It is strange that an industry whose only purpose is to service the productive economy should be 20% of GDP.
Here's an interesting take of the downsides to having such a large financial sector within an economy: https://www.theguardian.com/news/2018/oct/05/the-finance-cur...
Thats why the city of london is older than England it's self. because it provided finance for various powerful people to do "powerful people" things
Venice for example was ruled by a mercantile banking dynasty.
It's really not "essentially sovereign" or "outside national law" as you might argue of an embassy or a military base or even, say, the Channel Islands. People and businesses there are subject to all the laws of the land. Financial firms there are regulated by the FCA, which is based outside the City and appointed by the Treasury, definitely not by the City of London Corporation.
Prestigious financial firms have offices in the City because everyone else does, not because there's some legal or regulatory benefit from being incorporated there - again, very different from those who choose other Crown jurisdictions like Jersey or IOM or the Caymans.
This is definitely not true. Maybe you confused it with Isle of Man or Channel Islands, which are crown dependencies with certain autonomy, often accused to be British tax havens.
yes I am a wonk
Not sure how seriously I'm arguing that, but it does seem that if the situation was sustainable/survivable there would be records of previous instances of that situation.
The brain does far, far more than marshal resources and distribute the where they are needed, which in essence is what the financial sector does for the economy.
Because of our brains, humans are extremely adaptable. Even with primitive technology we spread throughout the globe, and unlike wild cats or bears we haven't needed to speciate into each climate, develop camouflage fur, etc. The biological investment in an advanced brain gave us the opportunity to thrive everywhere.
Is the job fulfilling? Depends on your goals - for me I've gained a huge knowledge of low level programming, and front line experience on how far one can go with both software and hardware to 'win' against other competitors in the space. That's invaluable stuff for me.
Is the job moral? Anyone who puts their money on the line knows the risks, this isn't stealing from the poor. People who invest must understand risk, and risk is really the only way things move forward in the first place. But it also implies there can and will be people who lose out.
It depends on how you look at things I guess.
For instance, when trading in commodities like grain, and deploying a strategy to push the price up over a long time period (whether or not it's a single entity doing so or all traders in unison), people somewhere in the world aren't able to buy that grain and go hungry.
Same with all the foodstuffs. But what about other stuff, metals? What happens if you drive those prices up? Well, again, somewhere in the world some poor chap now cannot afford the metal roof sheet that goes on top of his shed, and he'll sleep under the stars.
I think most if not all finance trading negatively impacts the people that are too poor to even dream about finance trading. When there's a buck to be made in finance, there's always a sucker paying for it. Somewhere along the line that sucker becomes someone who isn't even in the whole financial trading circus, and he'll in the end foot the bill. It must be this way, because the financial industry itself doesn't produce or increase the value of things, it just manipulates the price tags.
Significantly influencing the price of a commodity with liquid markets, such as corn or soybeans is pretty much impossible unless you're acting on behalf of a country or are able to control weather. The existence of liquid markets is beneficial for the producers and consumers as the price volatility is reduced and hedging becomes easier. I like to showcase the effect of information on price with the example of fish price in Kerala before and after the introduction of mobile phones to fishermen[1].
The financial world is evolving very quickly with various participants driven by different goals pulling the rug in opposite directions which theoretically should reduce volatility and spreads. However, when people get greedy - and there's a lot of that in finance - bad things happen, e.g. see the natural gas last week[2].
[1]: https://www.researchgate.net/figure/Changes-in-fish-price-vo...
[2]: https://www.ft.com/content/b7c525f6-ec44-11e8-89c8-d36339d83...
Yeah, that's a nice fairy tale. It isn't true though. It's criminally untrue.
I can't eat volatile grain, nor hedged grain. I just eat grain. At a price I can afford, today and tomorrow, not bankrupting me in the process. When you're hungry you really don't care about all the financial jargon. You care about price.
Traders cannot make a profit if they don't manipulate the price. Simple, if a trader always sold for the same price he bought for he wouldn't make any money. So price goes up, trader has profited from the grain I eat, and has taken a few cents out of my pocket. And I don't even trade. I just live on a dollar day in a shithole somewhere.
If everybody bought just the grain they needed to eat, and every grain producer simply put their product on the market for people to buy, without a "liquid global market" and price index, without traders in the middle wanting to profit from it, my food would be affordable. But because the market bets on a price rise in the future, even though the bad weather hasn't materialized yet, my food is unaffordable.
In financial, when someone profits, someone hurts. And the one that hurts is almost always not even in the game.
