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Exactly. Because it doesn't generate real value. Lets compare to alternatives like dam and flood control infrastructure, better roads, rail, etc. I understand

Exactly. Because it doesn't generate real value. Lets compare to alternatives like dam and flood control infrastructure, better roads, rail, etc. I understand the real pragmatic benefits and return on investment from these. A farm field is irrigated, a home not destroyed, less fuel used in trucking, on and on. These investments generate real value because they increase the total of societal output, not just that particular factions slice of the pie. Meaning, you are finding new gold to mine, not just taking over part of your neighbors gold mine and saying you are adding value. Its not adding value to the overall economy. Please help me, what real value does an investment like this yield for the economy as a whole? As i understand it an investment like taking part of your neighbors gold mine, not mining new ground. Effectively they have increased their slice of the pie, in this case it is time not land, but not made the overall pie bigger. It is interesting to think about things this way, in terms of investments that increase the carrying capacity of our economy, and those that don't. Advertising comes to mind. The cola wars, while expensive, dont yield a net increase in cola drinking, just a relative difference between the brands. Same with beer, on and on.

lucaspauker 6y ago
>Please help me, what real value does an investment like this yield for the economy as a whole? The argument usually goes like this: HFT firms provide liquidity for the market; they are usually the people on the other side of the trade when a retail investor buys stock/bonds/etc. So without the HFT firms, you wouldn't be able to trade at a good/fair price according to market conditions. Furthermore, if you buy stock from NASDAQ or NYSE or London stock exchange, you should get the same price. This idea that you should pay the same price for an asset regardless of where you buy it is enforced by HFT firms, as outlined in the article. Clearly, HFT firms need to get paid for this service, so retail investors typically pay the bid/ask spread.
- MereInterest 6y ago
  Isn't the liquidity only worthwhile at times of low liquidity? The ability to quickly exchange shares only matters at times when you want to exchange shares quickly. The only time when you care about exchanging shares quickly is if the price is changing quickly. Those are exactly the times when HFT is the riskiest, and the most likely to be shut off to avoid losses. (For example, shutting off HFT as a response to the 2010 flash crash[0].) I get the argument, but it feels like the societal benefit is taken away whenever it is needed, and paid for only when it isn't needed. [0] https://en.wikipedia.org/wiki/2010_flash_crash https://en.wikipedia.org/wiki/2010_flash_crash
  - lucaspauker 6y ago
    Good point. Here is an in-depth analysis from the NY Fed: https://libertystreeteconomics.newyorkfed.org/2015/08/liquidity-during-flash-events.html https://libertystreeteconomics.newyorkfed.org/2015/08/liquid...
  - derriz 6y ago
    I don't think I get your point. Correct me if I'm wrong but it seems to be that you're suggesting that if I want to sell some of my shares, for example, that I should wait until volatility is low? If I had a way of knowing when the market would have low volatility, I'd throw away the shares and become a billionaire trading options. Saying you should wait for low volatility before trading is equivalent to saying you should wait until the price is high before selling. Both statements seem to reflect common sense but neither piece of advice can be translated into an actual strategy. The impact of HFT market making isn't that difficult to observe - all markets which have attracted such participants have seen huge falls in spreads. The spread is a tax on everyone who buys and sells in the market so lower spreads are good for everyone. (For example the cost of buying and selling a DAX future before fees was about 70 euro just 15 years ago while the spread is now typically less than a euro.)
  - thedufer 6y ago
    > Isn't the liquidity only worthwhile at times of low liquidity? No, because liquidity is also about tighter spreads. Since the spread is effectively a transaction fee paid to buy or sell on exchanges, shrinking it is beneficial to most market participants.
- deanCommie 6y ago
  Honest naive question - Just because HFT firms provide liquidity does that mean it is the ONLY way such liquidity could be provided?
  - lucaspauker 6y ago
    Market makers provide liquidity as a service. HFT firms are market makers: https://www.investopedia.com/terms/m/marketmaker.asp https://www.investopedia.com/terms/m/marketmaker.asp
    - buck4roo 6y ago
      Long before HFT firms, we had Market Makers -- they were often a separate department of the brokerage firm you were already using. Therefore, Markets don't need HFT firms to provide this service, they simply coopted a friendly-sounding rationale in an attempt to dismiss skeptics.
      - rblatz 6y ago
        And we all benefit through lower bid/ask spreads
      - pgwhalen 6y ago
