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> So, in real financial markets, all the arbitrage games etc. [2] at least support actual productive purposes. So without all those games, what would be substa

> So, in real financial markets, all the arbitrage games etc. [2] at least support actual productive purposes. So without all those games, what would be substantially different?

lxgr 3y ago
You‘d probably see much larger spreads and lower liquidity when buying and selling stocks or commodities/currencies; you’d often overpay on insurance etc. (All assuming a properly working market without collusion, illegal usage of non-public information etc. – which is unfortunately not always the case.)
MrMan 3y ago
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pembrook 3y ago
By referring to arbitrage as “games” OP’s comment has poisoned the well for this entire chain of responses. So to get an understanding, first we need to fix. A “game” implies non-productive or zero sum. By definition, an arbitrage is not that. Any arbitrage is the result of an inefficiency in prices or the economy. When someone arbitrages prices back to where they should be, they are performing a service that everyone else benefits from, and are rightly compensated for this. Now, are finance people compensated too much for correcting price discrepancies? If yes, then that’s another arbitrage opportunity! But the question of what would be substantially different is easy. No arbitrage = no markets = top-down command economy. Check out North Korea, Cuba, USSR, the former Yugoslavia, etc. for what would be different.
- less_less 3y ago
  > When someone arbitrages prices back to where they should be, they are performing a service that everyone else benefits from, and are rightly compensated for this. Now, are finance people compensated too much for correcting price discrepancies? If yes, then that’s another arbitrage opportunity! While I agree that finance serves a useful purpose, I don't understand this bit. Suppose hypothetically that arbitrage gives some social utility, but not in proportion to the amount of money it makes for arbitrageurs, and thus not in proportion to the effort put into it. Suppose that society is overproducing finance -- that most people would be better off if the world had slightly worse pricing information, fewer financial datacenters and low-latency microwave links, less human effort devoted to banking, and more of something else that could be built with those resources and that effort. Maybe this creates another arbitrage opportunity -- maybe in an idealized free market (where there are no barriers to entry) more people would work in finance, and their competition would reduce profits. But it seems to me that this would only worsen the overproduction problem. Or is there something I'm missing here? Why isn't this really an "opportunity" to (carefully) increase taxes on finance, so that it won't be overproduced by as much?
  - nsvd 3y ago
    I don't think it's the case that finance is over produced. If it were, then the value of financial services would drop. Rather, because the gain produced by financial instruments is proportional to the wealth someone has, the returns of finance disproportionately benefit those with large amounts of wealth. One man can only make so much plumbing or being a mechanic, but can make an arbitrary about by investing in ETFs. In other words, if the financial sector was largely a collection of small businesses run by middle class people, no one would think it was a problem that they make money. That would be great! But in reality it's a smaller amount of companies and smaller amount of wealthy people that benefit from it. That problem isn't unique to finance, it affects many parts of our society.
    - less_less 3y ago
      > I don't think it's the case that finance is over produced. If it were, then the value of financial services would drop. I don't think this follows for all financial services. Overproduction leads to a drop in value if the market is efficient, but real-life markets are not perfectly efficient. For arbitrage in particular, the whole point is that the market isn't efficient. Arbitrage makes it more efficient after the arbitrageurs have taken their cut, but the value of that service isn't necessarily determined efficiently. (At least as far as I know: I'm not an expert.) > Rather, because the gain produced by financial instruments is proportional to the wealth someone has, the returns of finance disproportionately benefit those with large amounts of wealth. One man can only make so much plumbing or being a mechanic, but can make an arbitrary about by investing in ETFs. > In other words, if the financial sector was largely a collection of small businesses run by middle class people, no one would think it was a problem that they make money. That would be great! But in reality it's a smaller amount of companies and smaller amount of wealthy people that benefit from it. > That problem isn't unique to finance, it affects many parts of our society. ... but I do almost entirely agree with this.
    - berniedurfee 3y ago
      I think regulatory capture needs to be considered as well. At some point those that amass large amounts of wealth are disproportionately able to influence government regulation to ‘game’ the system itself in their favor. It seems in the realm of finance, it’s much easier to obscure regulatory capture than in other domains, where anti-competitive practices are much easier to suss out.
- vinay_ys 3y ago
  Most of the pricing inefficiency comes from information asymmetry. It might have made sense a 100 years ago when information traveled slowly. But in today's world, it travels fast. But still there is asymmetry due to purposeful obfuscation and complex packaging.

