6 ms·

So much talent... focused on the buying and selling of securities, instead of creating new things that will make the world better in a directly measurable manne

by cs702 13y ago

So much talent... focused on the buying and selling of securities, instead of creating new things that will make the world better in a directly measurable manner. Virtually all trading volume today consists of buying and selling old securities -- essentially, legal claims on existing assets. The sale of new securities issued to finance the creation of new products and services -- for example, a company selling new shares via an IPO or issuing new bonds for investment in physical infrastructure -- represents only a minuscule portion of total trading volume. I'm not sure having so many of our best and brightest minds going to Wall Street (and into high-frequency trading in particular) is a good thing, from a societal perspective. -- PS. Whenever I read anything about high-frequency trading, I'm reminded of the following passage, written by John Maynard Keynes in 1936 -- 77 years ago (!): "Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of 'liquid' securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is 'to beat the gun,' as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow." Source: http://ebooks.adelaide.edu.au/k/keynes/john_maynard/k44g/chapter12.html#chapter12.3 http://ebooks.adelaide.edu.au/k/keynes/john_maynard/k44g/cha... The more things change, the more they stay the same!

foobarian 13y ago
I always wondered whether it would make sense to legislate a random added latency in exchanges in order to create a latency noise floor to remove the need for HFT. Without such a cap it's an arms race that adds no value.
- socillion 13y ago
  > Without such a cap it's an arms race that adds no value. I have seen nobody ever challenge the value of liquidity in these discussions of HFT. Assuming this, the argument is that at some amount of latency the additional liquidity turns into a negative. It seems more like the additional value is simply extremely small, but meaningful over an entire market. What's the exact cutoff point for the value of additional liquidity turning negative, and will anyone agree on that arbitrary number? Assuming HFT does turn into a negative at some point, wouldn't the same apply to optimizations in other markets like online advertising? If it does apply elsewhere, we should also legislate away the practice of making online advertising more efficient to prevent tech giants like Google and Facebook from wasting billions of dollars and untold man-hours on these activities that are clearly worthless to society.
- npongratz 13y ago
  Why resort to legislation? Create such a market yourself (or with a team) and see if your tweaks naturally drive demand from market participants. No force necessary.
dopamean 13y ago
Someone said something similar about a lot of people in the startup community. That we were sending our best and brightest out to create products that ultimately only served the purpose of pushing ads (Instagram, Facebook, Twitter, etc). I don't know how true this is. There are a lot of very smart people in the world. The luxury of having that many smart people is that we can have a lot dedicated to designing amazing infrastructure that sends satellites into orbit and we can also have Twitter and HFT.
- 31reasons 13y ago
  Then why we haven't cured cancer yet or malaria or global warming or psychological disorders ? There are a lot of smart people in the world but we really can't afford to work on silly things.
  - kylebrown 13y ago
    Price discovery in markets, and economic boom-bust cycles are a societal/tech problem going back hundreds if not thousands of years. HFT is only part of the solution (or should be), and I don't think its silly. And even if it were, sometimes there's just no getting around the silly/thorny issues (makefiles anyone?) before you work on the important stuff directly.
  - SkyMarshal 13y ago
    Some of those problems are "Nine women can't make a baby in one month" type problems. Sometimes the solutions are stumbled upon by accident, rather than by concerted effort, especially in medicine. In fact it wouldn't surprise me if some sophisticated neural net algorithm developed for HFT was repurposed and used successfully for other things - medical research, climate modelling, brain research - basically anything involving non-linear dynamic systems. Only problem of course is that all those HFT algorithms aren't FOSS, but the incentive to develop them in the first place would be greatly diminished since they'd lose whatever edge they had almost immediately after publishing. The markets are a pretty decent lab for experimentation and learning about complex systems, which we're still not so great with, as long as systemic risk can be prevented and every player forced to take their losses instead of passing them off to governments. I personally don't think HFT is remotely as much a problem as what caused the financial crisis - a few flash crashes here and there plus an "HFT tax" on asset prices, vs the arguably-fraudulent origination and dissemination of trillions of dollars of bad debt resulting in the near total annihilation of the global economy. I think we'll gain a lot more (or at least lose a lot less) as a society by prioritizing the latter problem.
analyst74 13y ago
Similar things can be said about military research, law firms, medical clinics (not medical research), advertisement firms and most other types of work.
- 0xdeadbeefbabe 13y ago
  Especially law firms.
- sumodds 13y ago
  I disagree with this assumption. The problems with military research, law firms, advertisements are of degree not of its existence. Sure, they have their own problems. But we need military research: which is arisen out of insecurities of nation states, to given protection to their states. Law firms, too have a place so too medical clinics and advertisement firms. In case of HFT, the argument is not of degree but existence. Military solves security problems of nation states, law firms communal issues of individual citizens, advertisements to help the product reach the intended audience. But what problem does HFT solve other than making a few people very rich.
  - gd1 13y ago
    It reduces the friction in every single financial transaction. There used to be considerably more people making markets, at first yelling at each other across the pit, then manually clicking on the screens, now automated out of existence. Machines not just doing the same job mind you, but doing it much better and faster (and without sleeping, toilet breaks, emotions). So the better consistency/efficiency means these firms can quote tighter and tighter spreads in a price war, which they do. Never has so little money been leeched from the markets by middle men (less money extracted, but concentrated in fewer hands perhaps...). An enormous benefit to society. A benefit that compounds along the supply line. The reason you hear so much about HFT is because the traditional firms it is displacing want you to.