        "Market maker" refers to a "role" in a market. HFT is simply one way that role is fulfilled, in some markets (equities, futures, ...) but perhaps not others (corporate bonds, MBS, ...). No market needs HFTs to provide the service, but they exist because in those markets they provide a monumentally better (cheaper) service than their predecessors.
      - rcxdude 6y ago
        You don't need HFT, but those market makers lost to HFT on price. HFT is far far cheaper than the old market makers.
- mdtusz 6y ago
  I've never liked this explanation because most HFT is just front-running. The liquidity is there already, they're just shaving their cut off the top in most cases because they can move faster than everyone else.
  - neolog 6y ago
    Isn't the market more liquid if new prices come in every day rather than every week?
  - vmception 6y ago
    The market is already liquid and also more liquid. Strategies that had less efficacy at $100mm position sizes now can scale to $10bn position sizes. I like the growth of liquidity.
  - SamReidHughes 6y ago
    HFT is not front-running. Front-running is a form of trading on non-public information.
    - bananaface 6y ago
      Some forms of HFT work by getting information from other exchanges before you, then front-running on price differences.
      - SamReidHughes 6y ago
        That's not what front-running is.
      - lucaspauker 6y ago
        This is arbitrage, not front running. Front running requires not-public information.
      - denotational 6y ago
        Front-running usually refers to a fairly specific scenario in which a brokerage or fiduciary executes orders as principal prior to dealing on behalf of their client so as to benefit from a market movement they anticipate will be caused by the client's orders. This is categorically not what HFT firms are doing.
- dtech 6y ago
  While this argument holds some merit for intermediaries in general, it provides no argument why boring a $300M hole in a mountain for a 3ms speed improvement adds any value.
  - oceanplexian 6y ago
    The people who bored the hole were paid a wage that allowed them to support their families. The company that made the boring machine received more capital to develop better machines. The company that made the fiber employed thousands of workers and engineers who are advancing the state of material science. The engineers who built the optics are furthering our ability to drive down the cost high speed data transmission. The provider operating the circuit is paying hundreds of employees and engineers who build out new infrastructure for other customers, universities, businesses. The HFT firm can now build a datacenter outside of the metro, freeing up land to house residents in the city. Banks can take advantage of the liquidity to reduce transaction risk and offer lower rates on financial products to customers. Customers who spend less on loans and credit have more money to spend on other things. This process goes on, and on, and on. It’s why capitalism is so effective as an economic system. And also the reason why things that may not seem like they produce value actually produce extraordinary value for society.
    - jlokier 6y ago
      By that argument, any kind of "make work", doing something pointless, provides value to society as a side effect. For example: Consider a job going to the office to write on pieces of paper and then throw those pieces of paper into the incinerator so nobody will ever read what was written. Sounds pointless. Is it "providing value"? By your argument yes: All those people were paid and can now support their families. The paper makers made paper and advanced the state of the art in fine paper-making, as did the pen makers and the ink makers. The incinerator is looked after, and it keeps new incinerator designers in work. All the fuel which is mined to run the incinerator keeps miners busy. All the commuting to the office and back keeps train operators busy. And yet, going to the office to write things on paper and then destroy them repeatedly does seem rather pointless.
  - 6y ago
lend000 6y ago
Prices determine the allocation of resources in society. Higher prices of food in New York allow a dense city of 9 million to channel enough food from the economy to feed the populace. The more accurate the prices, the less waste (in terms of both the commodity and time). While it may seem like any improvements to price-time reactivity would be negligible compared to the 300mm investment, these things are simply too difficult to measure in a complex system like a global economy where any change can result in a butterfly effect. Over many years, more reactive prices could prevent arbitrageurs (who perform a critical service) from making less efficient trades. In fact, the firm who commissioned the new line is likely doing arbitrage, which is one of the key services that allows us to have a globalized economy with relatively stable prices.
- xg15 6y ago
  Ok, how exactly do HFT traders lead to less food waste?
  - lend000 6y ago
    The thing about complex systems is that you typically can't just say A causes B, which is what most people want. There is certainly a causal relationship, but it's a chain of events uncountably long, so it's best understood in terms of A improves prices and improved prices result in better resource allocation, as I tried to explain. If you truly want to put in the work to understand how markets work, I'd recommend running a simple forex arbitrage bot with a trivial amount of money (there are plenty of open source options that are straightforward to set up and won't make or lose you much money) to see hands on. Also, check out Matt Levine's newsletters.