> Significantly influencing the price of a commodity [...] is pretty much impossible unless you're acting on behalf of a country or are able to control weather.
No. A market can do that by itself. It's what all those terms bullish and bearish and stuff are for. Markets can drive up commodity prices like a rocket. Bad weather coming? "Let's buy all the grain everybody! Guaranteed profit! Just ignore the starving people over there, they'll go away fast enough." And buy the way, all those think tanks and the pentagon predicting a shortage of every natural resource in the near future, that's not going to influence the price at all, right? Great example of how a country manipulates commodity prices btw.
Financial trade is just people profiting from people who are worse off to begin with. And don't start about how nowadays regulations are much tighter and all that, it's just not true. Everybody always says that in times when stuff is stable, but as soon as something big happens everybody starts the "nobody could have forseen this" dance followed by the too-big-to-fail entities being saved by the govt and the bill footed to the people.
I think you two are talking about different things. The comment you're responding to is talking about the price discovery and liquidity facilitated through trading. You're (correct me if I'm wrong) talking about how physical commodities are treated as abstractions, which doesn't help e.g. a farmer.
But it does help producers of commodities - they can hedge against (for example) crop failures. And it helps consumers by driving down the price and making the price more predictable. Futures in particular are very helpful for producers.
This is obviously not a perfect process. But I think it's really unfair to call it a fairy tale, or to say that traders are manipulating the price. In an abstract or purely literal sense they are; but in the malicious, legal sense of markets they are not (at least not in the aggregate).
With respect, your last paragraph sounds like an oft-repeated narrative about the financial industry which - though it has kernels of truth - does not charitably reflect the full picture. Finance is not an unmitigated good, but comments like yours which present it as an unmitigated bad are also off the mark.
Posing those things as separate, saying "price discovery" and "liquidity" are different from "how physical commodities are treated as abstractions" is just muddying the waters. They're part of the same slang of the system.
The farmer doesn't care if somebody plays Farmville and treats in game abstractions as though they were his real physical produce. Who cares.
But the farmer does care when a lot of people trade in what he produces, and all those traders act like they're playing f-ing Farmville with virtual goods. In reality that trading influences the price the farmer gets paid and the price the consumer has to pay. Big time. Tell me again how it's just an abstraction. The supermarket doesn't accept my abstract money unfortunately.
That farmer worked hard for that grain you know, why do you think it's suddenly morally okay if you tell yourself nice stories about "liquidity" and "abstractions" and "price discovery" while you just want to make a buck on the farmers grain without putting in the labour yourself.
I don't give a hoot that you tell yourself that you're trading in an abstraction of grain to make yourself feel good about your actions. I just see the price of grain go up and my family going hungry, despite the fact that traders keep telling themselves it's all "funny goods that don't really exist"
> But it does help producers of commodities - they can hedge against (for example) crop failures.
I can see how it does, but honestly, that's one of the worst solutions to that problem. I think crop failure is a problem for everyone not just the farmer (we all have to eat, right?), so a solution that involves everyone instead of letting the farmer fend for himself would be preferable, because when the guy needs to fend for himself he'll fall prey to someone offering him a very volatile, hedged, and abstract "solution" to his problems.
A simple granary (sized to community) and enough cash to resow next year is usually enough. No virtual, hedged, liquid or funny stuff needed. It's as old as the hills as well, failing crops have been dealt with by humanity successfully in many civilizations through out history. Without a financial system that requires the farmer to bet on the price of grain next year, I might add.
With respect, your last paragraph sounds like you get tired of the argument, but, respectfully, you don't give me any reason not to believe "finance" in it's current form is one of the most evil thing humanity has ever come up with.
They are typically willing to pay for price insurance to reduce their financial risk. (that could close your factory because of the weather, etc) (If they trade with other countries they are typically also willing to pay for currency insurance)
At that point a secondary market emerges with arbitrages between different market and points in time.
So far this is to the benefit of everyone. Farmers and Buyers get more stable prices.
This secondary market pins into tertiary markets where you can try to outsmart other players, and to the extent that manipulation is possible it will push back into the primary price or more probable the "insurance" cost. This cost is paid by Joe Random.
This is probably not beneficial but unavoidable and acceptable for having access to price insurance.
My understanding is that in futures markets, you make money by predicting what the price of something will be at a time in the future.
Let's say you know of a new battery technology that is much more efficient than anything we have today. Let's further say that this type of battery uses a lot of copper. You think that this will massively increase the amount of copper needed.
