Just because something has benefit, doesn't mean the benefit outweighs the cost. Specifically we are talking about the opportunity cost of other valuable things these people could be creating. Obviously this can be difficult to measure.
That's not a terribly strong argument. Should we ban making chocolate as well? Sports? Art?
After all, these people could surely be creating something more valuable.
If you want to make an argument based on opportunity cost, it generally should have specific alternatives and a viable cost metric. Without that, it's not an argument, just an opinion.
You're way off the mark with your examples. More appropriate ones would be military weapons, multi-level marketing, payday loan firms with ridiculous interest rates, scummy advertisement firms. You might not remember that in the Middle-Ages a large portion of intellectuals were spending most of their time debating religion such as is God really omnipotent and what a specific verse in Bible meant.
Now sure you can argue that they were doing only what the society and themselves considered valuable. But one can only wonder if those smart people had been putting their best effort into other things, say developing agriculture or better industrial processes.
I myself did a little day-trading at one period in my life and while I made money, I thought it was the most useless thing I could spend my life in. I was just creating money out of thin air doing basically nothing. Maybe HFT is intellectually more interesting than day-trading but I don't believe it to be very gratifying at deeper level. Perhaps it requires a certain type of person to enjoy that kind of pursuit. I'm definitely not one of those.
> You're way off the mark with your examples. More appropriate ones would be military weapons, multi-level marketing, payday loan firms with ridiculous interest rates, scummy advertisement firms.
Agreed. Modern economics encourages waste, such as multi-level marketing, payday loans, advertising, etc.
Hell, I'm sure most people's jobs here, indeed, most jobs would fall under David Graeber's "Bullshit Jobs".
> You might not remember that in the Middle-Ages a large portion of intellectuals were spending most of their time debating religion such as is God really omnipotent and what a specific verse in Bible meant.
>
> Now sure you can argue that they were doing only what the society and themselves considered valuable. But one can only wonder if those smart people had been putting their best effort into other things, say developing agriculture or better industrial processes.
... I cannot agree. A few years ago I picked up Anthony Kenny's "A Brief History of Western Philosophy", and "A New History of Western Philosophy". What these "useless" debates about knowledge got us were considerable changes in morality, metaphysics, and helped us create things that were useful in the long run. Indeed, the only reason formal 'science' is around is because of those changes in thought and reasoning.
Correct in one sense, but assumes we know in advance what will be waste and what won't be. Central planning has shown itself to be far less effective, both in overall quality of life and in meeting specific demands, than more wasteful competitive economies. So although its easy to point to retrospectively wasteful activities, life without them would be objectively worse.
Tangentially, when covid was in early days and people were beginning to develop vaccines, I saw someone comment asking who was going to coordinate the many disparate development efforts to make sure resources were being effectively used. I can't think of a more starkly absurd idea - it's only by allowing free activity, incentivized by some external, real forcing function, that we can expect to see consistent success. Any central definition and sanction of what should and shouldn't be done instantly distorts incentives towards pleading some central arbiter, and fails.
So all the scuzzy businesses and pursuits that the GP thinks are wasteful, are part of the rich tapestry that overall feeds us and keeps lifting us up. The only way we'd should be signaling they are not helpful is by not using them (and just for greater certainty I'm not talking about tolerating things that are exploitive, harmful, etc, just "wastful")
>in the Middle-Ages a large portion of intellectuals were spending most of their time debating religion such as is God really omnipotent and what a specific verse in Bible meant.
Right. And through all that thinking about silly stuff, people eventually came to the idea that a LOT of this religion stuff is silly and not worth wasting time on, so smart people could skip worrying about it for the rest of human existence if they chose to. (Whereas beforehand, it was considered a super-important thing to think about).
You seem to imply all this effort was a waste but ultimately it led to the Reformation, various Renaissance periods and, most importantly, Douglas Adams.
I suspect that the same thing will happen with HFT. Either people will stop bothering with it eventually, or they will discover some fantastic new quantum effects that pay dividends for humanity forever more. :)
> You might not remember that in the Middle-Ages a large portion of intellectuals were spending most of their time debating religion such as is God really omnipotent and what a specific verse in Bible meant.
And that lead to establishing a whole new field of social sciences that is philosophy. Yes, i am aware that middle-age debates and musings like that were not solely responsible for philosophy as a field of study, we gotta remember eastern philosophers and others too, but they were still monumental to making philosophy what it is today.
