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The market is a place for risk transfer. That is where the profit that HFT makes comes from. Long term investors transfer the risk of being or not being in a po

by vecter 15y ago

The market is a place for risk transfer. That is where the profit that HFT makes comes from. Long term investors transfer the risk of being or not being in a position to HFT market makers, who then (in expectation) make a small profit per transaction. The bigger picture that your argument misses is that trading is zero sum in wealth, but NOT zero sum in utility. That is the amazing thing about trading (and by trading, I mean trading in general). Say I have three oranges and you have two bananas. It turns out that I really really love bananas, and you have equal preferences for oranges and bananas. I would be happy to exchange two of my oranges for one of your bananas. The next result is an increase in both of our individual utilities. That is how trading work (and why people trade), and HFT is no different.

cma 15y ago
Here's a better analogy: Bananas and oranges go by nightfall after arrival in the day by ship, and there are no other sources of bananas and oranges. For every banana a person eats, they must also eat an orange. Ships arrive sporadically throughout the day, and a ship can only contain bananas or oranges, not some of each. Only a few ships arrive each day. An equal number of bananas an oranges are shipped each day from the sources, but some of the ships sink on the way, so that there may be a surplus or deficit of bananas or oranges (remember, to eat one banana you must eat one orange). Spotters see the ships coming at roughly the same time, with some randomly variation, and immediately adjust the price of existing bananas or oranges based on what the incoming ship is carrying--after all it didn't sink, and the fact that it didn't gives some information on whether or not there will be a banana/orange deficit. One day a man invents a telescope and begins seeing the arriving ships five minutes before everyone else. He provides no net-wealth to society as a whole, but with the money he makes via arbitrage he begins commanding a disproportionate share of society's wealth for his own use. *Galileo originally used his telescope invention for exactly this (in conjunction with a wealthy family)--one of the least useful things he ever did. Would you rather someone work in HFT (scope out banana boats 5 minutes earlier than the next guy) or work in something useful like scientific research/general technological improvement (Galileo's discovering of deeper secrets of the heavens/improvement of navigation and cartography enabled by the scope)?
- mmodahl 15y ago
  So you'd rather he not invent the telescope? Because inventing the telescope "provides no net-wealth to society?"
  - cma 15y ago
    Lets say it is a hypothetical telescope that has no other use than banana/orange arbitrage. If you don't think that addition makes the analogy more accurate, you haven't seen market-data parsing FFPGAs. And don't forget this: "By March 2009 Spread was moving dirt. Soon it had 125 construction crews working at once. [...] At 825 miles and 13.3 milliseconds, Spread's circuit shaves 100 miles and 3 milliseconds off of the previous route of lowest latency. [...] Spread won't disclose cost, but Jason Cohen, the chief operating officer of Allied Fiber, which is building a nationwide network, says laying cable through easy terrain runs $200,000 per mile. Half of Spread's route, however, is through tough virgin terrain, pushing forbes' estimate of its cost toward $300 million." http://www.forbes.com/forbes/2010/0927/outfront-netscape-jim-barksdale-daniel-spivey-wall-street-speed-war.html http://www.forbes.com/forbes/2010/0927/outfront-netscape-jim... And, back away from the hypothetical, obviously from my post I think Galileo's telescope was great overall.
    - mmodahl 15y ago
      "One day a man invents a telescope .... He provides no net-wealth to society as a whole" Financial incentive drives creation. Programable gate arrays that can keep a limit order book drive sales of the cards. If more cards are sold, they get cheaper. If they are cheaper, they are more accessible for medical imaging. What impact on the national fiber network has the Spread line had? What has it taught us?
      - cma 15y ago
        Sometimes the Randian suggestion doesn't meaningfully differ from the caricature of Keynes: "dump a portion of production into the ocean to help the economy." World War II spurred development of new metal alloys, better vehicles, and thousands of other innovations. Does that make Hitler a hero? Was war the only path? (Sorry, I had to Godwin it before this thread got too long; the more general war analogy isn't too far off though: $300-million in heavy-equipment laden fiber laying probably resulted in some injury--is it too much to ask that we both get the beneficial externalities of R&D and put in the fiber for a useful purpose in the first place?)

by vecter 15y ago

cma 15y ago

Here's a better analogy: Bananas and oranges go by nightfall after arrival in the day by ship, and there are no other sources of bananas and oranges. For every banana a person eats, they must also eat an orange. Ships arrive sporadically throughout the day, and a ship can only contain bananas or oranges, not some of each. Only a few ships arrive each day. An equal number of bananas an oranges are shipped each day from the sources, but some of the ships sink on the way, so that there may be a surplus or deficit of bananas or oranges (remember, to eat one banana you must eat one orange). Spotters see the ships coming at roughly the same time, with some randomly variation, and immediately adjust the price of existing bananas or oranges based on what the incoming ship is carrying--after all it didn't sink, and the fact that it didn't gives some information on whether or not there will be a banana/orange deficit. One day a man invents a telescope and begins seeing the arriving ships five minutes before everyone else. He provides no net-wealth to society as a whole, but with the money he makes via arbitrage he begins commanding a disproportionate share of society's wealth for his own use. *Galileo originally used his telescope invention for exactly this (in conjunction with a wealthy family)--one of the least useful things he ever did. Would you rather someone work in HFT (scope out banana boats 5 minutes earlier than the next guy) or work in something useful like scientific research/general technological improvement (Galileo's discovering of deeper secrets of the heavens/improvement of navigation and cartography enabled by the scope)?

mmodahl 15y ago
So you'd rather he not invent the telescope? Because inventing the telescope "provides no net-wealth to society?"
- cma 15y ago
  Lets say it is a hypothetical telescope that has no other use than banana/orange arbitrage. If you don't think that addition makes the analogy more accurate, you haven't seen market-data parsing FFPGAs. And don't forget this: "By March 2009 Spread was moving dirt. Soon it had 125 construction crews working at once. [...] At 825 miles and 13.3 milliseconds, Spread's circuit shaves 100 miles and 3 milliseconds off of the previous route of lowest latency. [...] Spread won't disclose cost, but Jason Cohen, the chief operating officer of Allied Fiber, which is building a nationwide network, says laying cable through easy terrain runs $200,000 per mile. Half of Spread's route, however, is through tough virgin terrain, pushing forbes' estimate of its cost toward $300 million." http://www.forbes.com/forbes/2010/0927/outfront-netscape-jim-barksdale-daniel-spivey-wall-street-speed-war.html http://www.forbes.com/forbes/2010/0927/outfront-netscape-jim... And, back away from the hypothetical, obviously from my post I think Galileo's telescope was great overall.
  - mmodahl 15y ago
    "One day a man invents a telescope .... He provides no net-wealth to society as a whole" Financial incentive drives creation. Programable gate arrays that can keep a limit order book drive sales of the cards. If more cards are sold, they get cheaper. If they are cheaper, they are more accessible for medical imaging. What impact on the national fiber network has the Spread line had? What has it taught us?
    - cma 15y ago
      Sometimes the Randian suggestion doesn't meaningfully differ from the caricature of Keynes: "dump a portion of production into the ocean to help the economy." World War II spurred development of new metal alloys, better vehicles, and thousands of other innovations. Does that make Hitler a hero? Was war the only path? (Sorry, I had to Godwin it before this thread got too long; the more general war analogy isn't too far off though: $300-million in heavy-equipment laden fiber laying probably resulted in some injury--is it too much to ask that we both get the beneficial externalities of R&D and put in the fiber for a useful purpose in the first place?)