In this case, you buy a future (enter a contract) saying you will buy 250,000 tons of copper in January 2020 for $3.20 / lb (which is considerably higher than the price of copper today). Someone with a copper mine can take the other side of that contract and expand their operation (buy equipment, hire workers), knowing that in January of 2020 they will be able to sell that copper at a higher price, and expand their operations.
If the price of copper goes up, in 2020 you buy all of that copper from the mine, resell it, and make a ton of money. The owner of the mine makes a modest profit.
If the price of copper goes down, in 2020 _you still have to buy all of that copper from the mine_, and you lose a ton of money. The owner of the mine makes a modest profit.
You will only enter into such a contract if you have (or think you have) information that the person you are making a contract with does not have, thus allowing them to act on that information sooner and without risk. If your information is wrong, you are the person who loses out, not the person you contracted with, so you're taking on all of the risk for some of the possible benefits.
> A simple granary (sized to community) and enough cash to resow next year is usually enough. No virtual, hedged, liquid or funny stuff needed. It's as old as the hills as well, failing crops have been dealt with by humanity successfully in many civilizations through out history. Without a financial system that requires the farmer to bet on the price of grain next year, I might add.
If you know that the crops are likely to fail, you can buy futures in grain. It's the ultimate "put your money where your mouth is". If you buy grain futures, you are saying "There will be a crop failure. Plant more grain. I will cover the downside if I'm wrong." Thus you make the crop failure less impactful by prompting action earlier.
I agree that a simple granary is _usually_ enough. But a simple granary plus a futures market will be enough even more often.
That's the market actively destroying the fundamental purpose of a good because the dynamics of its value are able to bring more profit than using the good for its existential purpose. If that can happen to housing, it can happen to anything. BurnGpuBurn is absolutely correct here.
There's an argument, not entirely (as far as I can tell) unreasonable, that at least some trading firms - the market makers - are benefitting the small folks in these markets. The argument goes that they do siphon profits out of the market, but it's mostly the profits of other financial firms. What they're ultimately nabbing is profits that come from information asymmetry, and that asymmetry usually benefits hedge funds more than farmers. So hedge funds make less money, yeah, but the impact on farmers is greater price stability, which is a benefit to them.
By extension, the implication is that, when hedge fund managers complain loudly about high frequency trading, it's crocodile tears.
The opportunity costs of prioritising the financial industry over other activities are almost incalculably huge. Bubbles aren't the only problem. The industry has cannibalised top talent and kept it from working on useful problems, which has created a huge deficit in future potential.
This is false.
Commodities futures markets exist precisely so the price of bread stays stable and relatively risk-free for a year at a time. The big players are not traders - they are companies that work in grain, use grain, produce grain, etc.
As for markets creating money by driving up prices - this doesn't really happen. You can make money when prices go up or down, and nobody really has the size or the stomach to try and corner a market (which is also illegal). Typically these efforts fail miserably and lose the trader a lot of money.
Countries manipulating prices is a totally different matter, than "markets".
I'd think hard about it before you attack commodities markets as the enemy of food prices, and do a bit of digging as to the actual purpose of those markets.
Go ahead - sell a couple hundred thousand pounds of grain. "Simply" put it on the market... how do you do that reliably? How can you plan as a farmer ? Budget for seed, etc?
You're totally right about there being a few big players in production and so on. That's part of the problem. Because every farmer has had to operate and compete in this insane globally connected commodities market, what we're left with now after decades is a few big players. That's what you get when a German farmer has to compete with the US farmer, the Chinese farmer, and the Russian farmer, all the others and vice versa. Everybody loses and gets bought up by the bigger fish. That's a symptom of this market though, not a cause. And in my eyes, it's not a very good symptom either.
> Go ahead - sell a couple hundred thousand pounds of grain. "Simply" put it on the market... how do you do that reliably? How can you plan as a farmer ? Budget for seed, etc?
Well, I wouldn't know how of course, but that's not the point. Humanity has done the grain thing successfully, on large scales and over long time periods, multiple times in the past. Without a commodities futures market to keep prices stable.
I'm just saying this isn't the only way to do trade, and in a lot of ways, it's a very bad way to do trade.
I must confess to some confusion. I thought you wanted affordable food. Do you think that you'd get affordable food if you were only ever able to purchase from the providers in your immediate vicinity, who won't face price competition from farmers elsewhere who might be more efficient?
As for competition internationally and “big fish” - I’d say that some of this is due to economies of scale in agriculture especially as automation reduces labor required per acre - but this is also other asymmetries and market factors. State subsidies is one huge factor that incentivizes owning land that doesn’t even produce. Further, as farmers retire their kids want less and less to do with ag and sell the land to bigger companies (or maybe to a housing developer).