Regardless of how much their musings on god contributed to creating philosophy as we know it today in comparison to efforts of others working in that field (e.g., eastern philosophers in old China or middle eastern philosophers of about the same time period), their efforts accomplished a lot in terms of generating actual value for the society through philosophy as a field of study. Unless you are dismissing the entire field of philosophy as it stands today as "useless", then the value of those discussions is pretty obvious.
Not even mentioning second-order effects, like those debates making people question prior assumptions and embarking on important scientific endeavors, like trying to prove that Earth might be indeed revolving around the sun and not the other way around.
Absolutely agreed, it goes at least as far (if not further) as ancient Greece.
Just wanted to highlight that specific time period, since it was pointed out by the parent comment as a specific example of those efforts going nowhere.
Debating religion is far from useless - these discussions are what ultimately helped us shape a coherent foundation for philosophy and science.
Most systems are pretty inefficient and the problem is at the time we do not know which pursuits will yield the most valuable results.
Top-down, authoritarian direction of intellectual pursuit tends to yield worse outcomes than just letting people do as they wish. It's dangerous to suggest that any single perspective can accurately decide value.
The first step is to measure whatever can be easily measured. This is OK as far as it goes. The second step is to disregard that which can't be easily measured or to give it an arbitrary quantitative value. This is artificial and misleading. The third step is to presume that what can't be measured easily really isn't important. This is blindness. The fourth step is to say that what can't be easily measured really doesn't exist. This is suicide.
— Daniel Yankelovich, "Corporate Priorities: A continuing study of the new demands on business" (1972).
Actually, I somewhat agree with you. In the interest of time, I had to just stop at "Obviously, this can be difficult to measure". I find this allocation of resources problem very interesting, but I don't claim to know the answer. You can even flip it around the other way and say "Actually there really isn't anything more valuable they could be doing." It sure seems however there is a ton of brain power being used for things that would benefit society more elsewhere, but who knows.
People aren't complaining about arbitrage, they're complaining about microsecond-level timing optimizations. The same benefits to smaller players could be obtained from trading at a human time scale (e.g. something around professional StarCraft player actions per minute).
Arbitrage is fine. This amount of arbitrage, and the subsequent fighting over microseconds from the exchange, is completely fucking dumb, and I want to live in a world where there is zero money in it.
Saving one microsecond is rewarded the same as saving one millisecond, as long as you beat out the next best guy. There are vast diminishing returns to society but the winner is still rewarded the same so incentivized to make it faster and faster, ultimately burning away energy and misallocating capital until the reward is exhausted, and then repeating each time a new generation of hardware is out.
Not quite, you're forgetting the T in HFT. If everyone was just buying securities a microsecond vs a millisecond might not matter much. What happens is a lot of HFTs act as market makers. They arbitrage positions they create which screws over any non-HFTs. It also moves the price of securities for no reason which affects everyone holding that security. There's also been plenty of cases of HFTs doing front-running and spoofing.
The effects of HFTs aren't limited to HFT vs traditional traders. Their artificial arbitrage affects people's retirement funds and the like. It wouldn't be so bad if they were just making money off other traders but instead they're making money off everyone with money in the markets.
> It also moves the price of securities for no reason which affects everyone holding that security.
Huh? It's narrowing bid-ask spreads, which is beneficial to other market actors. There's nothing "artificial" in it other than betting that the price fundamentals won't move against them, like any other market maker.
This was actually visible on some cryptocurrency exchanges, where the EURUSD exchange rate differed significantly (>5%) from the regular market exchange rate.
I believe that arbitrage within the platform kept the prices and exchange rates consistent (i.e. it didn't matter whether you bought Bitcoin for EUR or first changed the EUR to USD then used that to buy Bitcoin), but of course you could make/lose some money by exchanging EUR <--> USD on the platform then exchanging it back outside (or simply exchanging it on the platform, waiting until arbitragers brought the exchange rate back to normal levels, then exchanging it back).
But in effect, the lack of efficient arbitrage between the platform and the "real world" that allowed EURUSD rates to drift so far meant that how much your coins were worth depended on what currency you bought/sold them for, making the whole thing highly annoying.
The cryptocurrency markets, which seem less mature/complicated/HFT-overrun than the "big" markets, are great for learning market principles.
Can we quantify how much advantage we get as retail investors? And how does it compare to the billions spent on dedicated networking, radio gimmickry, and specialized hardware and software magic, plus the opportunity cost of pulling all that talent and capacity from other industries?
