No one disputes the quantitative benefits of increasing liquidity. But I've yet to see it quantified in a mathematically rigorous way. Are the speculators and active traders actually generating more value for society as a whole then they're syphoning off? (That's an honest question, I'd really like to know.)

I think that, in terms of social value, the point of diminishing returns for market making and liquidity has long since passed, especially wrt social value for Avg. Joes & Janes.

I def. don't hold Facebook etc in a much higher regard here, but if we're talking about brain drain from socially useful fields, I don't think anyone can credibly argue that finance (esp. HFT et al) provides any meaningful social value.

In fact I'll go one further: by sucking up the best and brightest, high finance is doing a net harm to more socially useful sectors.

I'm not being prescriptive wrt what choices people should make, btw, just speaking in terms of social good.

This is somewhat self correcting.

HFT firms are make money by taking a spread, which is effectively the cost of making a single trade. As they compete and get better and better at there jobs, this spread well be reduced, the amount of money available to pay for the best and brightest programmers will come down, and they'll suck fewer of them away from other parts of the economy.

The point being, the further they go past this 'point of diminishing returns', the less money they can possibly make. To the extent that HFT is a zero sum game, there will always be a limit on how much money they can spend.

(I believe but cannot prove that this limiting effect has already started, HFT firms are consolidating and making thinner margins than they used to)

That's a good point, but would that happen quickly enough to undo whatever brain drain problems the industry creates?

Nearly all hedge funds still take 2/20 for example, and their returns have been questionable for a decade, so idk we have reason to have faith in high finance's ability to self correct.

Every time someone brings up social good, I keep wanting to know what that means. Can we have a truly objective definition of 'social good'? Or is it entirely dependent on the individual person's definition of what that means to them.

I agree that it's not a sufficiently precise term, but I think it's obtuse to suggest it's so ambiguous as to be deceptive or obstructive to discussion.

How's about: an act that is socially valuable has benefits, immediate or otherwise, realized by parties that aren't directly involved in the transaction.

Eg, a blackjack dealer's labor probably only matters to her players and her boss, but a cancer researcher impacts well beyond that. Both can be lucrative, but one is clearly more socially valuable.

i agree with you and i think it is a good point but just one doubt i have that liquidity argument is correct assuming that this doesn't effect the fundamental pricing and cause bubbles (for ex.[oversimplified one] if lot of people followed trend following - it keeps driving bubbles in the long run - although i know counter argument is markets actually become efficient with more trading, but it is hard for me to buy into that 100% - i hope i'm wrong though). Also I think a decent gauge would be how much open-source has been contributed back and how much of it is valuable. Other things are hard to quantify like the example you gave, but I can't prove that you're wrong either.

Also when you develop something like physics, once proved - it always works with very good precision(reason we can launch satellites accurately). Or let's say a software or database that is supposed to work a certain way. What's being done at quant funds - I can't think of something on those lines that could be useful. Lot of these things don't always work because you're still speculating with large inaccuracy but a slight edge statistically.

Some interesting links:

http://fortune.com/2016/05/11/warren-buffett-hedge-fund-bet/

http://www.marketwatch.com/story/why-99-of-trading-is-pointl...

I'm not going to comment on the liquidity argument (it's a dead horse in my opinion), but another commenter and I mentioned a few examples of open source contributed by "quant" funds.

Not everyone at Google works on adtech. There are many people working on browsers that have sped up and innovated the web for hundreds of millions of users, or operating systems that are the foundations of many people's lives.

I didn't say Google, I said adtech.

Also, one could say the value that Android has added as an open-source alternative to Ios has a value to society in the tens of billions.

Ordinary people eh? Extraordinary are you?

All I see Wall St and Silicon Valley doing is using new found speed and scale for their own benefit while concocting self deluding narratives about how this benefits everyone. Nothing extraordinary about that.

Thomas isn't being condescending (at least not intentionally) when he uses the term, "ordinary." He would also fall into "ordinary" under his own definition, as he's not in that industry.

His point is that, contrary to the narrative of the "little guy" getting screwed by Wall St, they are actually helped by the liquidity HFT market makers contribute.

Everyone is unsophisticated at something. It's not an insult.

Unfortunately, there is such a thing as too much liquidity as it can cause turbulence. Extending the metaphor, a viscous fluid might be more stable.