I’m not saying “the market” is perfect but it didn’t necessarily get this way by accident either. It serves an important function across the board for all parties involved - including consumers.
"If everybody bought just the grain they needed to eat, and every grain producer simply put their product on the market for people to buy, without a "liquid global market" and price index, without traders in the middle wanting to profit from it, my food would be affordable."
Well, yes, but the grain would be in Saskatchewan rotting and you'd be wherever you are starving.
The people who cause markets to move are not the traders, they are the people who buy from and sell to the traders.
Traders aren't the only reason prices move. Clearly a wide spread crop failure would also increase grain prices. You can still make money as a trader if you do a better job at predicting such events than others.
In practice, many markets are far from frictionless, and far from liquid, and pricing far from transparent, which is where most (all?) of our problems come from.
The best (and most ironic) example comes from the financial services industry itself: Although markets are the daily bread of the industry, it is ironic that the market for financial services is opaque and noncompetitive. How else could such profits be sustained? How else could the two and twenty compensation convention survive, if it weren't for the fact that the industry acts as an unofficial cartel?
When we complain about financial services, we often forget that the rhetoric of many free-market neoliberals is pure hypocrisy: what they practice is 180 degrees apart from what they preach.
Is that supposed to be obvious? It seems very not-obvious to me: e.g., if a trader has no ability at all to manipulate the price, but is able to predict future prices better than anyone else can, then they can make a shedload of money by doing it. (The market will respond to their trades, which I suppose is a kind of manipulation, but that reduces their ability to profit.)
Maybe it's true in practice that no one can actually make money by predicting future price movements better than other people do, and that the only way to succeed is market manipulation. If so, it would be nice to see some evidence.
(There are other options besides "win by manipulating markets" and "win by being good at predicting on account of being extra-smart": for instance, "win by being good at predicting by means of illegal insider trading". That has ethical problems of its own, but they're very different problems from those of market manipulation.)
If the market bets on future grain price increases and makes grain more expensive before the bad weather materializes then sure, that's bad for people trying to buy grain. (Though presumably it's good for farmers.) But that same process of prediction, at least if it works -- which presumably it does, somewhat, else no one would be trying to do it -- also means that once the bad weather does materialize the prices will be lower than they otherwise would have been, because the market can predict that the weather won't always be bad just as well as it can predict that the weather will be bad one day. So, at least when the market is doing what it's meant to, the highest grain prices get reduced and the lowest ones get increased. It's not obvious that that's bad for those not-even-in-the-game people.
(The market will make mistakes, sometimes big ones. In that case, grain may get super-expensive and people will suffer or even die. That's very bad. But it's not specifically a finance problem. Grain can get super-expensive because of mistakes made by farmers or meteorologists, too.)
> Financial trade is just people profiting from people who are worse off to begin with.
There's truth in that. But -- ignoring actual market manipulation, which I appreciate you regard as a major activity of the finance industry -- when someone makes a profit out of your being worse off, they make you better off in the process. Suppose some guy on Wall Street figures out that X is going to get more expensive. You own X but haven't figured it out because you don't have Wall Street's insider knowledge or supercomputers or whatever. So you sell X to Wall Street Guy, and X gets more expensive, and Wall Street Guy makes a profit that you missed out on. Sad. But Wall Street Guy didn't force you to make that trade! Presumably you sold X because you didn't want it any more, or you needed the money. Without Wall Street Guy in the picture, you'd have sold it anyway, and got (very slightly) less for it. So, sure, Wall Street Guy is better off, and you're sad that you missed out -- but you were always going to miss out, and you are a tiny bit better off because Wall Street Guy was there bidding against other people to buy X from you.
I dunno; maybe in practice Wall Street Guy has to do a load of much shadier stuff than merely predicting how the price of X is going to change, and maybe that ends up hurting you. Maybe in practice Wall Street Guy's attempts to react quickly to new information destabilizes things more than his ability to react quickly stabilizes them. But these seem like complicated questions whose answers need a deep examination of the world's financial systems, rather than pointing to a few specific cases where bad things happened and claiming that "traders can't make a profit if they don't manipulate the price".
Now, this is obviously a silly hypothetical. Very few people are going to produce sheet metal for that poor chap if they can't cover their costs plus at least some profit, leading to nobody having any sheet metal. Now the whole world is worse off and lacking sheet metal, and for what?
