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If you believe that op played the game well, then he successfully took capital from less efficient companies and allocated it to new more efficient companies.

If you believe that op played the game well, then he successfully took capital from less efficient companies and allocated it to new more efficient companies. This creates value.

episode0x01 6y ago
is efficient the right word?
TeMPOraL 6y ago
Does anybody truly believe that this is a good thing? The stock market is detached from reality. It creates its own universe. The efficiency we're talking about here is self-referential - it's not efficiency in producing object-level value, it's efficiency in enriching participants of the stock market. Which depends as much on the company itself as it depends on the hype the funds and the shareholders can make around it. That WSB can tank or revive companies just for teh lulz only shows to demonstrate how the stock market is an universe of its own.
- koheripbal 6y ago
  I find people who stand in disbelief of the markets often don't understand how they are working, and/or why they have and societal value. Skepticism is healthy, but in this case, it's closer to ignorance. The ability for corporations to go to the open market to secure capital is contingent upon a high liquidity of buyers and sellers present and actively participating. The market doesn't exist without "primary" buyers and seller acting on behalf of their company to issue new stock (raising capital) or buying back stocks (returning capital (or via dividends)). Between these two types of transactions, there are participants that are constantly estimating the value of these share. If the price of the share deviates too far from what the company thinks it's worth, it will actually trigger one of those two events. Options are just another more efficient mechanism to make these estimations on a specific timeframe. They allow traders to have a very specific thesis on what is mispriced and place a trade on it. Without these trades, the market would lack liquidity, and companies would see an increase in their cost of new capital - which is bad for everyone because it means companies wouldn't invest in growth, equipment purchases, new jobs, etc...
  - mbg721 6y ago
    I guess I'm one of the ignorant; I'm still skeptical about derivatives. I get the need for hedging, but when you can construct something mathematically equivalent to a stock without actually putting money into the company, that seems like it could end very badly.
    - koheripbal 6y ago
      Sorry if my comment came off as critical - probably could have been worded better. Derivatives are critical even to primary market participants. Farmers looking to secure their pay for future crop deliveries. Banks looking to remove interest rate risk on mortgages they've issued. Shipping companies looking to remove the risk of fuel fluctuations on their future transport costs. Fluctuations of cost inputs and uncertainty of future revenues can be a company death sentence as they cause cash flow shocks. They have real value to the economy. Often, they are only possible if there is a liquid market of people willing to take the other side of these transactions. Narrowing the spread between buy/sell prices on these derivative contracts allows more companies to be able to afford them, and that makes many low margin businesses able to exist at all. Despite all the hate on social media, these markets have material value. ...even if there are these anomalies like this Gamestop incident. I imagine the SEC is going to shut down that Reddit sub because these types if activities actually destroy liquidity but discouraging short sellers. Regulation plays an important role in keeping markets running smoothly.
    - imtringued 6y ago
      Commodities have to be traded as futures because you cannot move commodities instantaneously. So what you do is you write on a piece of paper (its digital today) that you will provide X amount of commodities for price Y in Z days. You can then sell the contract for the total value of the commodities and when the contract is due you just send the commodity to the holder of the contract.
  - imtringued 6y ago