chordalkeyboard 6y ago
Prices are information about the relationship between supply and demand, they allow people to make accurate judgments about resource allocation. This information is time sensitive so any decrease in latency increases the accuracy of the information.
fn1 6y ago
Isn't the main issue "financial products" (all these abstract things built over normal stocks)?
TehCorwiz 6y ago
At first glace, it looks like it generated 300 million dollars in revenue for the construction, tunneling, and telecommunications industries. Which was a real value for the companies doing the work. Was the end result useful for anyone else? Probably not, but the companies and employees who made it possible took home a tangible value.
- paulryanrogers 6y ago
  This seems really close to the broken window fallacy. The kid breaking the window made some work for the glass maker and installer but the shop owner poorer. So on the whole the village is one window poorer.
  - oceanplexian 6y ago
    If kids breaking windows is a societal problem, an economic system that has to frequently produce windows would result in stronger windows, making them less attractive for kids to break. A top down solution imposed by police, laws, and imprisonment also makes society poorer, arguably more so.
    - xg15 6y ago
      > an economic system that has to frequently produce windows would result in stronger windows, making them less attractive for kids to break. If I just opened a new window factory, I'd absolutely be interested in as many windows breaking as possible, so I can sell more products. It would make a lot more economic sense for me to produce cheap, thin windows: I need less raw material to produce them and they will break more easily, giving me more opportunity to sell replacements.
  - TehCorwiz 6y ago
    I see where you're coming from. However that fallacy assumes that someone or something was injured and that there's a perverse incentive at play to incentivize destructive behavior. In this situation I'm not sure it applies. Who or what was injured by installing this tunnel? Were the tunneling companies now selling high-speed tunnels to other companies?
vkou 6y ago
> Exactly. Because it doesn't generate real value. Better price discovery generates some amount of 'real value', though. Whether or not this particular investment generated 300 million dollars worth of real value is... A bit up in the air.
vmception 6y ago
Its just a business model. You decided to understand tangible goods and decided not to understand ephemeral goods. The value is no less real and the distinction is arbitrary. The only thing happening here is an uncomfortable relationship with people making money and having complete discretion to acquire more goods and services with that money than others. HFT has no more or less arbitrary value or merit than any ephemeral software business that you might happen to respect. SaaS, ad tech, data brokering, YC cash burning darling, etc. Trying to rationalize its utility (“is it providing liquidity or just front running”) is just as much of a red herring. Its just a business.
- josho 6y ago
  The question was “what real value does an investment like this yield for the economy as a whole?” If I understand your comment correctly then your answer is essentially: it provide no value to society, but few other businesses do either. To which I largely agree, and is the reason why myself and OP are left frustrated that society spends billions on things to improve arbitrary efficiencies while disregarding the well being of millions of people.
  - vmception 6y ago
    > it provide no value to society, but few other businesses do either. That’s correct, this one happens to be more lucrative and scalable (revenue increases with capital size, overhead costs are logn) when it works. Regarding a communication network that alters the terrain for the benefit of very few people, I can see that being frustrating. The business model typically does turn into licensing of the data route and others can benefit.
Slartie 6y ago
> Please help me, what real value does an investment like this yield for the economy as a whole? I see this situation to be very similar to the reason why the Bitcoin network burns hundreds of MWh of power per day. They do this because it is the only way to ensure everyone adheres to the market rules that were collectively declared as "fair". Bitcoins' fairness rules work by incentivizing an arms race of who can compute hashes faster. The "conventional" stock/bond/futures markets ensure fairness by resorting to time an order was placed as the ultimate arbiter when it comes to whose orders are filled first. In both cases, there is a physics-related element that cannot be cheated by any one market participant, because nobody can transfer information faster than light and nobody can produce power out of the void. The end product of this is "fairness" - which is extremely valuable, because without a reliable ledger, bitcoins would have no value, and without the ultimate judge of time at the stock market, there would be no stock market, because nobody would trade at a market where a specific participant could