3 ms·

Is that 5 minutes of advanced information truly worthless? Does the average wealth of society increase or decrease with the addition of the arbitraging Galileo

Is that 5 minutes of advanced information truly worthless? Does the average wealth of society increase or decrease with the addition of the arbitraging Galileo? I think it increases. Inequality increases, true, and there are other dangers in inequality. But the median wealth of everyone also increases because now people know 5 minutes earlier if they're going to eat oranges tonight. Presumably that information is worth something, and I think there is a good argument to be made that the value of that information is equivalent to the profit of all the arbitrageurs. I believe in wealth redistribution, but this question is less about inequality and more about the utility of that advance information. Intuitively it does seem ridiculous that 3ms of ping is worth $300,000,000. But we're dealing in a global economy with nearing 7 billion people, and 3ms * 7,000,000,000 adds up to 8 months of human life. It would be a problem if the fiber line owner, with his wealth, gains some kind of hegemony over the world and enforces some kind of human-life-crushing totalitarianism. But the inequality argument is most sensibly solved by wealth redistribution - taxes, welfare, public healthcare, etc. Rather than outlawing arbitrage.

cma 15y ago
> Is that 5 minutes of advanced information truly worthless? >But the median wealth of everyone also increases because now people know 5 minutes earlier if they're going to eat oranges tonight. Since we can assign an arbitrary utility value to that knowledge while not changing the profits telescope man makes (how much is the existing stock of oranges and separately the existing stock of bananas now worth, now that telescope man sees a boat of bananas has arrived unsunk and each banana must match an orange? He can use this to revalue the two and sell or buy from/to people who only know the old valuation). The utility you claim isn't directly related to the telescope-man profit. Certainly not equivalent as you seem to think: >I think there is a good argument to be made that the value of that information is equivalent to the profit of all the arbitrageurs. What makes you think there is a one-to-one correspondence? Can you make the argument, or do you just think there is a good one to be made? If you already made the argument I didn't see it, and if it involved multiplying ping delta by current world-population then I am definitely not clever enough to understand it. ;) ("go by nightfall" in my original post should have been worded "go bad by nightfall")
- forensic 15y ago
  My point regarding pings was that tiny advantages in speed, if leveraged across enough people, become large advantages in speed, and if a single person provides a tiny bit of value to many people, then that adds up to a lot of total value produced by one person and therefore a big paycheck for that one person. The telescope information is valuable to fruit sellers and fruit consumers alike. If Bill is very hungry today, but Joe is not, then Bill is rightly willing to pay a higher price for fruit. Let's say that the loss of one ship raises the fruit price from $1 to $10. Bill wants to eat today and so he is saving his last $10 for when the fruit arrives. As the ship crosses the ocean, the closer it gets to shore, the less risk there is in Bill spending his other $9. He wants to buy beer but is unwilling due to the risk of not being able to afford fruit. To Bill, there is clear value in knowing how far along the ship has gone. The sooner he knows the better. Since knowing the ship is coming frees up his $9, this information also provides value to the brewer who will be able to sell his beer sooner. If the brewer sells his beer sooner, the brewer will be able to buy himself new shoes sooner, and so on. The 5 minutes of foreknowledge results more economic activity, and higher wealth in general. Bill gets his beer sooner, making him happier sooner. This has value. Mr. Guinness the Brewmaster gets his shoes sooner, easing his ankles sooner, and this is worth something. Every little bit of foreknowledge helps. All arbitrage follows this same model. Whether the arbitrage profits are collected by one person or many is not relevant. There is utility in prices that accurately reflect supply and demand. The sooner prices reflect reality, the better. If there are going to be fewer oranges available, the price should be higher to ensure an efficient distribution - a distribution to those who most value the oranges. Galileo made prices 5 minutes more accurate, and while that is unsexy, it saved 5 minutes of inefficient trading. In aggregate, those 5 minutes end up being worth a lot. Those minutes provide some level of utility equal to or greater than Galileo's profit. If Bill did not get at least $10 worth of utility from his oranges, he would not buy them, and Galileo would not receive Bill's money. These are voluntary transactions after all. Bill can always starve until tomorrow, or boil his shoes, or go forage for berries. Fast information is worth something in itself.
  - cma 15y ago
    First you were arguing that the profit equaled the utility exactly. Now you are saying something different. Taking your new example, since the trading profits are roughly the same whether the advantage is 5 minutes or 20 seconds so long as the ship is seen first by telescope man, yet the probability of Bill mistakenly wasting his money on beer when he should have saved for bananas does depend on that length of time, then the utility and the profit aren't equal; and as the time advantage approaches 0, (and thus the utility you are talking about here approaches 0) the profit remains the same. You are saying there is always some utility. Ok fine, but it gets arbitrarily close to 0. In the case of HFT there is also some cost (brain-drain for proprietary R&D, power drain for datacenters, etc.). Which outweighs which? What timescale do we have to get to? We are already well below it.