    - sumodds 13y ago
      I am not as much against automated trading, as I am against High Frequency Trading. Automated trading itself is still dangerous, in that many of these algorithms are black-boxes. They induce complexity and turbulence into the system. For example the minor bubble just before 2008 crash. May be automated trading/HFT was lucky that, the crash wasn't majorly their part. But it is a ticking time bomb. Now with HFT it is all the more dangerous, because of the speed of interactions. If I make a bet in 50micro seconds, the space of possibilities explodes on you. And how is it of enormous benefit to society, when it is concentrated in fewer hands. Again, these micro variations hardly say anything about the quality of the goods being produced than what other traders think about the goods. You are optimizing on a parameter, which does not model the problem you are solving. You might find a minima, but one that has nothing to do with making/distribution of these goods.
fmstephe 13y ago
While I wouldn't want to defend HFT on any moral grounds we are at least seeing some of the technology leaking out into open source. https://github.com/OpenHFT https://github.com/OpenHFT While I don't like the role of HFT in modern markets I find the technology that it drives very exciting.
- fijal 13y ago
  Most of their technology is incredibly secret (for obvious reasons). They won't even tell you they're using your open source project (they can give you money though). They're (on average) worse than your average tech shop. But then again, people like google or facebook will never buy software from anyone, so if we're left with just them, you can never create a business writing software that caters for other software companies, not sure what is worse.
pdovy 13y ago
Virtually all trading volume today consists of buying and selling old securities -- essentially, legal claims on existing assets. The sale of new securities issued to finance the creation of new products and services -- for example, a company selling new shares via an IPO -- represents only a minuscule portion of total trading volume. -- Leaving aside for a moment the question of the value of HFT, this is a skewed view of the world of finance. The equities markets may be the most visible to the public (quoted on the news, associated most directly with companies and products we all know, etc), but it's just one market. In fact, the size of global bond markets is almost double that of equities [1] and is a huge source of funding for companies (and governments), and has more frequent new issues for the same entity than in equities. Similarly futures markets are hugely active and important as both a source of price discovery for commodities and as a way for businesses small and large to hedge risk. I mention all this not to pick on you in particular, but because it seems in the wake of the financial crises of the past few years, this "finance is bad" mentality seems to be pervasive. There are absolutely problems, but I think it's important not to lose sight of the fact that much of what financial markets do is hugely important to modern businesses and governments. [1] http://finance.zacks.com/bond-market-size-vs-stock-market-size-5863.html http://finance.zacks.com/bond-market-size-vs-stock-market-si...
- dasil003 13y ago
  Markets are hugely important. The problem is the size of the investment banks who neither supply the capital nor the equities, but due to proximity of the transaction are able to skim more and more cream out of the transactions and devote more and more brainpower to increasing that arbitrage. They have become so instrumental to the lives of the rich and powerful that they can completely destroy economies and be bailed out by tax payers the majority of whom have absolutely no interest in the solvency of said banks other than some extremely urgent, hand-wavy and fundamentally interest-conflicted warning of economic cataclysm. Obviously regulation doesn't seem to do much good because it just changes the rules which sends the investments games scrambling for new arbitrage opportunities which no regulatory agency has the resources to keep up with until its too late. Given the lack of political fortitude to combat moral hazard by forcing financial institutions to take their own losses on the chin, I think perhaps widespread and rabid investment banker hate could be the best societal medicine we have against the brain-drain to finance.
fin101 13y ago
Company MakeWorldABetterPlace.com creates new thing and makes us all feel better in a directly measurable way. They decide to create an even better new thing that has heavy capital requirements so they issue stock. Even better new thing is not as great as we all thought, so stock goes out of favor as market participants channel capital to new and more promising tech companies. Years down the road, MakeWorldABetterPlace.com, trading on old securities decides to enter the mobile market and creates revolutionary device. Market participants catch on and start channeling capital out from less promising securities and into the old and existing claims on assets of MakeWorldABetterPlace.com. Thousands of businesses and jobs are created by new privately held companies that create new things using MakeWorldABetterPlace.com's mobile operating platform. So much talent focuses on the buying and selling of securities because it is the most social way to vote directly - by allocating capital. And the product of that capital flow is what is observed as the creation of new products that make the world better in a directly measurable way. If you don't think liquidity is important, then with it goes the ability for countless tech startups to exit (through their acquisition by large corporations in exchange for claims on existing assets) and use the resulting capital to create subsequent startups, that perpetuate the cycle of creativity.
- a_c_s 13y ago
  There more liquidity there is, the less marginal value additional liquidity has.
3327 13y ago
This is why I left. It is actually the ultimate brain drain for the United States.
phyalow 13y ago
>Virtually all trading volume today consists of buying and selling old securities. >I'm not sure having so many of our best and brightest minds going to Wall Street (and into high-frequency trading in particular) is a good thing, from a societal perspective. Your so wrong. Cash Equities account for notionally c. 50% volume at best the rest being made up from exchange traded derivatives. HFT, MM and Prop firms by speculating and posting contra liquidity lower transaction costs for other market participants. Society benefits from having a fluid and well greased market which reflects all known information. Also get your Keynesian BS out of here.