    The primary value traders provide is liquidity and decreased volatility. There is a fixed need for these two services. Once you have served every customer the only way to make more money is to take customers away from other competitors, or grow the market as a whole. Traders do not influence the size of the market, they only increase efficiency, so the expectation is that you run into diminishing returns stays. There is more than enough liquidity in the markets. Any more liquidity is not providing any value. >Without these trades, the market would lack liquidity, and companies would see an increase in their cost of new capital - which is bad for everyone because it means companies wouldn't invest in growth, equipment purchases, new jobs, etc... The Fed is already taking care of that. The bigger problem is that there is no reason to invest the Fed money and grow the market.
- afiori 6y ago
  > it's efficiency in enriching participants of the stock market. Proponents would say that it is efficienct in funding ideas that are more likely to succeed, with the partecipants in the stock market taking a commission for the transactions.
  - TeMPOraL 6y ago
    My point is that "success" on the stock market isn't always a function of doing anything useful in the real world.
    - fsckboy 6y ago
      the stock market is doing something useful in the real world. the aggregate success thrown off by the stock market is a measure of the usefulness of the stock market. participating in that is what enables to stock market to provide its usefulness. so, yes, success on the stock market is a function of usefulness in the real world.
      - afiori 6y ago
        This is sort of circular, the stock market can also devolve is pure speculation and go full casino, which are generally considered an example of a not-necessarily-net-positive addition to society.
        fsckboy 6y ago
        it's not circular, but more to the point, you suggesting that the stock market can devolve (fail) is like saying "brakes on a car can fail, so brakes are stupid." Brakes are not stupid.
        afiori 6y ago
        I did not say that, I said that just because the people working with stock are getting paid does not mean that the stock market is doing something useful. Parassitism also exists in free markets. Stretching the brake analogy it would be similar to noting that just because you are pressing more your brake pedal it does not mean that your car is slowing down faster, sometimes you need an ABS
jameshart 6y ago
Market theory only says that the aggregate effect of market activity is to allocate capital efficiently. The claim is that it does so by broadly rewarding investors whose decisions maximize value creation, encouraging more such decisions in general over the long term. It does NOT say that any individual investment decision that produces a reward for the investor must necessarily have improved the allocation of capital to maximize value. Options trading in particular has only indirect market-making effects on how the primary capital allocation market works. The existence of the options market helps the primary market discover efficient allocations (the theory goes). Participating in the options market has a side effect of increasing efficiency, but the way the options market allocates rewards is less connected to the information value that your trades contributed to the market. There’s an investment product some governments sell called a ‘lottery bond’. People buy the bond, then periodically, rather than every bond being redeemed for a small premium over its value, one randomly selected bond is redeemed for a much higher value. As a thanks for participating in that bond market and letting the government use your capital, instead of a predictable investment return the government offers a chance of a life changing lottery win. This isn’t better or worse than a traditional bond offering, it just offers a different strategy for allocating the rewards for investing some capital in that government. The person who wins a lottery bond didn’t do anything better or different than a lottery bond loser - both of them contributed the same value to the market in terms of increasing capital allocation efficiency. But the rewards were distributed unevenly - which is by design and both of them knew that going in. Options traders take the same deal. Playing the game has the chance of winning big; participating in the game has a side effect of producing value. And the way the rewards are allocated for playing... don’t matter too much.
- koheripbal 6y ago
  > the way the rewards are allocated for playing... don’t matter too much. Of course they matter. If they didn't matter, then participants wouldn't participate. ...and if they didn't participate then the market would have less liquidity. ...and higher liquidity is ALWAYS a good thing. The health of a market can be characterized by the persistence of liquidity.
  - 6y ago