just backdate his orders. Of course the "fairness" is not directly a product of the 300m$ investment for that ultra fast data connection. Nor is it directly a product of the MWh of power burnt for bitcoin blockchain hashes. But these two things are direct outcomes of the rules that effectively produce the fairness we want, and without accepting that we get these outcomes, these rules would not function and would not be accepted, which would void them, because they can only produce the desired "fairness" product as long as they are accepted by the market participants. Hence I consider "fairness" to be an indirect product of these two effects - and all similarly-categorized effects that don't directly seem to serve any purpose except for being actions in some kind of arms race between market participants. One could also replace "fairness" with "trust", if that's more to your liking. The concept is the important thing, not what the product is named.
- xg15 6y ago
  > The end product of this is "fairness" - which is extremely valuable, because without a reliable ledger, bitcoins would have no value, and without the ultimate judge of time at the stock market, there would be no stock market, because nobody would trade at a market where a specific participant could just backdate his orders. But again, those benefits are self-referential: Fairness rules for Bitcoin serve Bitcoin and fairness rules for stock exchanges serve stock exchanges. Would the wider world be very much worse off if we had no Bitcoin or stock exchanges? > without the ultimate judge of time at the stock market, there would be no stock market I'm also not sure about that. Yes, in principle, time is a good arbiter - however the descision to follow that rule down to microsecond precision seems like a deliberate choice to allow HFT. The article mentions front running as an attack on the trading system that would occur with inaccurate timekeeping. However, seems to me this could be circumvented: e.g., if an exchange wanted to ensure fairness but also prevent HFT (and the associated technology arms race), they could bucket orders by e.g. second resolution and then execute the orders in a bucket in random ordering. This will give predictable ordering at second resolution but would make front-running or racing impossible as the sub-second ordering would be unpredictable.
oceanplexian 6y ago
Advertising absolutely generates value. An advertisement might sell someone a vacuum cleaner when they were previously using a broom, saving them countless hours every week to spend on other economic pursuits, resulting in a net benefit for society.
- richk449 6y ago
  Advertising absolutely can generate value. An advertisement might sell someone magic beans that clean your house if you leave them under your kitchen table. How do you know that advertising provides more value than it takes away?
solatic 6y ago
> Please help me, what real value does an investment like this yield for the economy as a whole? Think of it instead like parcel deliveries. It should be plainly clear that delivering a package in two days is more valuable than delivering a package in a week, that delivering a package overnight even moreso. Oftentimes, an item is only valuable if we receive it as soon as possible - if we had to wait a month to receive a package, the whole arrangement might not have been worth it in the first place. Furthermore, it is also plainly clear that delivery is worth more for more valuable items. This is typically communicated in the price of insuring a shipment, but plain common sense explains why people are willing to pay hundreds of dollars in delivery charges for automobiles but not for a box of tissues. If you understand that logistics is valuable, that speed makes logistics more valuable, and that logistics is made more valuable by the value of the goods transported by it, then it really should not be such a stretch of the imagination to understand how the logistics of capital plays by exactly the same rules; it is only a question of degree and scale.
TuringNYC 6y ago
>> Lets compare to alternatives like dam and flood control infrastructure, better roads, rail, etc. I'm going to provide a totally contrarian viewpoint as an engineer previously employed by Wall Street -- the difference to the alternatives is simple -- one exists and the other is theoretical. The difference is is that Wall Street pays actual paychecks to engineers to do these things. Meanwhile, as much as i'd love to work for a better railroad company or what not, I did not find any engineering jobs there (computer science and statistics in my case.) Jobs and paychecks is how I am able to make car payments and pay for my daughter's bicycle. To continue the thought, if you really do feel dam and flood control infra is a better thing to spend money on (i feel this way), HN isnt really the place: 0. Be like Elon and start your own railroad and dam company 1. Invest your own money into a dam and infra startup 2. Lobby your senator and representative to put money into infra Speaking down the folks who are actually giving engineers paychecks is not a great thing IMHO when there arent all that many alternatives. Same sentiment from most of my former colleagues with Physics PhDs on Wall St. Yeah, it sucks, but tell me that once you can land me a tenure track teaching position. Until then, let me eat.