by cs702 13y ago

foobarian 13y ago

I always wondered whether it would make sense to legislate a random added latency in exchanges in order to create a latency noise floor to remove the need for HFT. Without such a cap it's an arms race that adds no value.

socillion 13y ago
> Without such a cap it's an arms race that adds no value. I have seen nobody ever challenge the value of liquidity in these discussions of HFT. Assuming this, the argument is that at some amount of latency the additional liquidity turns into a negative. It seems more like the additional value is simply extremely small, but meaningful over an entire market. What's the exact cutoff point for the value of additional liquidity turning negative, and will anyone agree on that arbitrary number? Assuming HFT does turn into a negative at some point, wouldn't the same apply to optimizations in other markets like online advertising? If it does apply elsewhere, we should also legislate away the practice of making online advertising more efficient to prevent tech giants like Google and Facebook from wasting billions of dollars and untold man-hours on these activities that are clearly worthless to society.
npongratz 13y ago
Why resort to legislation? Create such a market yourself (or with a team) and see if your tweaks naturally drive demand from market participants. No force necessary.

dopamean 13y ago

Someone said something similar about a lot of people in the startup community. That we were sending our best and brightest out to create products that ultimately only served the purpose of pushing ads (Instagram, Facebook, Twitter, etc). I don't know how true this is. There are a lot of very smart people in the world. The luxury of having that many smart people is that we can have a lot dedicated to designing amazing infrastructure that sends satellites into orbit and we can also have Twitter and HFT.

