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You hit on so many great points in this post. Another important function trading firms (especially market makers like Jane Street) is to serve as ready-and-will

You hit on so many great points in this post. Another important function trading firms (especially market makers like Jane Street) is to serve as ready-and-willing counterparties for the pension funds, endowments, and retirement funds of the world. All of those firefighters, police officers, and teachers can't get their monthly check unless the pension funds converts part of their investment into cash, and the amount traded gets so large you need well-funded financial participants who will pay the pension fund a large lump of cash and assume the risk of unwinding the position. The same thing goes for portfolio rebalances. Some smart and prudent retirement fund has run their risk model and decided that their sector exposures are off by like a few percent. They've got 2% too much financials, 2% too little tech, they want to move 1% from consumer staples to consumer discretionary, etc. We're talking about billions of dollars being moved right here! They want to use the money from the assets they sold to purchase the assets they bought, but they want the transaction to happen all at once... not in two parts. Again, this is where the quant funds and market makers of the world come in. It's easy to think that finance is all fat cats, hedge funds and multibillionaires, but anybody with a retirement plan, a pension, ETF holdings, or mutual fund holdings, benefits from the work these quant funds do.

whatever1 5y ago
No they are not. Wall street is a cancer for the economy that lives on fees for allowing people to participate in an elaborate gambling game. And due to their influence in US politics, they have forced everyone to play the game, under the false premise that the stocks will always go up. Except they are not, check the European stock market that has stagnated for decades. Companies can find investors without the stock market. Companies can pay dividends to their owners & employees. No need to have an additional speculation layer for fund raising and profit distribution.
- mucle6 5y ago
  "Wall street is a cancer for the economy that lives on fees..." You Should Look Into Low Cost Index Funds "...for allowing people to participate in an elaborate gambling game" I believe if you invest in a market cap weighted U.S. stock market, there has never been a 20(?) year period where you lose money on your investment adjusting for inflation. I'm sure there is another number for the global market. I think it is disingenuous to call something with a positive expected return gambling. "...and due to their influence in US politics, they have forced everyone to play the game..." This implies that having a market to buy and sell stocks is unstable and only being propped up by laws, but there are many stock markets around the world, so unless there is a large conspiracy to make investing inefficient through the use of large markets, I think we have to conclude that a stock market has some intrinsic value. "under the false premise that the stocks will always go up. Except they are not, check the European stock market that has stagnated for decades." The only free lunch in investing is diversification. Don't invest in one company, sector, or country. And if you do, don't complain when it doesn't track the rest of the market. "Companies can find investors without the stock market." Then why don't they? Aren't big bad companies only concerned with making more money? If finding investors without the stock market was more profitable, then wouldn't they? "Companies can pay dividends to their owners & employees. No need to have an additional speculation layer for fund raising and profit distribution." This assumes that their owners and employees currently have enough money to collectively fund whatever venture they're working towards. To be honest I think you already know this but I'll bite. The world can be more efficient if we let people with money and no ideas give their money to people with ideas and no money.
  - whatever1 5y ago