Some things in the finance industry are valuable. Insurance and its ability to spread risks springs to mind readily. The joint stock company, and its ability to pool resources to grand ends, has unleashed incredible forces.
My experience disagrees with every statement you made, except the job fulfilling part.
Making markets does not add any value to anyone other than the marketmakers and the stock exchanges.
The only decent thing about those places is that they usually do not beat around the bush. "Does your idea help us be faster? Got proof? Go implement. Money is no objection."
Morals did not exist in that world when I was there.
What I was doing, was helping the 0.01% consolidate their power and wealth at the cost of all other living beings on this one habitable planet.
Then I stopped kidding myself and got out of my golden cage.
Could you elaborate on this statement? It is my understanding that the value market markers provide is liquidity and tighter spreads. Worst case, they pull orders when informed volume is detected, but then the book is no worse off than what it would be if the market makers weren't there.
The liquidity is something that the exchanges want so they can provide better services to their other users / customers.
What the market makers get in return is some privileges on the exchange, such as favorable credit exempts or short sale treatments. This depends on the exchange.
But being a marketmaker, basically obliging to be able to quote a price on anything and everything, is regarded as much as a nuisance as it is a benefit.
Yes. And I do not see this as a boon. It reduces the cost of trading for traders at the expense of _everything_else_.
Eg: search for 'whack bully oil prices'.
I can understand arguments that the work wasn't fulfilling, or you didn't enjoy your colleagues...but what you're saying seems to be incorrect, strictly speaking. Were you working in marketing making where most/all trades were OTC?
But no, this is not the reason marketmakers make markets.
They do this in order to make more profit.
The rest is a side effect that they happily spindoctor into their "raison d'etre".
The company I worked for is known for being the primary source of rich people in the Netherlands. And they keep getting richer. Very much the so-called 1%.
And a disclaimer: I'm an engineer. Not a trader.
She was in energy and oil instead - her success would mean that down the line, we all would pay up a bit for her success (selling expensively when demand was high). And also with oil, she would be trying to create as cheap gas/diesel from oil as possible (meaning passing regulations in some 3rd world country), it took her easily 10 fails to get just slightly above the (very low) bar. The result - engines destroyed over time with crappy fuel, environment polluted with less-than-ideal material burned. But nobody gave a nano-fraction of a fck, it was Africa.
Yeah, traders, they think super high about themselves, most are properly broken human beings, a pure net loss for humanity
Never underestimate the very human emotional motivation of coming up with a pleasing rationalization. Just because someone earnestly says 'we are helping, so much!' doesn't mean they're correct.
To me this argument always came across as fabricated and empty.
I have seen too many examples internally at that place, where the (to me) obvious moral choice was neglected or even laughed at.
The "because of us, instruments are priced properly everywhere and that's good for everyone" is interesting.
Does that result solely exist because of us making a market? What is 'properly priced' exactly and why would it be a Bad Thing if it were less 'properly priced'? And why is this even a goal that should be pursued? And should that goal be pursued at all (and I do mean ALL) cost?
Those questions were never answered to my satisfaction.
The problem here is that, for example, at least in the US, not everyone with a pension or who "contibutes" to a retirement plan is comfortable or even aware of the risks. That ignorance is not a defense, per-se, but if you've got blinders on that you're fleecing pennies off the already rich you are sorely mistaken.
I'd go so far as to argue that turning money into more money without providing a good or service in exchange is squarely immoral.
>There is one bit of advice given to us by the ancient heathen Greeks, and by the Jews in the Old Testament, and by the great Christian teachers of the Middle Ages, which the modern economic system has completely disobeyed. All these people told us not to lend money at interest: and lending money at interest — what we call investment — is the basis of our whole system. Now it may not absolutely follow that we are wrong. Some people say that when Moses and Aristotle and the Christians agreed in forbidding interest (or “usury” as they called it), they could not foresee the joint stock company, and were only dunking of the private moneylender, and that, therefore, we need not bother about what they said.
>That is a question I cannot decide on. I am not an economist and I simply do not know whether the investment system is responsible for the state we are in or not. This is where we want the Christian economist. But I should not have been honest if I had not told you that three great civilizations had agreed (or so it seems at first sight) in condemning the very thing on which we have based our whole life.
For example, here's Aristotle on usury[1]:
>There are two sorts of wealth-getting, as I have said; one is a part of household management, the other is retail trade: the former necessary and honorable, while that which consists in exchange is justly censured; for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of an modes of getting wealth this is the most unnatural.
Perhaps it's time to consider forming some fundamental principles and reasoning from them instead?
