4 ms·

Yes, that's the model. So, tell me. Would any profit be possible in an ideally functioning market? If so, how is any item worth more than the total cost of all

Yes, that's the model. So, tell me. Would any profit be possible in an ideally functioning market? If so, how is any item worth more than the total cost of all inputs including externalities? If not, how is such a dynamic system attracted to an ideal state, given that those who would make the market ideally functional are best placed to gain from market inefficiency and dysfunction? Given an answer, do you have a sound game theory explanation for this? Additionally, what is the nyquist limit for such an ideally realised market, if it is indeed to be modelled as a recursive sampled approximator and how is this derived? Given an infinitely recursive network of arbitrarily connected market agents, is any such calculation convergent? If so, why? If not, how does the market ever converge to any appropriate price - a price which accurately reflects the market conditions excluding pricing operations and market costs which aren't directly related to the production of the instrument in question? Keep in mind that, if the market is functioning ideally no market participant will exceed the nyquist rate as all participants knowledge of market conditions converges to zero. How is any sampling rate, excluding zero, convergent? If not, how is any such market realisable? If so, what is the loss function between ideal model and realisable, perfectly imperfect real world implementation? What is the minimum profit, if not zero, and why? However, it does seem that arbitrage opportunities decrease when such high-speed trading is occurring and, does so even more quickly the faster trading speed and market sampling are increased. How can we account for this, if not by increased market efficiency? I conjecture that, by ever increasing the sampling rate and the speed at which transactions complete, markets are not being made more efficient. Instead, I hypothesise that, as markets directly effect the price of the instrument reflexively, the feedback latency produced creates relative local pockets of perceived value - which are only profitable trades in relation to local information asymmetry. As the vast majority of high-speed trading holds market positions on extremely short time scales, shifting exposure constantly, this profit is immediately realised locally resulting in the gradual diffuision of this inefficiency as the increase in price of all instruments. This is a direct result of the cost of trading being factored directly into the agent's local acceptable sale price of held instruments. Every local agent trading action is ideal, but the global market is a divergently inefficient one. Indeed, it is a market in which its pricing inefficiency is maximally concealed from all market participants. In a sense, I conjecture that the estimator is not functioning to increase market efficiency but is, instead amplifying local inefficiency globally, in effect, much like a charge pump would operate in a voltage multiplier circuit. In essence such a scheme acts to conceal increased market cost and overhead (including the profit of market participants) into market instrument pricing. However, it does so in an extremely small and diffuse way so as to make the rise in price of a single instrument, as a result of this activity, extremely difficult to detect as all instruments increase similarly on the same time scale. This behaviour appears to be similar in nature to 'salami slicing', an often effective embezzlement technique - except that, instead of exploiting an information asymmetry created by lack of interest in small quantities in the part of auditing accountants, it exploits the information asymmetry created by the speed of light itself. Of course, the faster the sampling rate, the more efficient the described amplification process would take place. Does this effect correlate between markets with differing but estimable information asymmetry? If there is no correlation, this hypothesis is invalid. It would seem to be an area ripe for research and analysis of market data. Do you see any technical issue with this conjecture by which we may discount it immediately?

