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The trader self-justification spiel is that traders provide liquidity; they tighten the spread, so you get a better price if you trade on the market. However,

The trader self-justification spiel is that traders provide liquidity; they tighten the spread, so you get a better price if you trade on the market. However, the actual effect of arbitrage is to make things that are already reasonably liquid much moreso, which means that the benefit to buy-and-hold investors is low. Illiquid stocks are avoided by arbitrageurs (too risky). So the net benefit to society is nonzero, but minuscule. Plus, rich people are the biggest beneficiaries, which makes it even less appealing. Trading isn't something you do to make the world a better place. On the other hand, it's one of the few high-paying finance jobs that doesn't make the world a worse place.

cameldrv 17y ago
That depends. Their profit comes from somewhere, and it's everyone else's trades. The average investor is giving the HF traders a few pennies on each trade.
- wglb 17y ago
  Actually, it comes from the people (brokers) who were making a killing on (by today's standards) enormous spreads between buy and sell. The end buyer is likely ahead.
- pwnstigator 17y ago
  The average investor is always paying a (minuscule) spread to trade. If the bid is 57.63 and the ask is 57.64, the "fair value" of the stock is held to be approximately 57.635, so you're losing 0.5 cents every time you trade. If the spread is wider than $0.01, which is the case if the stock's illiquid, then you pay more to trade. The average investor, however, doesn't care about the loss of < 0.01%. Broker fees are much higher than that. Hedge fund traders do actually make markets more efficient, and so those who trade on them get better deals. This is not to justify finance having been enormous talent sink that it has been for the past 30 years; society would probably be better off with these people in science and technology, but the net benefit to the world produced by these people is positive.
tree5 17y ago
You're right that the value of a trade is minuscule. But, a trade's value only amounts to only a handful of cents. The top high-frequency traders though multiply that minuscule effect by millions (amounting to a much higher-value add as a whole to society), which IMHO justifies their high earnings.
- artsrc 17y ago
  Taking small amounts from very large numbers of other market participants trades, and doing nothing else justifies being removed from the trading arena. I understand that large market participants are starting to do this, setting up 'dark trading pools' where leaches are excluded. Large fund managers also do internal crosses I think to avoid fees, but avoiding leaches might be part of it. What would justify their earnings would be if they made less money than the humans that preceded them would have. Two people want to exchange. If a algo trader might quickly hit the seller, then a second later sell at a higher price to a buyer who arrived later, the buyer is worse off in price than if the seller had to wait. The seller gets to sell a second earlier, they probably don't care. You can't make money unless you are a mint. Traders extract money from the market that would otherwise go to others. They produce no goods that we can consume. There is value to allocating investment funds to useful endeavors. It is not clear that algo's do much of this.
  - cynicalkane 17y ago
    Algos provide liquidity and speed far more efficiently than any other category of traders. And, since they don't market time or trade swings, they can't contribute to bubbles. You want algos.
    - pwnstigator 17y ago
      Also, algorithmic traders are, by far, the least scummy people on Wall Street. They're in it for the money, they work hard, and generally don't care in the least about power. The real assholes are the ones who are robbing people of their companies, and those people have very little to do with arbitrage.
redcap 17y ago
I believe liquidity is a good thing, but can there be too much liquidity? These computer algorithms seem to be really good at making things very liquid, is there any inherent danger in that? I seem to remember reading an article that the automated nature of the high-volume trading machines posed a danger in and of itself.
cynicalkane 17y ago
I can't imagine a scenario where long-term investors are burned because they have an easier time buying equities. Anyway, I think most people are confused because they think of Wall Street as though it is all about equities. Equities are a casino because the public treats them that way. If people learned not to throw their money away in the stock market, maybe equities traders would be in fixed income and derivatives instead, where they provide a much more important service.

cameldrv 17y ago

That depends. Their profit comes from somewhere, and it's everyone else's trades. The average investor is giving the HF traders a few pennies on each trade.

wglb 17y ago
Actually, it comes from the people (brokers) who were making a killing on (by today's standards) enormous spreads between buy and sell. The end buyer is likely ahead.
pwnstigator 17y ago
The average investor is always paying a (minuscule) spread to trade. If the bid is 57.63 and the ask is 57.64, the "fair value" of the stock is held to be approximately 57.635, so you're losing 0.5 cents every time you trade. If the spread is wider than $0.01, which is the case if the stock's illiquid, then you pay more to trade. The average investor, however, doesn't care about the loss of < 0.01%. Broker fees are much higher than that. Hedge fund traders do actually make markets more efficient, and so those who trade on them get better deals. This is not to justify finance having been enormous talent sink that it has been for the past 30 years; society would probably be better off with these people in science and technology, but the net benefit to the world produced by these people is positive.

tree5 17y ago

You're right that the value of a trade is minuscule. But, a trade's value only amounts to only a handful of cents. The top high-frequency traders though multiply that minuscule effect by millions (amounting to a much higher-value add as a whole to society), which IMHO justifies their high earnings.

artsrc 17y ago
Taking small amounts from very large numbers of other market participants trades, and doing nothing else justifies being removed from the trading arena. I understand that large market participants are starting to do this, setting up 'dark trading pools' where leaches are excluded. Large fund managers also do internal crosses I think to avoid fees, but avoiding leaches might be part of it. What would justify their earnings would be if they made less money than the humans that preceded them would have. Two people want to exchange. If a algo trader might quickly hit the seller, then a second later sell at a higher price to a buyer who arrived later, the buyer is worse off in price than if the seller had to wait. The seller gets to sell a second earlier, they probably don't care. You can't make money unless you are a mint. Traders extract money from the market that would otherwise go to others. They produce no goods that we can consume. There is value to allocating investment funds to useful endeavors. It is not clear that algo's do much of this.
- cynicalkane 17y ago
  Algos provide liquidity and speed far more efficiently than any other category of traders. And, since they don't market time or trade swings, they can't contribute to bubbles. You want algos.
  - pwnstigator 17y ago
    Also, algorithmic traders are, by far, the least scummy people on Wall Street. They're in it for the money, they work hard, and generally don't care in the least about power. The real assholes are the ones who are robbing people of their companies, and those people have very little to do with arbitrage.

redcap 17y ago

I believe liquidity is a good thing, but can there be too much liquidity? These computer algorithms seem to be really good at making things very liquid, is there any inherent danger in that? I seem to remember reading an article that the automated nature of the high-volume trading machines posed a danger in and of itself.

cynicalkane 17y ago

I can't imagine a scenario where long-term investors are burned because they have an easier time buying equities. Anyway, I think most people are confused because they think of Wall Street as though it is all about equities. Equities are a casino because the public treats them that way. If people learned not to throw their money away in the stock market, maybe equities traders would be in fixed income and derivatives instead, where they provide a much more important service.