So I don't see where this should stop us from trying to form principles as an alternative to arguing that something must be or must not be true because of what someone wrote down millennia ago.
People with less knowledge. Less technology.
There should not be an additional layer of risk involved only because people bet on other people.
If I buy a share from company x, the success of that company should represent the share price. But that is partially true.
And NO enough people have no idea what they are doing. In Germany we increased the requirements for trading. You have to read stuff and sign off otherwise the bank will not allow you to buy certain products.
Is the job moral? No.
One of my observations, to make a living you need an angle. This isn't necessarily 'bad'. A mechanic has years of experience and tools, and a lift. In return for parting with cash he'll do something for you (hopefully). Trading houses use their angle to do something to you, namely siphon off some of your money without providing you anything.
In Germany we increased the requirements for trading. You have to read stuff
and sign off otherwise the bank will not allow you to buy certain products.
- a bank, insurance company, registered investment company, business
development company, or small business investment company
- an employee benefit plan, within the meaning of the Employee Retirement
Income Security Act, if a bank, insurance company or registered investment
adviser makes the investment decisions, or if the plan has total assets in
excess of 5,000,000 dollars
- a charitable organization, corporation, or partnership with assets
exceeding 5,000,000 dollars
- a director, general officer, or partner of the company selling the
securities
- a business in which all the equity owners are accredited investors
- a natural person who has individual net worth or joint net worth with the
person's spouse that exceeds 1,000,000 dollars at the time of purchase or
has assets under management of 1,000,000 dollars or above, excluding the
value of the individual's primary residence
- a natural person with income exceeding 200,000 dollars per year in each of
the two most recent years or joint income with a spouse exceeding 300,000
dollars per year in those years and a reasonable expectation of the same
income level for the current year
- a trust with assets in excess of 5,000,000 dollars not formed to acquire
the securities offered whose purchases a sophisticated person makes
I have zero ethical qualms about winning when I know that the other people I'm competing against are millionaires, have institutional backing, have government approval or all of the above.
Physicists working on physics research might be a problem if those physicists could just divert money elsewhere in the economy into their own research programs. As it is, there's a complex system of controls so that public research money is generally used for some reasonably good purpose.
Except when the finance industry creates (directly or indirectly) a financial crisis like in 2008. Its the poor, that never stood to gain from the financial system in the first place, that end up hit the worst.
However, nowadays the banking tech sector here in the UK seems to be more mature. Our traders are quite often from a STEM background which gives them an understanding of technology, and they don't adhere to the dicky stereotype you often hear about. But most of all, I've always found my tech colleagues to be extremely smart but also down to earth, pragmatic and meritocratic which is the reason why I've ended up remaining in banking.
This is really interesting. I'm at least passingly aware about high speed/frequency trading, but don't know much about the topic in depth.
How low is low in this field? I'm picturing RTOSes running AVX512-heavy hand-optimized code, FPGA farms, custom network ASICs... how overly optimistic am I being here? Heh
Of course, such a vision is very lop-sided, since HFT depends heavily on high-level intelligence. So perhaps it's realtime(ish) Linux and lots of GPUs.
When I was working in this field, 2008-2011, there were guys doing fpgas, custom tcp/ip stacks, custom network drivers, dedicated networks and network cards for exchange data coming in and for going out. Mostly linux.
Hardware and lowlevel fun.
Allthough the fastest trades were always done by this one catalonian guy using Windows and .NET. I kid you not.
Good times. Soulless. But good.
And wow, so I wasn't too far off the mark. FPGAs and exotic networking. Huh.
I remember reading a story about a trading floor running on SQL Server, which was doing continuous throughput of 6000 queries/second. I didn't know enough at the time to discern what percentage of that was writes, but I think the point may have been that it was all of it. This was quite a few years ago. So perhaps Windows isn't actually the slowe{st,r} system out there for certain tasks.
But again: not an RTOS expert. We had a lab that would constantly test configurations of hardware and software. And I remember them finding RTOS not being helpful.
Oh yeah. I remember reading something along the same lines about x86 a while back. I guess it didn't really go in properly, heh. Thanks
I'm reminded of the "x86 is high level" thing: https://news.ycombinator.com/item?id=9264195
Also, I think the iPhone 6's NVMe apparently uses a Cortex-R: https://ramtin-amin.fr/#nvmepcie
FPGA feed handlers are common, but now that can also be rented.
Whether you're using GPUs depends on what you're up to. A lot of the strategy testing requires a bunch of computing power but not speed. You then take your conclusions and implement something fast that doesn't necessarily use the GPU.