> So, in real financial markets, all the arbitrage games etc. [2] at least support actual productive purposes. So without all those games, what would be substantially different?

lxgr 3y ago

You‘d probably see much larger spreads and lower liquidity when buying and selling stocks or commodities/currencies; you’d often overpay on insurance etc. (All assuming a properly working market without collusion, illegal usage of non-public information etc. – which is unfortunately not always the case.)

MrMan 3y ago

[dead]

pembrook 3y ago

By referring to arbitrage as “games” OP’s comment has poisoned the well for this entire chain of responses. So to get an understanding, first we need to fix. A “game” implies non-productive or zero sum. By definition, an arbitrage is not that. Any arbitrage is the result of an inefficiency in prices or the economy. When someone arbitrages prices back to where they should be, they are performing a service that everyone else benefits from, and are rightly compensated for this. Now, are finance people compensated too much for correcting price discrepancies? If yes, then that’s another arbitrage opportunity! But the question of what would be substantially different is easy. No arbitrage = no markets = top-down command economy. Check out North Korea, Cuba, USSR, the former Yugoslavia, etc. for what would be different.

less_less 3y ago
> When someone arbitrages prices back to where they should be, they are performing a service that everyone else benefits from, and are rightly compensated for this. Now, are finance people compensated too much for correcting price discrepancies? If yes, then that’s another arbitrage opportunity! While I agree that finance serves a useful purpose, I don't understand this bit. Suppose hypothetically that arbitrage gives some social utility, but not in proportion to the amount of money it makes for arbitrageurs, and thus not in proportion to the effort put into it. Suppose that society is overproducing finance -- that most people would be better off if the world had slightly worse pricing information, fewer financial datacenters and low-latency microwave links, less human effort devoted to banking, and more of something else that could be built with those resources and that effort. Maybe this creates another arbitrage opportunity -- maybe in an idealized free market (where there are no barriers to entry) more people would work in finance, and their competition would reduce profits. But it seems to me that this would only worsen the overproduction problem. Or is there something I'm missing here? Why isn't this really an "opportunity" to (carefully) increase taxes on finance, so that it won't be overproduced by as much?
- nsvd 3y ago
  I don't think it's the case that finance is over produced. If it were, then the value of financial services would drop. Rather, because the gain produced by financial instruments is proportional to the wealth someone has, the returns of finance disproportionately benefit those with large amounts of wealth. One man can only make so much plumbing or being a mechanic, but can make an arbitrary about by investing in ETFs. In other words, if the financial sector was largely a collection of small businesses run by middle class people, no one would think it was a problem that they make money. That would be great! But in reality it's a smaller amount of companies and smaller amount of wealthy people that benefit from it. That problem isn't unique to finance, it affects many parts of our society.
  - less_less 3y ago
    > I don't think it's the case that finance is over produced. If it were, then the value of financial services would drop. I don't think this follows for all financial services. Overproduction leads to a drop in value if the market is efficient, but real-life markets are not perfectly efficient. For arbitrage in particular, the whole point is that the market isn't efficient. Arbitrage makes it more efficient after the arbitrageurs have taken their cut, but the value of that service isn't necessarily determined efficiently. (At least as far as I know: I'm not an expert.) > Rather, because the gain produced by financial instruments is proportional to the wealth someone has, the returns of finance disproportionately benefit those with large amounts of wealth. One man can only make so much plumbing or being a mechanic, but can make an arbitrary about by investing in ETFs. > In other words, if the financial sector was largely a collection of small businesses run by middle class people, no one would think it was a problem that they make money. That would be great! But in reality it's a smaller amount of companies and smaller amount of wealthy people that benefit from it. > That problem isn't unique to finance, it affects many parts of our society. ... but I do almost entirely agree with this.
  - berniedurfee 3y ago
    I think regulatory capture needs to be considered as well. At some point those that amass large amounts of wealth are disproportionately able to influence government regulation to ‘game’ the system itself in their favor. It seems in the realm of finance, it’s much easier to obscure regulatory capture than in other domains, where anti-competitive practices are much easier to suss out.
vinay_ys 3y ago
Most of the pricing inefficiency comes from information asymmetry. It might have made sense a 100 years ago when information traveled slowly. But in today's world, it travels fast. But still there is asymmetry due to purposeful obfuscation and complex packaging.