    "You Should Look Into Low Cost Index Funds" - Not sure how this helps your argument. Low cost != zero cost. "I believe if you invest in a market cap weighted U.S. stock market, there has never been a 20(?) year period where you lose money on your investment adjusting for inflation. I'm sure there is another number for the global market. I think it is disingenuous to call something with a positive expected return gambling." - In your own words "Don't invest in one company, sector, or country. And if you do, don't complain when it doesn't track the rest of the market." The probability that the US is the outlier is much higher compared to the cummulative stock performance of companies from 27 european nations being the outlier. "This implies that having a market to buy and sell stocks is unstable and only being propped up by laws, but there are many stock markets around the world, so unless there is a large conspiracy to make investing inefficient through the use of large markets, I think we have to conclude that a stock market has some intrinsic value." - The value generated from stock market speculations in the EU the past 20 years is close to zero [1]. So I have to conclude that the stock market is really useless. "The only free lunch in investing is diversification. Don't invest in one company, sector, or country. And if you do, don't complain when it doesn't track the rest of the market." - Or, don't speculate at all if you are not an expert and knowing that you are taking the risk of losing everything. No reason for the almost retired mom and pop to speculate on the value of my business. I am all in for long term investing (aka buy shares from the company). The buy-sell between stock holders - buyers needs to be heavily taxed due to the risk for the wider economy that these transactions can cause. "Then why don't they? Aren't big bad companies only concerned with making more money? If finding investors without the stock market was more profitable, then wouldn't they?" - I made this year 200% from speculating on Bitcoin and 90% from speculating on the recovery of the US stock market. Of course everyone tries to benefit from the game, but the reality is that only the middlemen are making money from the transactions. For the rest of us it is a zero-sum game. Some poor folks on the other side had to pay for my gains. "This assumes that their owners and employees currently have enough money to collectively fund whatever venture they're working towards. To be honest I think you already know this but I'll bite. The world can be more efficient if we let people with money and no ideas give their money to people with ideas and no money." - If only we had a solution to this! Oh I forgot, we have already a couple: 1) Banks and 2)"Issuing more shares". There is no benefit to the company when mucle6 sells their shares to whatever1 for 10 trillion dollars. [1] https://www.marketwatch.com/investing/index/sxxp?CountryCode=xx https://www.marketwatch.com/investing/index/sxxp?CountryCode...
jollybean 5y ago
Just because financial firms provide legitimately important services, doesn't mean the value they capture is commensurate with that value creation. So yes, it's a leap of abstraction for most people to grasp that 'market making' etc. is an important function, and that there's legit value created. ... but the amount of surplus capture is gigantic and that's the problem. Fouquet became Louis IX 'CFO' and somehow at the same time amassed massive wealth possibly illegitimately and so he lost his head very quickly. It's always the people closest to the piles of Gold that end up with all of the Gold. There are a million ways they justify it, and in free markets where information and relations are 'the power', well, they have it all. Usually it's 'generally very talented' people involved, of that I have no doubt, but that again doesn't justify necessarily the surplus capture.
- whatshisface 5y ago
  If you count the trading firms that don't do so well, are the people in finance really making off with all that much money, or is it the best firms taking all the sunlight from the middle and worst firms?
  - jollybean 5y ago
    Sure, but then you'd have to count the regular businesses that don't post heavy profits of which there are many. Also either it's 'market making' or 'trading' I think it should never be the same thing under one roof and that market making should have a fair bit of regulation and transparency.
    - filoleg 5y ago
      Are you aware of market making actually means? Because your statement about "either it's 'market making' or 'trading' I think it should never be the same thing under one roof" is like saying "it either gotta be 'playing soccer' or 'kicking the ball', they should not be the same". Sure, "kicking the ball" is done by many different sports and in many different ways, but it is literally an integral part of playing soccer, so you cannot say "either or" here. The same. The whole point of market making is trading securities at both ask prices and sell prices, thus providing liquidity to the markets. So they essentially are making profit off bid-ask spread, but doing so reduces bid-ask spread and decreases market inefficiency (thus converging on a more accurate value of the security in question). And to your point about regulation of market makers, they already have more than just a "fair bit of regulation and transparency".

