4 ms·

There is some chance I'm misreading your sarcasm here, but if you are willing to accept that arbitrageurs provide a useful function in the markets by keeping pr

by minimax 12y ago

There is some chance I'm misreading your sarcasm here, but if you are willing to accept that arbitrageurs provide a useful function in the markets by keeping prices equal for roughly equivalent instruments traded on geographically diverse trading centers, then what's wrong with arbitrageurs competing with one another to provide that function?

nullc 12y ago
Equality at the speed of light limited timescale is of relatively small economic value to the world. They are basically equalizing prices faster than you could ever learn about them. The service of arbitrage is useful, but there is a bit of a winner take all here and a race to the bottom (meaning highest cost way of accomplishing the service). No one may care if it's equalized in 1ms vs 200ms, but the party that can do it in 1ms is going to take all the gain from the spread. (I don't really blame the arbitrageurs; the markets should be doing batched sealed bid or other mechanisms to equalize participants; and avoid diverting massive amounts of funds to floating balloons between trading centres)
- minimax 12y ago
  there is a bit of a winner take all here and a race to the bottom (meaning highest cost way of accomplishing the service) It's true that the fastest arbitrageur takes most of the profit, but when we say the cost is going up (i.e. the "arms race"), that means a bigger chunk of the arb profits (which are basically fixed, regardless of cost) are going to network providers, NIC vendors, FPGA vendors, and so forth. The costs to investors are coming down as the chances of buying a mispriced instrument become smaller and smaller.
yummyfajitas 12y ago
The issue is that resources are being spent not to create value, but merely to ensure that HFT #1 captures it rather than HFT #2. It's a lot like wearing a suit or going to college - it doesn't create value, but it ensures that applicant #1 gets a job over applicant #2. Unlike normal market competition, this one actually is a zero sum game.
- brianwawok 12y ago
  You don't think college education has impacted the world at all? Its literally just a resume checkbox?
  - yummyfajitas 12y ago
    Mostly, yes. There are unusual cases like medicine and some engineering, but for the most part it is just a resume checkbox. Evidence in favor of this: the sheepskin effect is huge. http://econlog.econlib.org/archives/2013/06/baaaa_tremble_b.html http://econlog.econlib.org/archives/2013/06/baaaa_tremble_b.... http://econlog.econlib.org/archives/2013/02/sheepskin_effec.html http://econlog.econlib.org/archives/2013/02/sheepskin_effec.... So is ability bias: http://econlog.econlib.org/archives/2012/01/correcting_for.html http://econlog.econlib.org/archives/2012/01/correcting_for.h... And as a thought experiment, ask yourself which of the following would have had more of an effect on your life. Suppose you failed your humanities classes (assuming you are an engineer/CS and work as such). Would your life have been significantly different than if you forgot what you learned? How about if you cheated and passed? Mine certainly would be. In principle, wearing a suit also has a small positive effect. It arouses some women. But in general it's mostly wasteful signalling.
    - swatow 12y ago
      The sheepskin effect doesn't directly measure the effect of having a degree vs having exactly the same experience/education but no degree. This is because the person who gets the degree after 4 years might on average have worked a lot harder, and learned a lot more than the person who studies for 4 years but doesn't get the degree.
- minimax 12y ago
  The faster different markets come to agree on a price for similar instruments, the more efficient the markets are. The profit opportunity for the fastest arbitrageur drives competing arbitrageurs to compete. Ergo arbitrageurs are working with all of their skill and ability to make sure that markets are as efficient as possible. Now you have a global marketplace where investors have a pretty good idea that their local markets have reasonable prices. The system works for investors and arbitrageurs (the good ones, anyways) alike. What's wrong with that?
branchless 12y ago
I see this argument often. How useful is this function vs taking lots of talented maths/compsci phds out of banking and into something else? My guess is the system is utterly broken and we are wasting precious man hours gaming it.
- brianwawok 12y ago
  Should we stop making videogames too, because playing a game does nothing for the world. Should we stop making music? If all musicans picked up trash on the side of the road, we would have a cleaner world. We can just replay 90s music forever.
- sseveran 12y ago
  We can have them work on getting people to click on ads.
- minimax 12y ago
  If you want to argue in favor of a centralized system of allocating brain power from each according to his ability and to each according to his need, fair enough. Let's try it and see how it works out.
hfthurts 12y ago
None of this is simply "arbitrage" as HFTers want the public to believe. The major brokers are perfectly capable of buying and selling at the best prices across any non-darknet market with even rudimentary order routers. What's happening is HFTers are gaining informational advantages and then exploiting them in microseconds. Based on realtime orders, they'll infer that someone wants to buy share abc at price x, deviation y, and then bet on that happening. HFTers can even infer which brokerage firms are placing the orders based on technical data including lag times and data-sharing partnerships.