lucaspauker 6y ago

>Please help me, what real value does an investment like this yield for the economy as a whole? The argument usually goes like this: HFT firms provide liquidity for the market; they are usually the people on the other side of the trade when a retail investor buys stock/bonds/etc. So without the HFT firms, you wouldn't be able to trade at a good/fair price according to market conditions. Furthermore, if you buy stock from NASDAQ or NYSE or London stock exchange, you should get the same price. This idea that you should pay the same price for an asset regardless of where you buy it is enforced by HFT firms, as outlined in the article. Clearly, HFT firms need to get paid for this service, so retail investors typically pay the bid/ask spread.

MereInterest 6y ago
Isn't the liquidity only worthwhile at times of low liquidity? The ability to quickly exchange shares only matters at times when you want to exchange shares quickly. The only time when you care about exchanging shares quickly is if the price is changing quickly. Those are exactly the times when HFT is the riskiest, and the most likely to be shut off to avoid losses. (For example, shutting off HFT as a response to the 2010 flash crash[0].) I get the argument, but it feels like the societal benefit is taken away whenever it is needed, and paid for only when it isn't needed. [0] https://en.wikipedia.org/wiki/2010_flash_crash https://en.wikipedia.org/wiki/2010_flash_crash
- lucaspauker 6y ago
  Good point. Here is an in-depth analysis from the NY Fed: https://libertystreeteconomics.newyorkfed.org/2015/08/liquidity-during-flash-events.html https://libertystreeteconomics.newyorkfed.org/2015/08/liquid...
- derriz 6y ago
  I don't think I get your point. Correct me if I'm wrong but it seems to be that you're suggesting that if I want to sell some of my shares, for example, that I should wait until volatility is low? If I had a way of knowing when the market would have low volatility, I'd throw away the shares and become a billionaire trading options. Saying you should wait for low volatility before trading is equivalent to saying you should wait until the price is high before selling. Both statements seem to reflect common sense but neither piece of advice can be translated into an actual strategy. The impact of HFT market making isn't that difficult to observe - all markets which have attracted such participants have seen huge falls in spreads. The spread is a tax on everyone who buys and sells in the market so lower spreads are good for everyone. (For example the cost of buying and selling a DAX future before fees was about 70 euro just 15 years ago while the spread is now typically less than a euro.)
- thedufer 6y ago
  > Isn't the liquidity only worthwhile at times of low liquidity? No, because liquidity is also about tighter spreads. Since the spread is effectively a transaction fee paid to buy or sell on exchanges, shrinking it is beneficial to most market participants.
deanCommie 6y ago
Honest naive question - Just because HFT firms provide liquidity does that mean it is the ONLY way such liquidity could be provided?
- lucaspauker 6y ago
  Market makers provide liquidity as a service. HFT firms are market makers: https://www.investopedia.com/terms/m/marketmaker.asp https://www.investopedia.com/terms/m/marketmaker.asp
  - buck4roo 6y ago
    Long before HFT firms, we had Market Makers -- they were often a separate department of the brokerage firm you were already using. Therefore, Markets don't need HFT firms to provide this service, they simply coopted a friendly-sounding rationale in an attempt to dismiss skeptics.
    - rblatz 6y ago
      And we all benefit through lower bid/ask spreads
    - pgwhalen 6y ago
      "Market maker" refers to a "role" in a market. HFT is simply one way that role is fulfilled, in some markets (equities, futures, ...) but perhaps not others (corporate bonds, MBS, ...). No market needs HFTs to provide the service, but they exist because in those markets they provide a monumentally better (cheaper) service than their predecessors.
    - rcxdude 6y ago
      You don't need HFT, but those market makers lost to HFT on price. HFT is far far cheaper than the old market makers.
mdtusz 6y ago
I've never liked this explanation because most HFT is just front-running. The liquidity is there already, they're just shaving their cut off the top in most cases because they can move faster than everyone else.
- neolog 6y ago
  Isn't the market more liquid if new prices come in every day rather than every week?
- vmception 6y ago
  The market is already liquid and also more liquid. Strategies that had less efficacy at $100mm position sizes now can scale to $10bn position sizes. I like the growth of liquidity.
- SamReidHughes 6y ago
  HFT is not front-running. Front-running is a form of trading on non-public information.
  - bananaface 6y ago