31reasons 13y ago
Then why we haven't cured cancer yet or malaria or global warming or psychological disorders ? There are a lot of smart people in the world but we really can't afford to work on silly things.
- kylebrown 13y ago
  Price discovery in markets, and economic boom-bust cycles are a societal/tech problem going back hundreds if not thousands of years. HFT is only part of the solution (or should be), and I don't think its silly. And even if it were, sometimes there's just no getting around the silly/thorny issues (makefiles anyone?) before you work on the important stuff directly.
- SkyMarshal 13y ago
  Some of those problems are "Nine women can't make a baby in one month" type problems. Sometimes the solutions are stumbled upon by accident, rather than by concerted effort, especially in medicine. In fact it wouldn't surprise me if some sophisticated neural net algorithm developed for HFT was repurposed and used successfully for other things - medical research, climate modelling, brain research - basically anything involving non-linear dynamic systems. Only problem of course is that all those HFT algorithms aren't FOSS, but the incentive to develop them in the first place would be greatly diminished since they'd lose whatever edge they had almost immediately after publishing. The markets are a pretty decent lab for experimentation and learning about complex systems, which we're still not so great with, as long as systemic risk can be prevented and every player forced to take their losses instead of passing them off to governments. I personally don't think HFT is remotely as much a problem as what caused the financial crisis - a few flash crashes here and there plus an "HFT tax" on asset prices, vs the arguably-fraudulent origination and dissemination of trillions of dollars of bad debt resulting in the near total annihilation of the global economy. I think we'll gain a lot more (or at least lose a lot less) as a society by prioritizing the latter problem.

analyst74 13y ago

Similar things can be said about military research, law firms, medical clinics (not medical research), advertisement firms and most other types of work.

0xdeadbeefbabe 13y ago
Especially law firms.
sumodds 13y ago
I disagree with this assumption. The problems with military research, law firms, advertisements are of degree not of its existence. Sure, they have their own problems. But we need military research: which is arisen out of insecurities of nation states, to given protection to their states. Law firms, too have a place so too medical clinics and advertisement firms. In case of HFT, the argument is not of degree but existence. Military solves security problems of nation states, law firms communal issues of individual citizens, advertisements to help the product reach the intended audience. But what problem does HFT solve other than making a few people very rich.
- gd1 13y ago
  It reduces the friction in every single financial transaction. There used to be considerably more people making markets, at first yelling at each other across the pit, then manually clicking on the screens, now automated out of existence. Machines not just doing the same job mind you, but doing it much better and faster (and without sleeping, toilet breaks, emotions). So the better consistency/efficiency means these firms can quote tighter and tighter spreads in a price war, which they do. Never has so little money been leeched from the markets by middle men (less money extracted, but concentrated in fewer hands perhaps...). An enormous benefit to society. A benefit that compounds along the supply line. The reason you hear so much about HFT is because the traditional firms it is displacing want you to.
  - sumodds 13y ago
    I am not as much against automated trading, as I am against High Frequency Trading. Automated trading itself is still dangerous, in that many of these algorithms are black-boxes. They induce complexity and turbulence into the system. For example the minor bubble just before 2008 crash. May be automated trading/HFT was lucky that, the crash wasn't majorly their part. But it is a ticking time bomb. Now with HFT it is all the more dangerous, because of the speed of interactions. If I make a bet in 50micro seconds, the space of possibilities explodes on you. And how is it of enormous benefit to society, when it is concentrated in fewer hands. Again, these micro variations hardly say anything about the quality of the goods being produced than what other traders think about the goods. You are optimizing on a parameter, which does not model the problem you are solving. You might find a minima, but one that has nothing to do with making/distribution of these goods.

fmstephe 13y ago

While I wouldn't want to defend HFT on any moral grounds we are at least seeing some of the technology leaking out into open source. https://github.com/OpenHFT https://github.com/OpenHFT While I don't like the role of HFT in modern markets I find the technology that it drives very exciting.

