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0 pointshackerblues15y ago0 comments

My take on the money sink comment:

If there are n people in the market moving money around in a closed system then the combined wealth of those n people is constant.

If another person joins in and is making a net profit then it must be the case that the combined wealth of the original n is decreasing.

Admittedly this relies on money not being created or destroyed, which may cause the model to be a poor approximation of reality.

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7 comments · 2 top-level

tptacek15y ago· 5 in thread

The stock market is not a closed system. The total value contained in the markets rises over time.

klochner15y ago

Not as a result of trading.

You can argue that getting equity pricing right helps companies with their access to capital, but once you have the pricing right at 100ms I don't understand what value HFT firms are adding by pouring money and talent into getting the pricing right at 10ns.

It seems like such an obvious win for society to mitigate the winner-take-all incentive of being first to market on a pricing disparity.

tptacek15y ago

That's slippery slope logic. If the pricing is right at 1s, why pour money and talent into getting it right at 100ms?

What's the win to society to "mitigate" an "incentive"? Is the problem volatility? Other forces create huge volatility. Should we penalize anything that creates volatility? Maybe we should end all program trading?

Meanwhile, you're effectively vouching for a comment that models the markets as a closed system of people dividing up a single pot of money. Isn't it plain that such a model is wrongheaded?

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cperciva15y ago

Not as a result of trading.

Actually, trading can and does increase the total value of the system. If I own $100 of Intel stock and you own $100 of AMD stock, exchanging half of our stock (so that we each own $50 of Intel and $50 of AMD) leaves us both better off, since we each have less risk.

Symmetry15y ago

I'll agree that 100ms to 10ms difference probably isn't a social good, but if a certain amount of money is due to a group of people for their role in providing liquidity and they choose to collectively wast a fraction of it on cutthroat zero-sum competition with each other I'll say thats sort of a shame, but I don't really think its anything I need to worry about.

aurem115y ago

Your argument is silly for the following reason. Imagine that a firm was able to profit from discrepancies between values of two stocks that last 100 microseconds. Say this firm makes 1 billion dollars a year - it pays 350 million in corporate taxes to society, which is one direct way to measure the value it is adding. Looking at it differently, what value does a pizza cutter provide to society? why not ban pizza cutter production? Why can't people cut pizza with a knife? instead of having all those smart engineers work on making pizza cutters, let them make something worthwhile. Follow this line of reasoning to its logical conclusion and you end up with Soviet Union circa 1975 - i.e. system that does not work

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RickHull15y ago

> If there are n people in the market moving money around in a closed system then the combined wealth of those n people is constant.

> Admittedly this relies on money not being created or destroyed, which may cause the model to be a poor approximation of reality.

What investment markets provide is a way for firms to increase their productivity. Think of the farmer who has a bucket, a stream, and an acre of land. The economic pie gets a lot bigger if the farmer can secure an irrigation system.

The farmer can solicit the banker in town for a loan, or he can enter a debt offering into large market or exchange. Investors are more likely to invest if they know that they can exit their investment freely. i.e. there is liquidity, so they can sell their investment as their own needs dictate.

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