Realtime, but soft real time. It's not like a vehicle ABS system where you have to brake within x milliseconds or someone gets killed. I've seen places where they see the degradation over time and eventually decide it's time for the newest hardware, again.
I also just found http://redd.it/8dhp7q asking about AVX512 slowdowns too.
TIL about FPGA feed handlers. (http://redd.it/56tw4n, one of the first hits for the term, was mildly interesting)
Hmm, good point about not needing speed. Yeah, 24 execution units each capable of 3 billion ops/sec is probably more performance than is needed :)
Interestingly, I would have imagine HFT as needing ABS-style hard realtime. But no, it neither needs that nor is simple enough to be encapsulated by that sort of embedded-style approach.
That is definitely not the "game of life". Most business works by creating value for others. It's generally positive sum. Indeed, the only way people in zero-sum industries (e.g., betting, a lot of advertising, many kinds of finance) or negative-sum ones (e.g., scams) have anything to siphon off is because of people doing productive work.
One of reasons I'm most glad to get out of finance is that I could stop trying to justify it to myself. As Upton Sinclair wrote, "It is difficult to get a man to understand something when his salary depends upon his not understanding it!"
> Is the job moral? ...
But in what way do you consider your job meaningful?
I'm not arguing investment banks and hedge funds are an unmitigated good! But at minimum, finance (much like tech) is far too complex and mixed to be able to correctly say you're not making anything better if you work in it.
That being said, I can absolutely understand why you'd regret working at a specific firm in the industry.
I agree that the industry does produce some value. But ask yourself honestly: what percentage of any given person's time and energy is devoted to value creation? To what extent are they sure their day's work is value-creating rather than value-subtracting for the economy as a whole? Maybe things have changed, but at the time very few people even cared about those answers. Those that did thought about the question very little, and with none of their customary rigor.
The reason I said the industry could be half its size (rather than eliminating it entirely) is that I know it produces some value to the rest of the economy. But if it could be half its size (or smaller) then it's perfectly plausible the average person in finance is a net drain on society.
This is because while things like market making are obviously necessary, you've got to ask yourself: does making trades on a timescale of microseconds or even less as opposed to making trades on a timescale of minutes lead to better outcomes in the real economy?
The answer is almost certainly "no", but at the same time, trading firms that are engaged in zero-sum games are still able to siphon a lot of money from the rest of the economy that goes into just that. So the net outcome for society of that is clearly negative.
We shouldn't be kidding ourselves, though. A lot of the incremental improvements in tech these days are also net negatives to society. Mostly this is because so much of tech is driven by advertisement.
However, there are large parts of tech, including some very traditional parts, in which improvements are clearly beneficial to society, e.g. when it comes to building more powerful and efficient hardware.
[1] An exception might be entirely new sub-sectors of finance that explicitly target beneficial outcomes. Climate finance comes to mind.
That said, I believe the industry's total value to others could be produced at far, far less total cost than now. And a lot of those very smart, very motivated people could be out there actually creating value for others.
Also, I am curious as to what you mean when you refer to retail trading as printing money. Don't know anything about it (why I'm curious), but from what I have heard about trading in general, it seems to have some reasonable level of risk.
By retail trading, I meant that I'm not what you'd call a big-time trader. I use a broker that is available to retail clients (i.e. everyone). I didn't mean to imply that trading and speculation aren't risky. Trading is like printing money, because while you make money without producing any value, the guy next door makes money by actually producing something. Socially, it's freeloading, like stealing is freeloading. You get value, without providing value. A double-spend attack.
"First, Finance" is an extremely nebulous term, encompassing many subfields.
At its core, a financial firm like a proprietary trading company that invests money creates value by attempting to optimize the allocation of capital.
Do we give money to Google and trust that they will turn it into something more or do we give it to Elon Musk?
It turns out that this is really hard to do. If this were easy, pro sports players wouldn't go broke funding terrible projects.
While they don't have a direct hand in product design, creation, or sales, they have an indirect one.
Of course, there are firms that really abstract themselves from this process and basically just play the market as a game, with 100% technical analysis and short term positions and no fundamental analysis.
Are you quoting God Bless You, Mr. Rosewater there?
It doesn't matter that you made money because someone lost SOME. Both market participants receive what they wanted to out of it.
For example, you take linear bets - going short a stock - and you bought to cover at a profit to someone that was maybe long and selling at a loss. You say wow so zero sum.
But little did you know, the person that was long was actually collecting premium from their covered call options trade, and is still getting what they wanted out of it. They may not have begun losing more money for their tolerance for another 2% or 10% drop in the stock. They would come out net positive until then, even though their MAXIMUM potential profit was still more.