    Some forms of HFT work by getting information from other exchanges before you, then front-running on price differences.
    - SamReidHughes 6y ago
      That's not what front-running is.
    - lucaspauker 6y ago
      This is arbitrage, not front running. Front running requires not-public information.
    - denotational 6y ago
      Front-running usually refers to a fairly specific scenario in which a brokerage or fiduciary executes orders as principal prior to dealing on behalf of their client so as to benefit from a market movement they anticipate will be caused by the client's orders. This is categorically not what HFT firms are doing.
dtech 6y ago
While this argument holds some merit for intermediaries in general, it provides no argument why boring a $300M hole in a mountain for a 3ms speed improvement adds any value.
- oceanplexian 6y ago
  The people who bored the hole were paid a wage that allowed them to support their families. The company that made the boring machine received more capital to develop better machines. The company that made the fiber employed thousands of workers and engineers who are advancing the state of material science. The engineers who built the optics are furthering our ability to drive down the cost high speed data transmission. The provider operating the circuit is paying hundreds of employees and engineers who build out new infrastructure for other customers, universities, businesses. The HFT firm can now build a datacenter outside of the metro, freeing up land to house residents in the city. Banks can take advantage of the liquidity to reduce transaction risk and offer lower rates on financial products to customers. Customers who spend less on loans and credit have more money to spend on other things. This process goes on, and on, and on. It’s why capitalism is so effective as an economic system. And also the reason why things that may not seem like they produce value actually produce extraordinary value for society.
  - jlokier 6y ago
    By that argument, any kind of "make work", doing something pointless, provides value to society as a side effect. For example: Consider a job going to the office to write on pieces of paper and then throw those pieces of paper into the incinerator so nobody will ever read what was written. Sounds pointless. Is it "providing value"? By your argument yes: All those people were paid and can now support their families. The paper makers made paper and advanced the state of the art in fine paper-making, as did the pen makers and the ink makers. The incinerator is looked after, and it keeps new incinerator designers in work. All the fuel which is mined to run the incinerator keeps miners busy. All the commuting to the office and back keeps train operators busy. And yet, going to the office to write things on paper and then destroy them repeatedly does seem rather pointless.
- 6y ago

lend000 6y ago

Prices determine the allocation of resources in society. Higher prices of food in New York allow a dense city of 9 million to channel enough food from the economy to feed the populace. The more accurate the prices, the less waste (in terms of both the commodity and time). While it may seem like any improvements to price-time reactivity would be negligible compared to the 300mm investment, these things are simply too difficult to measure in a complex system like a global economy where any change can result in a butterfly effect. Over many years, more reactive prices could prevent arbitrageurs (who perform a critical service) from making less efficient trades. In fact, the firm who commissioned the new line is likely doing arbitrage, which is one of the key services that allows us to have a globalized economy with relatively stable prices.

xg15 6y ago
Ok, how exactly do HFT traders lead to less food waste?
- lend000 6y ago
  The thing about complex systems is that you typically can't just say A causes B, which is what most people want. There is certainly a causal relationship, but it's a chain of events uncountably long, so it's best understood in terms of A improves prices and improved prices result in better resource allocation, as I tried to explain. If you truly want to put in the work to understand how markets work, I'd recommend running a simple forex arbitrage bot with a trivial amount of money (there are plenty of open source options that are straightforward to set up and won't make or lose you much money) to see hands on. Also, check out Matt Levine's newsletters.

chordalkeyboard 6y ago

Prices are information about the relationship between supply and demand, they allow people to make accurate judgments about resource allocation. This information is time sensitive so any decrease in latency increases the accuracy of the information.

fn1 6y ago

Isn't the main issue "financial products" (all these abstract things built over normal stocks)?

