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0 pointsRhysU4y ago0 comments

Here's another example focusing on just market makers and the value they provide...

Many people disparage used car dealers. The used car salesperson is a trope punching bag. They offer bad prices versus what someone can get by using Craigslist or AutoTrader or something and putting in modest effort.

But those businesses serve a purpose because they allow folks to buy or sell a vehicle real darn fast relative to Craigslist or AutoTrader or something. Like, hours instead of days.

Market makers are used car dealers. They collect a spread every time they buy then sell the same car. Or when their car inventory goes up in value. They don't have perfect information, like a used car dealer, when someone is selling them a lemon so they build that risk into their quoted spreads.

The market maker's mission is be the most profitable used car dealer they can be. Unsavory? Perhaps. But they are kept in check by competition from every other used car dealer in town. Consequently, you get a reasonable price for reasonable amounts of liquidity. Just like you do when buying a first, used car one afternoon for some lucky teenager.

The other types of market participants you mentioned also accomplish useful things. I won't go into other examples nor will I field questions about any specific firm.

And, sure, everyone wants to be as profitable as they can be. That's business. Providing valuable service to customers for the highest possible profit in the face of competition isn't unique to the financial industry.

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spekcular4y ago

I was going to include market makers in my previous post, but didn't to keep things simple. I agree the benefits from them seem pretty clear, in the sense that lowering the spread and increasing liquidity helps retail investors (and maybe market stability in general). But there are a few points here that I think make a lot of people uncomfortable.

First, it's not so clear this is meaningful work. If I'm a smart college graduate and go to work in biotech, I get to save lives and cure disease (ideally). If I go to work at a market making firm, I get to ... lower the spread? I think it's quite reasonable for someone to forgo doing this because they feel it doesn't make a meaningful contribution to the world.

Second, I've watched many incredibly talented people disproportionately go work at HFT firms, and it's hard to to avoid the impression this is socially wasteful. Efficient markets are nice, but do the markets really need to be efficient on a microsecond scale? It seems like the talent sink here is unfortunate and society might be better off if some of them worked instead on, say, biotech or alternative energy sources.

I agree the the cause is obvious: finance pays more money. But it's hard to avoid thinking about solutions that reduce the profitability of HFT and don't harm market efficiency significantly, for example eliminating the subpenny rule [0]. It seems clear to me that if the current incentives result in one industry essentially monopolizing the nation's most quantitatively able workers, then those incentives might need to change.

I don't think this point was made explicit in the original post you responded to, but it lurks in the background.

Finally, I really wish you would treat other examples of market participants. Because right now you've done the easy cases, the ones that I, a total outsider, can mount a defense for. Again, it's the other ones that are interesting. And it's clear there are a ton of participants who are a) not aimed at increasing access for retail investors and b) not market makers.

[0] https://www.chrisstucchio.com/blog/2012/hft_whats_broken.htm...

RhysUOP4y ago

Define "meaningful work". Is it challenging? Enjoyable? Does it provide a good or service that someone wants? Can you support your dependents? Do you like the people you eat lunch with? Does it use the specialized skills that you have invested in learning? Check check check check check check.

Not sold? There are 168 hours in a week! Someone's raison d'etre need not fall into the 40 hours of the work week. For example, my job permits my spouse to pursue what she absolutely loves.

"Socially wasteful" is in the eye of the beholder. We probably have different values or philosophies. Let's just disagree.

You seem fixated on HFT. And you want more examples. Say there's some low-latency statistical arbitrage shop full of biotech luminaries that were sucked into finance only for the pay. And say they trade only to line their own pockets. And they hate all puppies and every single kitten. Real morally objectionable dirt bags. They're still (still!) trading with willing counterparties who wanted to trade that specific instrument at that specific price or per those specific terms. Every single trade requires two participants.

Hit me up by email if you want to talk more.

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