whatever1 5y ago

No they are not. Wall street is a cancer for the economy that lives on fees for allowing people to participate in an elaborate gambling game. And due to their influence in US politics, they have forced everyone to play the game, under the false premise that the stocks will always go up. Except they are not, check the European stock market that has stagnated for decades. Companies can find investors without the stock market. Companies can pay dividends to their owners & employees. No need to have an additional speculation layer for fund raising and profit distribution.

mucle6 5y ago
"Wall street is a cancer for the economy that lives on fees..." You Should Look Into Low Cost Index Funds "...for allowing people to participate in an elaborate gambling game" I believe if you invest in a market cap weighted U.S. stock market, there has never been a 20(?) year period where you lose money on your investment adjusting for inflation. I'm sure there is another number for the global market. I think it is disingenuous to call something with a positive expected return gambling. "...and due to their influence in US politics, they have forced everyone to play the game..." This implies that having a market to buy and sell stocks is unstable and only being propped up by laws, but there are many stock markets around the world, so unless there is a large conspiracy to make investing inefficient through the use of large markets, I think we have to conclude that a stock market has some intrinsic value. "under the false premise that the stocks will always go up. Except they are not, check the European stock market that has stagnated for decades." The only free lunch in investing is diversification. Don't invest in one company, sector, or country. And if you do, don't complain when it doesn't track the rest of the market. "Companies can find investors without the stock market." Then why don't they? Aren't big bad companies only concerned with making more money? If finding investors without the stock market was more profitable, then wouldn't they? "Companies can pay dividends to their owners & employees. No need to have an additional speculation layer for fund raising and profit distribution." This assumes that their owners and employees currently have enough money to collectively fund whatever venture they're working towards. To be honest I think you already know this but I'll bite. The world can be more efficient if we let people with money and no ideas give their money to people with ideas and no money.
- whatever1 5y ago
  "You Should Look Into Low Cost Index Funds" - Not sure how this helps your argument. Low cost != zero cost. "I believe if you invest in a market cap weighted U.S. stock market, there has never been a 20(?) year period where you lose money on your investment adjusting for inflation. I'm sure there is another number for the global market. I think it is disingenuous to call something with a positive expected return gambling." - In your own words "Don't invest in one company, sector, or country. And if you do, don't complain when it doesn't track the rest of the market." The probability that the US is the outlier is much higher compared to the cummulative stock performance of companies from 27 european nations being the outlier. "This implies that having a market to buy and sell stocks is unstable and only being propped up by laws, but there are many stock markets around the world, so unless there is a large conspiracy to make investing inefficient through the use of large markets, I think we have to conclude that a stock market has some intrinsic value." - The value generated from stock market speculations in the EU the past 20 years is close to zero [1]. So I have to conclude that the stock market is really useless. "The only free lunch in investing is diversification. Don't invest in one company, sector, or country. And if you do, don't complain when it doesn't track the rest of the market." - Or, don't speculate at all if you are not an expert and knowing that you are taking the risk of losing everything. No reason for the almost retired mom and pop to speculate on the value of my business. I am all in for long term investing (aka buy shares from the company). The buy-sell between stock holders - buyers needs to be heavily taxed due to the risk for the wider economy that these transactions can cause. "Then why don't they? Aren't big bad companies only concerned with making more money? If finding investors without the stock market was more profitable, then wouldn't they?" - I made this year 200% from speculating on Bitcoin and 90% from speculating on the recovery of the US stock market. Of course everyone tries to benefit from the game, but the reality is that only the middlemen are making money from the transactions. For the rest of us it is a zero-sum game. Some poor folks on the other side had to pay for my gains. "This assumes that their owners and employees currently have enough money to collectively fund whatever venture they're working towards. To be honest I think you already know this but I'll bite. The world can be more efficient if we let people with money and no ideas give their money to people with ideas and no money." - If only we had a solution to this! Oh I forgot, we have already a couple: 1) Banks and 2)"Issuing more shares". There is no benefit to the company when mucle6 sells their shares to whatever1 for 10 trillion dollars. [1] https://www.marketwatch.com/investing/index/sxxp?CountryCode=xx https://www.marketwatch.com/investing/index/sxxp?CountryCode...

jollybean 5y ago

Just because financial firms provide legitimately important services, doesn't mean the value they capture is commensurate with that value creation. So yes, it's a leap of abstraction for most people to grasp that 'market making' etc. is an important function, and that there's legit value created. ... but the amount of surplus capture is gigantic and that's the problem. Fouquet became Louis IX 'CFO' and somehow at the same time amassed massive wealth possibly illegitimately and so he lost his head very quickly. It's always the people closest to the piles of Gold that end up with all of the Gold. There are a million ways they justify it, and in free markets where information and relations are 'the power', well, they have it all. Usually it's 'generally very talented' people involved, of that I have no doubt, but that again doesn't justify necessarily the surplus capture.

whatshisface 5y ago
If you count the trading firms that don't do so well, are the people in finance really making off with all that much money, or is it the best firms taking all the sunlight from the middle and worst firms?
- jollybean 5y ago
  Sure, but then you'd have to count the regular businesses that don't post heavy profits of which there are many. Also either it's 'market making' or 'trading' I think it should never be the same thing under one roof and that market making should have a fair bit of regulation and transparency.
  - filoleg 5y ago
    Are you aware of market making actually means? Because your statement about "either it's 'market making' or 'trading' I think it should never be the same thing under one roof" is like saying "it either gotta be 'playing soccer' or 'kicking the ball', they should not be the same". Sure, "kicking the ball" is done by many different sports and in many different ways, but it is literally an integral part of playing soccer, so you cannot say "either or" here. The same. The whole point of market making is trading securities at both ask prices and sell prices, thus providing liquidity to the markets. So they essentially are making profit off bid-ask spread, but doing so reduces bid-ask spread and decreases market inefficiency (thus converging on a more accurate value of the security in question). And to your point about regulation of market makers, they already have more than just a "fair bit of regulation and transparency".