If you believe that op played the game well, then he successfully took capital from less efficient companies and allocated it to new more efficient companies. This creates value.

episode0x01 6y ago

is efficient the right word?

TeMPOraL 6y ago

Does anybody truly believe that this is a good thing? The stock market is detached from reality. It creates its own universe. The efficiency we're talking about here is self-referential - it's not efficiency in producing object-level value, it's efficiency in enriching participants of the stock market. Which depends as much on the company itself as it depends on the hype the funds and the shareholders can make around it. That WSB can tank or revive companies just for teh lulz only shows to demonstrate how the stock market is an universe of its own.

koheripbal 6y ago
I find people who stand in disbelief of the markets often don't understand how they are working, and/or why they have and societal value. Skepticism is healthy, but in this case, it's closer to ignorance. The ability for corporations to go to the open market to secure capital is contingent upon a high liquidity of buyers and sellers present and actively participating. The market doesn't exist without "primary" buyers and seller acting on behalf of their company to issue new stock (raising capital) or buying back stocks (returning capital (or via dividends)). Between these two types of transactions, there are participants that are constantly estimating the value of these share. If the price of the share deviates too far from what the company thinks it's worth, it will actually trigger one of those two events. Options are just another more efficient mechanism to make these estimations on a specific timeframe. They allow traders to have a very specific thesis on what is mispriced and place a trade on it. Without these trades, the market would lack liquidity, and companies would see an increase in their cost of new capital - which is bad for everyone because it means companies wouldn't invest in growth, equipment purchases, new jobs, etc...
- mbg721 6y ago
  I guess I'm one of the ignorant; I'm still skeptical about derivatives. I get the need for hedging, but when you can construct something mathematically equivalent to a stock without actually putting money into the company, that seems like it could end very badly.
  - koheripbal 6y ago
    Sorry if my comment came off as critical - probably could have been worded better. Derivatives are critical even to primary market participants. Farmers looking to secure their pay for future crop deliveries. Banks looking to remove interest rate risk on mortgages they've issued. Shipping companies looking to remove the risk of fuel fluctuations on their future transport costs. Fluctuations of cost inputs and uncertainty of future revenues can be a company death sentence as they cause cash flow shocks. They have real value to the economy. Often, they are only possible if there is a liquid market of people willing to take the other side of these transactions. Narrowing the spread between buy/sell prices on these derivative contracts allows more companies to be able to afford them, and that makes many low margin businesses able to exist at all. Despite all the hate on social media, these markets have material value. ...even if there are these anomalies like this Gamestop incident. I imagine the SEC is going to shut down that Reddit sub because these types if activities actually destroy liquidity but discouraging short sellers. Regulation plays an important role in keeping markets running smoothly.
  - imtringued 6y ago
    Commodities have to be traded as futures because you cannot move commodities instantaneously. So what you do is you write on a piece of paper (its digital today) that you will provide X amount of commodities for price Y in Z days. You can then sell the contract for the total value of the commodities and when the contract is due you just send the commodity to the holder of the contract.
- imtringued 6y ago
  The primary value traders provide is liquidity and decreased volatility. There is a fixed need for these two services. Once you have served every customer the only way to make more money is to take customers away from other competitors, or grow the market as a whole. Traders do not influence the size of the market, they only increase efficiency, so the expectation is that you run into diminishing returns stays. There is more than enough liquidity in the markets. Any more liquidity is not providing any value. >Without these trades, the market would lack liquidity, and companies would see an increase in their cost of new capital - which is bad for everyone because it means companies wouldn't invest in growth, equipment purchases, new jobs, etc... The Fed is already taking care of that. The bigger problem is that there is no reason to invest the Fed money and grow the market.
afiori 6y ago
> it's efficiency in enriching participants of the stock market. Proponents would say that it is efficienct in funding ideas that are more likely to succeed, with the partecipants in the stock market taking a commission for the transactions.
- TeMPOraL 6y ago
  My point is that "success" on the stock market isn't always a function of doing anything useful in the real world.
  - fsckboy 6y ago
    the stock market is doing something useful in the real world. the aggregate success thrown off by the stock market is a measure of the usefulness of the stock market. participating in that is what enables to stock market to provide its usefulness. so, yes, success on the stock market is a function of usefulness in the real world.
    - afiori 6y ago
      This is sort of circular, the stock market can also devolve is pure speculation and go full casino, which are generally considered an example of a not-necessarily-net-positive addition to society.
      - fsckboy 6y ago
        it's not circular, but more to the point, you suggesting that the stock market can devolve (fail) is like saying "brakes on a car can fail, so brakes are stupid." Brakes are not stupid.
        afiori 6y ago
        I did not say that, I said that just because the people working with stock are getting paid does not mean that the stock market is doing something useful. Parassitism also exists in free markets. Stretching the brake analogy it would be similar to noting that just because you are pressing more your brake pedal it does not mean that your car is slowing down faster, sometimes you need an ABS

jameshart 6y ago

Market theory only says that the aggregate effect of market activity is to allocate capital efficiently. The claim is that it does so by broadly rewarding investors whose decisions maximize value creation, encouraging more such decisions in general over the long term. It does NOT say that any individual investment decision that produces a reward for the investor must necessarily have improved the allocation of capital to maximize value. Options trading in particular has only indirect market-making effects on how the primary capital allocation market works. The existence of the options market helps the primary market discover efficient allocations (the theory goes). Participating in the options market has a side effect of increasing efficiency, but the way the options market allocates rewards is less connected to the information value that your trades contributed to the market. There’s an investment product some governments sell called a ‘lottery bond’. People buy the bond, then periodically, rather than every bond being redeemed for a small premium over its value, one randomly selected bond is redeemed for a much higher value. As a thanks for participating in that bond market and letting the government use your capital, instead of a predictable investment return the government offers a chance of a life changing lottery win. This isn’t better or worse than a traditional bond offering, it just offers a different strategy for allocating the rewards for investing some capital in that government. The person who wins a lottery bond didn’t do anything better or different than a lottery bond loser - both of them contributed the same value to the market in terms of increasing capital allocation efficiency. But the rewards were distributed unevenly - which is by design and both of them knew that going in. Options traders take the same deal. Playing the game has the chance of winning big; participating in the game has a side effect of producing value. And the way the rewards are allocated for playing... don’t matter too much.

koheripbal 6y ago
> the way the rewards are allocated for playing... don’t matter too much. Of course they matter. If they didn't matter, then participants wouldn't participate. ...and if they didn't participate then the market would have less liquidity. ...and higher liquidity is ALWAYS a good thing. The health of a market can be characterized by the persistence of liquidity.
- 6y ago