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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 o
by 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?
- eyeundersand 7y agoI'm an Econ grad student currently not paying attention in a Maths class (something about the Implicit Function Theorem) and I'm absolutely intrigued by your two comments. Kudos. Also, to sidetrack a little bit, may I ask how long it took you to gather these thoughts and post them? I'm trying to get a sense of how far along I am about gaining a holistic understanding of markets and trading.
- justinjlynn 7y agoWhile I don't think any time taken is necessarily a great indicator of general understanding, I was struck by a great feeling of unease while reading 1e-9's comment. Initially I sought to understand the apparent contradiction in the measurable reduction in arbitrage opportunity as a generally accepted proxy measure for increasing market efficiencies with my general understanding that HFT generally massively increases volatility and does not generally appear to result in the reduction of instrument pricing due to lower trading overheads and losses. I also sought to explain the seemingly unending profit stream made possible by such strategies - when, paradoxically the more efficient the market becomes, the less profitable all HFT stratigies should become globally - and yet, it does not seem they do. All in all, about 10 minutes or so of consideration, followed by about an half an hour of editing. That said, I'll likely spend much more time looking for existing models of financial markets under the information relativistic conditions created by HFT activity - it occurs to me that as trading moves closer to speed of causality in the market the models underlying market understanding may need to be adapted, perhaps using relativity as a prototype. With any luck they already have and I can elaborate from those to solve for conditions of such markets with information asymmetry and agents capturing value. If such markets are inherently volatile and that volatility increases geometrically nearing the speed of causality - presumably, the speed of light, then this may provide the mechanism for the apparent global inflation of instrument prices via distributed profitable high-speed trading activity while preserving lessened arbitrage opportunity and other visible market behaviours. I really must formalise this so that it may be thoroughly and logically evaluated - both symbolically and under simulation. However, I'm at a disadvantage in that I am merely a dabbler in the field of economics and game theory. I also have no formal background in stochastic finance or physics. I am but a Systems Engineer. So, fun challenges ahead.