If every trade settled at, say, the rolling average price of the last 60 seconds-- or 60 minutes-- it would dramatically quiet the "noise" in the market. There would still be enough demand from conventional investors, and the averaging policy could actually stabilize the riskiest scenarios (i. e. a temporary loss of market makers causing orders to settle at comically out-of-bound prices)
High speed trading is an effective route to achieve that policy as it reduces the need to keep resources tied up in market making, an activity that requires compensation.
Any other method to force a uniform price, i.e. a price that cannot quickly change in response to information, creates arbitrage opportunities that are greatly unfavorable to retail investors.
At least arbitrage provides some value by tightening bid/ask spreads. What about all the smart nerds who work on adtech instead of important problems? That's entirely irredeemable.
I’ve spent some time working in electronic trading, and I agree with you. Not only is the compensation very comfortable, but it’s the most interesting work I’ve ever done. That’s a tough combination to resist.
As a result, it attracts people who should be out there curing cancer, developing new technologies, researching fundamental sciences, and so forth. It’s something everyone around me has acknowledged at one point or another.
And yes, there is real benefit to providing liquidity. And yes (to another poster) exchanges love them some sweet, sweet algorithmic trader action.
IMHO this is a “bug” in capitalism that can’t be edited out by tweaking a line or two. I don’t know what the right answer is.
This is more complicated than it seems. You are comparing a job (HFT) with a pursuit (science). The actual comparison is HFT with academia (the job part). Academia is a terrible job and getting worse over time. Academics have been talking about how the job is bad and getting worse for 100 years. There is a long list of problems. Working in science is also an exercise of joining a community where your peers seem willing to put up with the terrible working conditions, almost to the point of masochism or martyrdom.
The other issue is that intelligent people tend to feel entitled to success, particularly if they succeed on traditional measures which rank them according to others. This makes them less likely to enter very difficult and uncertain fields when there are other options. Science is often inhumane in a sense, you can waste your life on the wrong idea, certainly many people have. You can also be right, but only proven so after you die.
Science also has developed a large swarm capacity, which reduces the ability of an individual to succeed and make an impact. The best example is deep learning... the explosion in deep learning research output is frankly astonishing. In real terms, a lot of researchers outside the field managed to drop whatever they were doing at the time and switch to deep learning research. Along with the excellent tooling, accessible hardware and data and low barrier to publication, there is literally a flood of papers. It is now very difficult to get noticed, and much harder to make any progress. This has happened in the space of one PhD duration. It is reasonable to assume this will keep happening as new fields open up. I presume it is because there are large numbers of people waiting for the next big thing, underemployed or underutilised in their own current work. In this scheme, research success comes to either those that found a field (even more difficult and unlikely) or have the best resources (often corporate research these days). Your talent, intelligence etc all become secondary. You can say that this is just 'rapid progress' and good for humanity. Maybe. There is also a lot of low quality work. But in the end one is an individual, not humanity, and you need to act on that basis.
All these factors conspire to send smart people away from science, and it is hard to blame them.
>> Science is often inhumane in a sense, you can waste your life on the wrong idea, certainly many people have. You can also be right, but only proven so after you die.
I’m no scientist, but the above really resonated with me.
Conversely: science pays junk money compared to IT. I have a Masters in chemistry, my wife has a Ph D. I make more then twice what she does off of skills I taught myself, and when I'm between work recruiters call me.
If we want more people in the sciences, we've got to create the jobs.
That's what my chemistry teacher told us in high school. If you want to really 'make it' in chemistry you better be insanely good, which is has a small probability. Otherwise you sorta end up as a lab technician.
Made me choose the other thing I loved in high school which was math and computer science.
Once you have enough liquidity that the markets function (i.e. the stuff of actual value to people doesn't get jammed up) it seem the marginal utility of adding liquidity is near zero.
capital deteriorates and becomes obsolete so executives are constantly maintaining and optimizing their businesses as they respond to market conditions. These trades are how the market chooses who is better and worse at this constant maintenance/optimization. unfortunately capital isn't something you can set up and allow to run indefinitely.
it can but this is "late" capitalism, we are at a point where capital that updated every year was outcompeted by capital that updated every quarter, which was outcompeted by capital that updated every month, and so on. Each time this happened there were efficiency gains that required everyone to keep up or go out of business, and the efficiency gains resulted in surpluses that were allocated somewhere in the economy. If we turned back the clock then these businesses would become less efficient and we would have to sink more resources into them to continue the same output.
Iterative optimization resulted in smaller and smaller (and more frequent) corrections.
its highly counterintuitive to see the modern system in the same terms as the capital markets of last millennium. and I'm convinced the system isn't perfect, I'm sure there are things that should be changed. I'm merely suggesting that the market sped up as people learned to do market stuff faster, and that market stuff is ultimately a process of allocating capital resources.
