-party that's also engaged in arbitraging, but has an opposite opinion. Thought experiment - let's say there's an imaginary country that has 100 companies listed publicly, each floating 1,000 shares. Most citizens prefer indexing so 99,000 shares are owned by a bunch of Country 100 index funds. Those index funds will only trade on inflow/outflow into their own fund, never on corporate earnings, board changes, product announcements or other external event. What opportunities are there for arbitrageurs?

darawk 8y ago
Someone has to sell to them when they get inflow and buy from them when they get outflow. Who do you think that will be?
- fjsolwmv 8y ago
  That would be wage savers buying from retirees who are cashing out, both with market orders, not limit orders.

georgeburdell 8y ago

>It is a self-balancing situation. A scenario of "oh my god, everyone is just putting their money on index funds" would never happen. Such a situation is not stable if the speed of information is not fast enough. If the market is unable to produce information quickly enough, or market actors don't act fast enough, basic differential equations dictate that you will get oscillations. See e.g., the business cycle.

ucaetano 8y ago
Of course you'll get oscillations (but the business cycle doesn't have anything to do with it), and you don't even need differential equations. But the point of equilibrium is a Nash Equilibrium, meaning that any deviation from it will create forces that push back to it (you can think of it as a valley). So while there will be oscillations, you won't expect large deviations.
perl4ever 8y ago
It seems to me obvious, yet implicitly overlooked, that people who hold stocks and don't trade aren't affecting the price one way or another. It's only the traders that set prices.
- fjsolwmv 8y ago
  Anyone who holds stocks bought them, and if they are still generating net wage income will buy more, and presumably will eventually sell them when hey retire.
  - perl4ever 8y ago
    All that time, however many years they own the stock, they are putting in neither bids nor offers, so they are completely uninvolved with the price. You put in an order, and it influences the price slightly for a matter of seconds. But if nobody traded, there would be no market price.

tanderson92 8y ago

If you carefully read the article, it is very much not about the "What if 100% of assets were indexed" argument you often see. It's about what happens as more and more assets are robotically allocated via algorithms. Matt Levine is not a clickbait writer, and he deals seriously with the arbitrage-seeking nature of capital markets including robots which will seek to dominate by predicting what the winners will be. I think the article deserves a fuller and fairer reading than your comment indicates you've given it.

qubax 8y ago
> Matt Levine is not a clickbait writer Come on. Enough of this. For some odd reason, every week there is a levine article here and every time someone goes out of their way to praise levine. The guy works for bloomberg. Clickbait is part of nature of the beast whether you think levine is great or not. Is levine a writer or a cult leader. What's with all the worship?
- tanderson92 8y ago
  Maybe he is praised because he is a good and thoughtful finance writer. And if there’s any financial news site which would have an incentive to avoid clickbait it would be Bloomberg because it’s subsidized by the rents it extracts from its terminal and data business, and this is one service they provide to those customers so they have an incentive to provide value.
  - qubax 8y ago
    > Maybe he is praised because he is a good and thoughtful finance writer. Could be. But there are a lot of good and thoughtful finance writers. I don't see their articles spammed here on the weekly like clockwork along with the fawning worship. It's almost like the article is just posted to talk about how great levine is and not the actual article. Just seems odd to me that's all. > And if there’s any financial news site which would have an incentive to avoid clickbait it would be Bloomberg because it’s subsidized by the rents it extracts from its terminal and data business, and this is one service they provide to those customers so they have an incentive to provide value. I'm well aware of what bloomberg is.

brownbat 8y ago

> This is fearmongering. Spoiler, the article is actually a playful response to a fear-mongering article titled "The Silent Road To Serfdom," with a bit of inspiration from Asimov at the end. The title is bait for misinterpretation, because the title is the original article's thesis that Matt is riffing on. Matt Levine is a really fun writer, and I recommend the click to anyone who skipped it because they thought the title was the main and uninteresting point of this piece.

alexgmcm 8y ago
Yeah - it took like the first paragraph to realise he was taking the piss... people should really read beyond the title.
- ucaetano 8y ago
  It isn't just the title, 2/3rds of the article are about index funds: > Are Index Funds Communist? > But when those thoughtful active analysts are replaced with passive index funds, the market stops serving that function. > Indexing is cheaper, yes, but that's because active management has positive externalities, and if no one will pay for it, those benefits will disappear. > But more fundamentally, there is an alternative view that the rise of passive investing will improve capital allocation > The passive investors can't influence relative prices > Their worry is that the growth in passive and quasi-passive products > Or I guess pure indexing -- everyone passively throws money at everything that there is, with no judgment at all -- is an imaginable fourth answer, and is strictly worse than the others.
  - deleted 8y ago
    [deleted]