cma 15y ago

> Is that 5 minutes of advanced information truly worthless? >But the median wealth of everyone also increases because now people know 5 minutes earlier if they're going to eat oranges tonight. Since we can assign an arbitrary utility value to that knowledge while not changing the profits telescope man makes (how much is the existing stock of oranges and separately the existing stock of bananas now worth, now that telescope man sees a boat of bananas has arrived unsunk and each banana must match an orange? He can use this to revalue the two and sell or buy from/to people who only know the old valuation). The utility you claim isn't directly related to the telescope-man profit. Certainly not equivalent as you seem to think: >I think there is a good argument to be made that the value of that information is equivalent to the profit of all the arbitrageurs. What makes you think there is a one-to-one correspondence? Can you make the argument, or do you just think there is a good one to be made? If you already made the argument I didn't see it, and if it involved multiplying ping delta by current world-population then I am definitely not clever enough to understand it. ;) ("go by nightfall" in my original post should have been worded "go bad by nightfall")

forensic 15y ago
My point regarding pings was that tiny advantages in speed, if leveraged across enough people, become large advantages in speed, and if a single person provides a tiny bit of value to many people, then that adds up to a lot of total value produced by one person and therefore a big paycheck for that one person. The telescope information is valuable to fruit sellers and fruit consumers alike. If Bill is very hungry today, but Joe is not, then Bill is rightly willing to pay a higher price for fruit. Let's say that the loss of one ship raises the fruit price from $1 to $10. Bill wants to eat today and so he is saving his last $10 for when the fruit arrives. As the ship crosses the ocean, the closer it gets to shore, the less risk there is in Bill spending his other $9. He wants to buy beer but is unwilling due to the risk of not being able to afford fruit. To Bill, there is clear value in knowing how far along the ship has gone. The sooner he knows the better. Since knowing the ship is coming frees up his $9, this information also provides value to the brewer who will be able to sell his beer sooner. If the brewer sells his beer sooner, the brewer will be able to buy himself new shoes sooner, and so on. The 5 minutes of foreknowledge results more economic activity, and higher wealth in general. Bill gets his beer sooner, making him happier sooner. This has value. Mr. Guinness the Brewmaster gets his shoes sooner, easing his ankles sooner, and this is worth something. Every little bit of foreknowledge helps. All arbitrage follows this same model. Whether the arbitrage profits are collected by one person or many is not relevant. There is utility in prices that accurately reflect supply and demand. The sooner prices reflect reality, the better. If there are going to be fewer oranges available, the price should be higher to ensure an efficient distribution - a distribution to those who most value the oranges. Galileo made prices 5 minutes more accurate, and while that is unsexy, it saved 5 minutes of inefficient trading. In aggregate, those 5 minutes end up being worth a lot. Those minutes provide some level of utility equal to or greater than Galileo's profit. If Bill did not get at least $10 worth of utility from his oranges, he would not buy them, and Galileo would not receive Bill's money. These are voluntary transactions after all. Bill can always starve until tomorrow, or boil his shoes, or go forage for berries. Fast information is worth something in itself.
- cma 15y ago
  First you were arguing that the profit equaled the utility exactly. Now you are saying something different. Taking your new example, since the trading profits are roughly the same whether the advantage is 5 minutes or 20 seconds so long as the ship is seen first by telescope man, yet the probability of Bill mistakenly wasting his money on beer when he should have saved for bananas does depend on that length of time, then the utility and the profit aren't equal; and as the time advantage approaches 0, (and thus the utility you are talking about here approaches 0) the profit remains the same. You are saying there is always some utility. Ok fine, but it gets arbitrarily close to 0. In the case of HFT there is also some cost (brain-drain for proprietary R&D, power drain for datacenters, etc.). Which outweighs which? What timescale do we have to get to? We are already well below it.