by minimax 12y ago

nullc 12y ago

Equality at the speed of light limited timescale is of relatively small economic value to the world. They are basically equalizing prices faster than you could ever learn about them. The service of arbitrage is useful, but there is a bit of a winner take all here and a race to the bottom (meaning highest cost way of accomplishing the service). No one may care if it's equalized in 1ms vs 200ms, but the party that can do it in 1ms is going to take all the gain from the spread. (I don't really blame the arbitrageurs; the markets should be doing batched sealed bid or other mechanisms to equalize participants; and avoid diverting massive amounts of funds to floating balloons between trading centres)

minimax 12y ago
there is a bit of a winner take all here and a race to the bottom (meaning highest cost way of accomplishing the service) It's true that the fastest arbitrageur takes most of the profit, but when we say the cost is going up (i.e. the "arms race"), that means a bigger chunk of the arb profits (which are basically fixed, regardless of cost) are going to network providers, NIC vendors, FPGA vendors, and so forth. The costs to investors are coming down as the chances of buying a mispriced instrument become smaller and smaller.

yummyfajitas 12y ago

The issue is that resources are being spent not to create value, but merely to ensure that HFT #1 captures it rather than HFT #2. It's a lot like wearing a suit or going to college - it doesn't create value, but it ensures that applicant #1 gets a job over applicant #2. Unlike normal market competition, this one actually is a zero sum game.

brianwawok 12y ago
You don't think college education has impacted the world at all? Its literally just a resume checkbox?
- yummyfajitas 12y ago
  Mostly, yes. There are unusual cases like medicine and some engineering, but for the most part it is just a resume checkbox. Evidence in favor of this: the sheepskin effect is huge. http://econlog.econlib.org/archives/2013/06/baaaa_tremble_b.html http://econlog.econlib.org/archives/2013/06/baaaa_tremble_b.... http://econlog.econlib.org/archives/2013/02/sheepskin_effec.html http://econlog.econlib.org/archives/2013/02/sheepskin_effec.... So is ability bias: http://econlog.econlib.org/archives/2012/01/correcting_for.html http://econlog.econlib.org/archives/2012/01/correcting_for.h... And as a thought experiment, ask yourself which of the following would have had more of an effect on your life. Suppose you failed your humanities classes (assuming you are an engineer/CS and work as such). Would your life have been significantly different than if you forgot what you learned? How about if you cheated and passed? Mine certainly would be. In principle, wearing a suit also has a small positive effect. It arouses some women. But in general it's mostly wasteful signalling.
  - swatow 12y ago
    The sheepskin effect doesn't directly measure the effect of having a degree vs having exactly the same experience/education but no degree. This is because the person who gets the degree after 4 years might on average have worked a lot harder, and learned a lot more than the person who studies for 4 years but doesn't get the degree.
minimax 12y ago
The faster different markets come to agree on a price for similar instruments, the more efficient the markets are. The profit opportunity for the fastest arbitrageur drives competing arbitrageurs to compete. Ergo arbitrageurs are working with all of their skill and ability to make sure that markets are as efficient as possible. Now you have a global marketplace where investors have a pretty good idea that their local markets have reasonable prices. The system works for investors and arbitrageurs (the good ones, anyways) alike. What's wrong with that?

branchless 12y ago

I see this argument often. How useful is this function vs taking lots of talented maths/compsci phds out of banking and into something else? My guess is the system is utterly broken and we are wasting precious man hours gaming it.

brianwawok 12y ago
Should we stop making videogames too, because playing a game does nothing for the world. Should we stop making music? If all musicans picked up trash on the side of the road, we would have a cleaner world. We can just replay 90s music forever.
sseveran 12y ago
We can have them work on getting people to click on ads.
minimax 12y ago
If you want to argue in favor of a centralized system of allocating brain power from each according to his ability and to each according to his need, fair enough. Let's try it and see how it works out.

hfthurts 12y ago

None of this is simply "arbitrage" as HFTers want the public to believe. The major brokers are perfectly capable of buying and selling at the best prices across any non-darknet market with even rudimentary order routers. What's happening is HFTers are gaining informational advantages and then exploiting them in microseconds. Based on realtime orders, they'll infer that someone wants to buy share abc at price x, deviation y, and then bet on that happening. HFTers can even infer which brokerage firms are placing the orders based on technical data including lag times and data-sharing partnerships.