4 ms·

Arbitrage adds market making value. Just like trading desks that make it so I dont have to (physically) find a person who has apple shares in order to buy some.

Arbitrage adds market making value. Just like trading desks that make it so I dont have to (physically) find a person who has apple shares in order to buy some. By making a well (or better) run market, prices can converge to their true value. The seller of the shares can potentially sell to more buyers, therefore finding the highest price possible. The buyer can potentially buy from more sellers therefore finding the lowest price possible. Between the two we get the "most agreeable" pricing . This is why selling CDs of free things on ebay converged down to the price of a CD + Shipping . Similarly its why (at least for now) bitcoins ought to hang out around the cost of electricity + the capital cost of ASICs ... If the price is much lower, dont mine, if the price is much higher its cheaper to buy electricity and ASICs than to buy bitcoins.

jjoonathan 13y ago
I'd hazard a guess that everyone here understands how arbitrage is supposed to work. But how valuable is market making, really? Is it always a good thing that "well-run" markets tend towards the extremes of having razor-thin producer excess or razor-thin consumer excess? Because that's what seems to happen in big/equilibrium markets. One party has a slightly stronger bargaining position and the process of market-making teases that out and translates it into "one person wins big, one person wins just-barely-more-than-nothing." In the process, some of that excess winds up in the hands of middlemen, so to argue that "it's a feature, not a bug" you have to show not only that the value of driving one party's margins to 0 is positive, but that it exceeds the sum of the value captured by middlemen in the process. Sometimes we can throw up our hands and say "eh, you win some you lose some," but other times the result is so unspeakably horrific that this attitude goes from "unproductive" to "evil." Example: labor markets. Is it a feature or a bug that unskilled laborers don't manage to capture any of their producer excess, and that the equilibrium wage would lie just north of what what was required to make work preferable to starvation and homelessness (less, actually, because some people will be willing to invest savings/debt/daddy's$$ in acquiring experience = differentiation = freedom from the crushing competition)? Look, I don't know of any system that I'm convinced is better. But that doesn't make the market perfect, so let's not pretend that its shit doesn't stink. In particular, is it possible to structure a market in some way to split the excess? Are there any big/equilibrium markets people know of that we could look to for inspiration?

jjoonathan 13y ago

I'd hazard a guess that everyone here understands how arbitrage is supposed to work. But how valuable is market making, really? Is it always a good thing that "well-run" markets tend towards the extremes of having razor-thin producer excess or razor-thin consumer excess? Because that's what seems to happen in big/equilibrium markets. One party has a slightly stronger bargaining position and the process of market-making teases that out and translates it into "one person wins big, one person wins just-barely-more-than-nothing." In the process, some of that excess winds up in the hands of middlemen, so to argue that "it's a feature, not a bug" you have to show not only that the value of driving one party's margins to 0 is positive, but that it exceeds the sum of the value captured by middlemen in the process. Sometimes we can throw up our hands and say "eh, you win some you lose some," but other times the result is so unspeakably horrific that this attitude goes from "unproductive" to "evil." Example: labor markets. Is it a feature or a bug that unskilled laborers don't manage to capture any of their producer excess, and that the equilibrium wage would lie just north of what what was required to make work preferable to starvation and homelessness (less, actually, because some people will be willing to invest savings/debt/daddy's$$ in acquiring experience = differentiation = freedom from the crushing competition)? Look, I don't know of any system that I'm convinced is better. But that doesn't make the market perfect, so let's not pretend that its shit doesn't stink. In particular, is it possible to structure a market in some way to split the excess? Are there any big/equilibrium markets people know of that we could look to for inspiration?