fijal 13y ago
Most of their technology is incredibly secret (for obvious reasons). They won't even tell you they're using your open source project (they can give you money though). They're (on average) worse than your average tech shop. But then again, people like google or facebook will never buy software from anyone, so if we're left with just them, you can never create a business writing software that caters for other software companies, not sure what is worse.

pdovy 13y ago

Virtually all trading volume today consists of buying and selling old securities -- essentially, legal claims on existing assets. The sale of new securities issued to finance the creation of new products and services -- for example, a company selling new shares via an IPO -- represents only a minuscule portion of total trading volume. -- Leaving aside for a moment the question of the value of HFT, this is a skewed view of the world of finance. The equities markets may be the most visible to the public (quoted on the news, associated most directly with companies and products we all know, etc), but it's just one market. In fact, the size of global bond markets is almost double that of equities [1] and is a huge source of funding for companies (and governments), and has more frequent new issues for the same entity than in equities. Similarly futures markets are hugely active and important as both a source of price discovery for commodities and as a way for businesses small and large to hedge risk. I mention all this not to pick on you in particular, but because it seems in the wake of the financial crises of the past few years, this "finance is bad" mentality seems to be pervasive. There are absolutely problems, but I think it's important not to lose sight of the fact that much of what financial markets do is hugely important to modern businesses and governments. [1] http://finance.zacks.com/bond-market-size-vs-stock-market-size-5863.html http://finance.zacks.com/bond-market-size-vs-stock-market-si...

dasil003 13y ago
Markets are hugely important. The problem is the size of the investment banks who neither supply the capital nor the equities, but due to proximity of the transaction are able to skim more and more cream out of the transactions and devote more and more brainpower to increasing that arbitrage. They have become so instrumental to the lives of the rich and powerful that they can completely destroy economies and be bailed out by tax payers the majority of whom have absolutely no interest in the solvency of said banks other than some extremely urgent, hand-wavy and fundamentally interest-conflicted warning of economic cataclysm. Obviously regulation doesn't seem to do much good because it just changes the rules which sends the investments games scrambling for new arbitrage opportunities which no regulatory agency has the resources to keep up with until its too late. Given the lack of political fortitude to combat moral hazard by forcing financial institutions to take their own losses on the chin, I think perhaps widespread and rabid investment banker hate could be the best societal medicine we have against the brain-drain to finance.

fin101 13y ago

Company MakeWorldABetterPlace.com creates new thing and makes us all feel better in a directly measurable way. They decide to create an even better new thing that has heavy capital requirements so they issue stock. Even better new thing is not as great as we all thought, so stock goes out of favor as market participants channel capital to new and more promising tech companies. Years down the road, MakeWorldABetterPlace.com, trading on old securities decides to enter the mobile market and creates revolutionary device. Market participants catch on and start channeling capital out from less promising securities and into the old and existing claims on assets of MakeWorldABetterPlace.com. Thousands of businesses and jobs are created by new privately held companies that create new things using MakeWorldABetterPlace.com's mobile operating platform. So much talent focuses on the buying and selling of securities because it is the most social way to vote directly - by allocating capital. And the product of that capital flow is what is observed as the creation of new products that make the world better in a directly measurable way. If you don't think liquidity is important, then with it goes the ability for countless tech startups to exit (through their acquisition by large corporations in exchange for claims on existing assets) and use the resulting capital to create subsequent startups, that perpetuate the cycle of creativity.

a_c_s 13y ago
There more liquidity there is, the less marginal value additional liquidity has.

3327 13y ago

This is why I left. It is actually the ultimate brain drain for the United States.

phyalow 13y ago

>Virtually all trading volume today consists of buying and selling old securities. >I'm not sure having so many of our best and brightest minds going to Wall Street (and into high-frequency trading in particular) is a good thing, from a societal perspective. Your so wrong. Cash Equities account for notionally c. 50% volume at best the rest being made up from exchange traded derivatives. HFT, MM and Prop firms by speculating and posting contra liquidity lower transaction costs for other market participants. Society benefits from having a fluid and well greased market which reflects all known information. Also get your Keynesian BS out of here.