TehCorwiz 6y ago

At first glace, it looks like it generated 300 million dollars in revenue for the construction, tunneling, and telecommunications industries. Which was a real value for the companies doing the work. Was the end result useful for anyone else? Probably not, but the companies and employees who made it possible took home a tangible value.

paulryanrogers 6y ago
This seems really close to the broken window fallacy. The kid breaking the window made some work for the glass maker and installer but the shop owner poorer. So on the whole the village is one window poorer.
- oceanplexian 6y ago
  If kids breaking windows is a societal problem, an economic system that has to frequently produce windows would result in stronger windows, making them less attractive for kids to break. A top down solution imposed by police, laws, and imprisonment also makes society poorer, arguably more so.
  - xg15 6y ago
    > an economic system that has to frequently produce windows would result in stronger windows, making them less attractive for kids to break. If I just opened a new window factory, I'd absolutely be interested in as many windows breaking as possible, so I can sell more products. It would make a lot more economic sense for me to produce cheap, thin windows: I need less raw material to produce them and they will break more easily, giving me more opportunity to sell replacements.
- TehCorwiz 6y ago
  I see where you're coming from. However that fallacy assumes that someone or something was injured and that there's a perverse incentive at play to incentivize destructive behavior. In this situation I'm not sure it applies. Who or what was injured by installing this tunnel? Were the tunneling companies now selling high-speed tunnels to other companies?

vkou 6y ago

> Exactly. Because it doesn't generate real value. Better price discovery generates some amount of 'real value', though. Whether or not this particular investment generated 300 million dollars worth of real value is... A bit up in the air.

vmception 6y ago

Its just a business model. You decided to understand tangible goods and decided not to understand ephemeral goods. The value is no less real and the distinction is arbitrary. The only thing happening here is an uncomfortable relationship with people making money and having complete discretion to acquire more goods and services with that money than others. HFT has no more or less arbitrary value or merit than any ephemeral software business that you might happen to respect. SaaS, ad tech, data brokering, YC cash burning darling, etc. Trying to rationalize its utility (“is it providing liquidity or just front running”) is just as much of a red herring. Its just a business.

josho 6y ago
The question was “what real value does an investment like this yield for the economy as a whole?” If I understand your comment correctly then your answer is essentially: it provide no value to society, but few other businesses do either. To which I largely agree, and is the reason why myself and OP are left frustrated that society spends billions on things to improve arbitrary efficiencies while disregarding the well being of millions of people.
- vmception 6y ago
  > it provide no value to society, but few other businesses do either. That’s correct, this one happens to be more lucrative and scalable (revenue increases with capital size, overhead costs are logn) when it works. Regarding a communication network that alters the terrain for the benefit of very few people, I can see that being frustrating. The business model typically does turn into licensing of the data route and others can benefit.

Slartie 6y ago

> Please help me, what real value does an investment like this yield for the economy as a whole? I see this situation to be very similar to the reason why the Bitcoin network burns hundreds of MWh of power per day. They do this because it is the only way to ensure everyone adheres to the market rules that were collectively declared as "fair". Bitcoins' fairness rules work by incentivizing an arms race of who can compute hashes faster. The "conventional" stock/bond/futures markets ensure fairness by resorting to time an order was placed as the ultimate arbiter when it comes to whose orders are filled first. In both cases, there is a physics-related element that cannot be cheated by any one market participant, because nobody can transfer information faster than light and nobody can produce power out of the void. The end product of this is "fairness" - which is extremely valuable, because without a reliable ledger, bitcoins would have no value, and without the ultimate judge of time at the stock market, there would be no stock market, because nobody would trade at a market where a specific participant could just backdate his orders. Of course the "fairness" is not directly a product of the 300m$ investment for that ultra fast data connection. Nor is it directly a product of the MWh of power burnt for bitcoin blockchain hashes. But these two things are direct outcomes of the rules that effectively produce the fairness we want, and without accepting that we get these outcomes, these rules would not function and would not be accepted, which would void them, because they can only produce the desired "fairness" product as long as they are accepted by the market participants. Hence I consider "fairness" to be an indirect product of these two effects - and all similarly-categorized effects that don't directly seem to serve any purpose except for being actions in some kind of arms race between market participants. One could also replace "fairness" with "trust", if that's more to your liking. The concept is the important thing, not what the product is named.