kortilla 7y ago
A perfect market where all participants get information at the same time does not exist. >This profit is immediately realised by the increase in price of all commodities globally. This would only hold if there weren’t profitable short trades. The profit can also be realized by the decrease in global commodities that would have been slower before.
- justinjlynn 7y ago
  I'm sorry for the confusion, I should've reviewed my post before submitting - I have edited that section extensively for, hopefully, greater clarity of thought.
1123581321 7y ago
In a perfect market, there would be no economic profit. Your entire comment is very interesting; sorry for the short response!
- justinjlynn 7y ago
  No worries at all. I know it's an extremely long comment on a comment on an article - thanks for reading it. On further thought, the conjecture's behavioural outcome is actually not quite so analogous to 'salami slicing' as it is analogous to monetary policy caused inflation. In effect, the amplification effect would serve to create profit by creating an apparent valuable trade where none actually exists - such trades essentially print money. This activity would function much like the "profit" realised by a central bank when it chooses to print additional currency for redistribution at government prerogative. However, monetary policy induced inflation is merely limited in effect to those exposed to any one central bank's monetary policy domain - and generally only occurs when the money supply is permitted to rise for all participants. The type of inflation produced by the activity outlined by the conjecture is inherently global - and would exert a pressure on all existing markets which permit this type of trading; and it is not governments, which are ideally responsible to those they represent, which benefit from this inflation - it is private market participants, in the profit they realise from each trade. This would certainly seem to account for the new behaviour of central banks having to cut their interest rates to near or at zero to compensate for this asymmetric inflation to drive slowing market activity outside of the financial sector... if the conjecture holds - they appear to have entirely lost control of monetary policy to the global market - and those who are best placed to capture value in those markets as a gestalt - via this mechanism. If the conjecture holds - and central banks and regulators are unable to reign in the behaviour globally - the economy will experience hyperinflation of Weimarian proportions. Unfortunately, such inflation will have vastly asymmetric effect - benefiting only those best positioned to participate in and drive the amplification behaviour itself. Indeed, it appears to be a naturally occurring divergent state in a market permitting ever higher sampling and clearing rates. Such behaviours are increasingly profitable - seemingly without end - and so it will attract a geometrically accelerating amount of market activity until such activity is no longer profitable due to market collapse. The analogy is a fascinating, and scary, thing. It's a bit like considering someone nucleating the economic equivalent of a false-vacuum collapse - or someone already having done so. I need to think about it more and find some way of formally stating and ideally disproving the conjecture. We might disprove the conjecture by looking for anti-correlations in the growth, availability and capacity of high-speed trading and clearing in markets controlling for the returns of financial institutions instruments and portfolios and the changing monetary policies of various central banks under whose jurisdiction they fall. Simulation of economic systems with and without these elements might also yield some insights, when compared to market conditions at large. Is anyone aware of any other similar research, work, and/or thought in regards to this concept?

kortilla 7y ago

A perfect market where all participants get information at the same time does not exist. >This profit is immediately realised by the increase in price of all commodities globally. This would only hold if there weren’t profitable short trades. The profit can also be realized by the decrease in global commodities that would have been slower before.

justinjlynn 7y ago
I'm sorry for the confusion, I should've reviewed my post before submitting - I have edited that section extensively for, hopefully, greater clarity of thought.

1123581321 7y ago

In a perfect market, there would be no economic profit. Your entire comment is very interesting; sorry for the short response!

justinjlynn 7y ago
No worries at all. I know it's an extremely long comment on a comment on an article - thanks for reading it. On further thought, the conjecture's behavioural outcome is actually not quite so analogous to 'salami slicing' as it is analogous to monetary policy caused inflation. In effect, the amplification effect would serve to create profit by creating an apparent valuable trade where none actually exists - such trades essentially print money. This activity would function much like the "profit" realised by a central bank when it chooses to print additional currency for redistribution at government prerogative. However, monetary policy induced inflation is merely limited in effect to those exposed to any one central bank's monetary policy domain - and generally only occurs when the money supply is permitted to rise for all participants. The type of inflation produced by the activity outlined by the conjecture is inherently global - and would exert a pressure on all existing markets which permit this type of trading; and it is not governments, which are ideally responsible to those they represent, which benefit from this inflation - it is private market participants, in the profit they realise from each trade. This would certainly seem to account for the new behaviour of central banks having to cut their interest rates to near or at zero to compensate for this asymmetric inflation to drive slowing market activity outside of the financial sector... if the conjecture holds - they appear to have entirely lost control of monetary policy to the global market - and those who are best placed to capture value in those markets as a gestalt - via this mechanism. If the conjecture holds - and central banks and regulators are unable to reign in the behaviour globally - the economy will experience hyperinflation of Weimarian proportions. Unfortunately, such inflation will have vastly asymmetric effect - benefiting only those best positioned to participate in and drive the amplification behaviour itself. Indeed, it appears to be a naturally occurring divergent state in a market permitting ever higher sampling and clearing rates. Such behaviours are increasingly profitable - seemingly without end - and so it will attract a geometrically accelerating amount of market activity until such activity is no longer profitable due to market collapse. The analogy is a fascinating, and scary, thing. It's a bit like considering someone nucleating the economic equivalent of a false-vacuum collapse - or someone already having done so. I need to think about it more and find some way of formally stating and ideally disproving the conjecture. We might disprove the conjecture by looking for anti-correlations in the growth, availability and capacity of high-speed trading and clearing in markets controlling for the returns of financial institutions instruments and portfolios and the changing monetary policies of various central banks under whose jurisdiction they fall. Simulation of economic systems with and without these elements might also yield some insights, when compared to market conditions at large. Is anyone aware of any other similar research, work, and/or thought in regards to this concept?