Ok, I get that - I don't think it really addresses my concern/question about whether or not this is far in the range of diminishing utility.
Put it another way, if the number of HFT trades were suddenly cut in half, what 1st order impacts would be felt by people outside those markets? The heart of the "but we're providing liquidity" argument is that this is a service provided that has real value outside the market. If that's not true the particular argument falls apart, doesn't it?
it probably is because of distortions in the flow of money
> Put it another way, if the number of HFT trades were suddenly cut in half, what 1st order impacts would be felt by people outside those markets?
it would probably result in capital markets taking longer to account for changes in the market/world such as shortages. Then the capital markets that weren't subject to the restriction would be more competitive as a whole. Depending on the specifics, it might open the door to people with relevant information (who weren't hf traders) to begin to make some of those trades.
> The heart of the "but we're providing liquidity" argument is that this is a service provided that has real value outside the market. If that's not true the particular argument falls apart, doesn't it?
I don't use the liquidity form of the argument because I think it focuses on the wrong things. Capital markets affect the rest of the markets by optimizing the creation and maintenance of capital. All consumer goods rely on capital. So policies that make the capital markets less efficient would have broad downstream effect in commodities markets, essentially there would be in aggregate fewer goods.
I haven’t seen any claims that HFT is allocating capital in better directions. They’re mostly reacting to the same signal and trying to trade the same asset at the same price, right? That’s the only case where the latency matters, because the market uses order time to break ties.
>As a result, it attracts people who should be out there curing cancer, developing new technologies, researching fundamental sciences, and so forth.
I'm in HFT, and I'm confident in speaking not only for myself when I say that if HFT didn't exist I'd be doing something else fun and profitable (e.g. investment banking, non-high-frequency trading), not something boring and/or poorly compensated like medical research. People on this site have no right to tell other people how to live their lives, especially when they themselves probably work on something like ad-tech which is arguably actively very harmful to democracy and society.
I like that term "“bug” in capitalism". I have always felt the "bug" is basically incorrectly pricing externalities. We don't properly charge you for the carbon you put into the atmosphere or the mental health strain you put on workers and so on. If societal costs were also real costs the allocation of resources could be more optimized.
It's an interesting of reasoning but comes with a caveat - Reducing externalities to a price figure allows you to trade them away on a balance sheet as nothing more than a price figure. This is fine if pricing accurately reflects value, but that's not the same as allowing a market to set the price. You lose a huge amount of detail in the process that can't simply be captured in a price signal moving up or down.
You may end up with things that have infinite price, at which point I think we're begging the question.
There's also a question of how commodified the things we're talking about here can actually be - If you can sell it one day and it's impossible to 'buy back' tomorrow at any price, then it's a fundamentally different kind of trade that doesn't really fit the framework as neatly as first appears.
Without pricing the externalities, we're basically taking on debt, a debt against the future number of years the planet is habitable. I imagine it probably started at 1M years of supporting human life. I wonder if that number is now down to 50000 left. And I feel like it went from 1M to 50K in the last 50 years.
Indeed, it seems the longer we run under the status quo the greater the cost in externalities, to the point we’re beginning to understand represents an existential threat globally.
However we also risk a self-fulfilling prophecy if we commodify those externalities and reduce them to lines on a balance sheet. I know that this is not quite what’s being argued for, but I am equally certain that is how it would land in practice.
I’m not convinced re-framing/codifying our social, environmental, and human capitals as financial instruments is any kind of progress towards salvation, rather it’s a doomed attempt to take everything that never fit inside the tidy box of capitalism and cram it inside of the box anyway. A try at making the world comprehensible to a mind accustomed to that manner of framing.
This problem needs novel thinking, more novel than finding a direct way to account for it within the existing framework. I regrettably don’t have a better idea.
Which social costs? Is it a social cost having too few kids? Or too many kids? Should we price that in? And what’s the cost we should price in? Who decides? Can we all agree on one price?
Nearly every symbol traded on exchanges trades with “price/time” priority meaning that the order that rests the longest at a price fills first. This provides a very big incentive to keep orders on exchanges for a long time.
The only time there is a speed race in these symbols to _place_ an order is when they are filling in a missing level. That is providing quotes at better prices. Why would you want to make that more expensive?
not saying that every industry should have a social benefit. Just that HFT is uniquely and excessively terrible and pointless and should die.
I think you are assuming that anyone who criticizes HFT must be clueless about how finance works because you can't imagine any other reason they would criticize it. Look around, that's not true.