xg15 6y ago
> The end product of this is "fairness" - which is extremely valuable, because without a reliable ledger, bitcoins would have no value, and without the ultimate judge of time at the stock market, there would be no stock market, because nobody would trade at a market where a specific participant could just backdate his orders. But again, those benefits are self-referential: Fairness rules for Bitcoin serve Bitcoin and fairness rules for stock exchanges serve stock exchanges. Would the wider world be very much worse off if we had no Bitcoin or stock exchanges? > without the ultimate judge of time at the stock market, there would be no stock market I'm also not sure about that. Yes, in principle, time is a good arbiter - however the descision to follow that rule down to microsecond precision seems like a deliberate choice to allow HFT. The article mentions front running as an attack on the trading system that would occur with inaccurate timekeeping. However, seems to me this could be circumvented: e.g., if an exchange wanted to ensure fairness but also prevent HFT (and the associated technology arms race), they could bucket orders by e.g. second resolution and then execute the orders in a bucket in random ordering. This will give predictable ordering at second resolution but would make front-running or racing impossible as the sub-second ordering would be unpredictable.

oceanplexian 6y ago

Advertising absolutely generates value. An advertisement might sell someone a vacuum cleaner when they were previously using a broom, saving them countless hours every week to spend on other economic pursuits, resulting in a net benefit for society.

richk449 6y ago
Advertising absolutely can generate value. An advertisement might sell someone magic beans that clean your house if you leave them under your kitchen table. How do you know that advertising provides more value than it takes away?

solatic 6y ago

> Please help me, what real value does an investment like this yield for the economy as a whole? Think of it instead like parcel deliveries. It should be plainly clear that delivering a package in two days is more valuable than delivering a package in a week, that delivering a package overnight even moreso. Oftentimes, an item is only valuable if we receive it as soon as possible - if we had to wait a month to receive a package, the whole arrangement might not have been worth it in the first place. Furthermore, it is also plainly clear that delivery is worth more for more valuable items. This is typically communicated in the price of insuring a shipment, but plain common sense explains why people are willing to pay hundreds of dollars in delivery charges for automobiles but not for a box of tissues. If you understand that logistics is valuable, that speed makes logistics more valuable, and that logistics is made more valuable by the value of the goods transported by it, then it really should not be such a stretch of the imagination to understand how the logistics of capital plays by exactly the same rules; it is only a question of degree and scale.

TuringNYC 6y ago

>> Lets compare to alternatives like dam and flood control infrastructure, better roads, rail, etc. I'm going to provide a totally contrarian viewpoint as an engineer previously employed by Wall Street -- the difference to the alternatives is simple -- one exists and the other is theoretical. The difference is is that Wall Street pays actual paychecks to engineers to do these things. Meanwhile, as much as i'd love to work for a better railroad company or what not, I did not find any engineering jobs there (computer science and statistics in my case.) Jobs and paychecks is how I am able to make car payments and pay for my daughter's bicycle. To continue the thought, if you really do feel dam and flood control infra is a better thing to spend money on (i feel this way), HN isnt really the place: 0. Be like Elon and start your own railroad and dam company 1. Invest your own money into a dam and infra startup 2. Lobby your senator and representative to put money into infra Speaking down the folks who are actually giving engineers paychecks is not a great thing IMHO when there arent all that many alternatives. Same sentiment from most of my former colleagues with Physics PhDs on Wall St. Yeah, it sucks, but tell me that once you can land me a tenure track teaching position. Until then, let me eat.