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Please don't spout vitriol when you don't understand what you're talking about. Trading is obviously zero-sum in wealth, but the important thing is that it is n

by vecter 15y ago

Please don't spout vitriol when you don't understand what you're talking about. Trading is obviously zero-sum in wealth, but the important thing is that it is not zero-sum in utility. That is the fundamental reason that people trade: to transfer risk. American Airlines does this every time they want to hedge against the price of oil. The fact that there are competitive market makers makes this cheaper for the airlines to do, and that savings in cost is transferred to you every time you sit on an airplane, go to the gas pump, buy orange juice or wheat products, buy a car, or almost anything else. The fact that market makers don't service you directly by selling you an apple does not mean that what they do is useless.

Symmetry 15y ago
I absolutely agree that trading is socially useful, and markets would be much less liquid if we didn't have big companies ready to stand as counter-party to whatever buying and selling smaller market players want to do. It just makes me a bit sad that the profits that rightfully accrue to the sector are then seemingly wasted on HFT infrastructure, a competition that doesn't seem to provide anything useful above the standard market-making role.
- vecter 15y ago
  * It just makes me a bit sad that the profits that rightfully accrue to the sector are then seemingly wasted on HFT infrastructure, a competition that doesn't seem to provide anything useful above the standard market-making role. I think that's the point though: the immediate execution that liquidity offers you is the price you pay to hedge risk. The other option is for these companies to set up their own trading desks. For instance, suppose an airline wanted to buy oil at a price it wanted. If the market is very illiquid, they're less willing to cross the bid/ask spread to hit whatever wide offer someone else is posting. The longer they have to wait, the more risk they're at. The "standard market-making role" solves this problem exactly. It allows them to hedge their risk at lesser cost. That is a valuable service, and that is why market makeres exist.
logjam 15y ago
Oh really. "Vitriol" in the rose-shaded eye of the beholder aside, methinks absent the WSJ pom-poms we will agree that a much more fundamental reason that people trade is: to make money without having to worry about consequences; and that particularly in light of events over the last decade, the fact that highly-interdependent, dubiously competitive "markets" have sprouted in many sectors means that the costs of mistakes, incompetence, fraud, theft, etc is transferred to you every time you sit on an airplane, go to the gas pump, buy orange juice, blah blah. As such, one supposes that dependence on many of those markets indeed resulted, as you say, in something other than zero-sum in terms of utility - they resulted in huge losses for some and huge inefficiencies resulting from unquestioning confidence in the supposed "efficiency" and beneficence of "markets". http://en.wikipedia.org/wiki/Externality http://en.wikipedia.org/wiki/Externality
- vecter 15y ago
  I will absolutely agree that traders want money. I may not be motivated by societal welfare, but it's naive to think most people are. Founders start companies because they want to hit it big. Sure, they do want to change the world, and I genuinely believe that, but I think if the huge upside potential wasn't there, the startup industry wouldn't be as competitive as it is. Can you be more specific about how these markets transfer the costs of mistakes to you? I'm not entirely disagreeing, I just don't know of any specific examples (although that may be a symptom of my ignorance). The fact that markets cause some to have huge losses doesn't particularly bother me. I'm talking specifically about US equities, futures, and options markets which, as far as I can tell, are extremely liquid and competitive. I don't see any negative externalities caused by HFT market makers in these markets, but again, if you have examples, I'm glad to be corrected. You also cite "huge inefficiencies" from "markets". Maybe we're talking about different markets, but I don't see these inefficiencies in the markets I mentioned. I know nothing about derivatives or anything other than HFT, so maybe that's what you're talking about.

by vecter 15y ago

Symmetry 15y ago

I absolutely agree that trading is socially useful, and markets would be much less liquid if we didn't have big companies ready to stand as counter-party to whatever buying and selling smaller market players want to do. It just makes me a bit sad that the profits that rightfully accrue to the sector are then seemingly wasted on HFT infrastructure, a competition that doesn't seem to provide anything useful above the standard market-making role.

vecter 15y ago
* It just makes me a bit sad that the profits that rightfully accrue to the sector are then seemingly wasted on HFT infrastructure, a competition that doesn't seem to provide anything useful above the standard market-making role. I think that's the point though: the immediate execution that liquidity offers you is the price you pay to hedge risk. The other option is for these companies to set up their own trading desks. For instance, suppose an airline wanted to buy oil at a price it wanted. If the market is very illiquid, they're less willing to cross the bid/ask spread to hit whatever wide offer someone else is posting. The longer they have to wait, the more risk they're at. The "standard market-making role" solves this problem exactly. It allows them to hedge their risk at lesser cost. That is a valuable service, and that is why market makeres exist.

logjam 15y ago

Oh really. "Vitriol" in the rose-shaded eye of the beholder aside, methinks absent the WSJ pom-poms we will agree that a much more fundamental reason that people trade is: to make money without having to worry about consequences; and that particularly in light of events over the last decade, the fact that highly-interdependent, dubiously competitive "markets" have sprouted in many sectors means that the costs of mistakes, incompetence, fraud, theft, etc is transferred to you every time you sit on an airplane, go to the gas pump, buy orange juice, blah blah. As such, one supposes that dependence on many of those markets indeed resulted, as you say, in something other than zero-sum in terms of utility - they resulted in huge losses for some and huge inefficiencies resulting from unquestioning confidence in the supposed "efficiency" and beneficence of "markets". http://en.wikipedia.org/wiki/Externality http://en.wikipedia.org/wiki/Externality

vecter 15y ago
I will absolutely agree that traders want money. I may not be motivated by societal welfare, but it's naive to think most people are. Founders start companies because they want to hit it big. Sure, they do want to change the world, and I genuinely believe that, but I think if the huge upside potential wasn't there, the startup industry wouldn't be as competitive as it is. Can you be more specific about how these markets transfer the costs of mistakes to you? I'm not entirely disagreeing, I just don't know of any specific examples (although that may be a symptom of my ignorance). The fact that markets cause some to have huge losses doesn't particularly bother me. I'm talking specifically about US equities, futures, and options markets which, as far as I can tell, are extremely liquid and competitive. I don't see any negative externalities caused by HFT market makers in these markets, but again, if you have examples, I'm glad to be corrected. You also cite "huge inefficiencies" from "markets". Maybe we're talking about different markets, but I don't see these inefficiencies in the markets I mentioned. I know nothing about derivatives or anything other than HFT, so maybe that's what you're talking about.