Both participants still got what they want, and you wouldn't be the wiser - unless of course you were trading products that had no derivatives market. But even then you wouldn't know, because they could be written OTC.
Where did / do you think money comes from?
Most businesses are positive sum. E.g., the sandwich shop down the street buys ingredients at X, puts in labor valued at Y, and sells me a sandwich for Z > X+Y. They have created value. (As have the the people doing the labor, because they took time valued at zero and turned it into marketable labor.)
Money is a representation of the value created by humans. That's why the government must continually increase the money supply [1]: if money's value is to stay stable relative to goods, the supply has to increase as society creates more value.
Finance is sometimes value creating. E.g., the sandwich shop owner is willing to pay the bank for transferring money from my account to theirs. But it can also extract rents (e.g., arbitrary or hidden fees) and be parasitic (as when banks speculate with money insured by society, like during the S&L crisis).
[1] E.g., https://fred.stlouisfed.org/series/M2
Yes, value is created, but money isn't, by the actions you describe.
If I 'value add' the ingredients of a sandwich, and then sell it to you, you still have to surrender (or lose) money.
Any sale of goods or services ideally involves both parties determining that the transaction is favourable to their interests -- but it's impossible to avoid the fact that the buyer will have less money as a result.
This isn't a bad thing. Arguably a strong indicator of the health of an economy is the agility of money / wealth within it. But your original observation was:
> But what I didn't understand was that mostly we made money when other people lost it.
... and that's an ineluctable outcome of any financial transaction.
When two parties make a bet, though, one of them loses and one of them wins. The losing side doesn't say, "That's great because I now have this cup of coffee I value more." They just write it off as a loss.
When I worked for prop trading firms, in every trade we did one side of a trade won and the other lost. In working for real businesses, both sides of a trade mostly walk away winners. Hopefully this difference is clear to you; it's that distinction I was pointing at.
If you're trying to make some sort of narrow point about my use of the colloquial phrases "made money" and "lost money", I grant that I was indeed being colloquial. Strictly speaking, we also didn't actually make money; I am told only the Federal Reserve gets to make new dollars.
Merely pointing out that any transaction involves a transfer, and your claim that some transactions are worse because someone has less money at the end of it, is perhaps missing the point.
Unless the people you were dealing with both went into the deal knowing which one would lose money - then it's comparable to your 'placing a bet' analogy.
Sure, I'm not doubting that it was (probably) ethically dubious - and kudos for not participating in that industry any longer.
As to:
> If I give somebody $10 for a sandwich, I didn't lose the money. I traded it for something more valuable.
- that's clearly not true.
You have ten fewer dollars than you did before the transaction.
Whether it's more valuable to you is very much subjective, though if you asked someone if they'd prefer $10 or a sandwich, most people would say the $10.
Between $100 and ten sandwiches, I'd suggest all would choose the money.
Conflating 'winners' with who came out ahead in terms of self-assessed value proposition of a particular transaction is to also miss the point.
> We turned a profit by being smarter or faster or luckier than the people we traded with.
This is the essence of trade.
I would say it depends on whether I'm hungry or not.
Parent was asserting a perishable item is inherently more valuable than the means to purchase same.
What? You literally did say that:
> I traded it [$10] for something more valuable [a sandwich].
You clearly aren't.
Other kinds of “finance” are more like playing poker where everyone is betting the public’s money.
I can believe someone new to finance didn’t think very hard about which kind of firm they were at.
Me too; but then I think of all those unsavoury traders who would have to get other jobs, eventually inflicting hell on the innocent, and the prospect of keeping them where they are, flies to flypaper, becomes more appealing. (disclaimer: I work in the sector at large)
I know some of them have gone on to do good things elsewhere. What if more of them did?
One, if you're selling coffee every day to people, then you are creating value for all the people who say, "Hey, this was a good purchase. I'll come back tomorrow." So it's definitely not zero sum in the main economic sense. Value is created with every cup.
Two, if you open up next near another coffee shop, that's still not zero sum. More people will get coffee. Your better coffee means that people will get more for their money. Maybe your competition will force neighboring businesses to up their game. And even if another business ends up closing and exactly no new customers get served, that's still not zero sum, in that you're providing a better product.
I agree big financial firms are a mix of productive and rent-seeking behavior, although a lot of their nominally productive behavior is just helping other rent-seekers, so I think the truly positive-sum service is pretty small. I also disagree that rent-seeking is ethical. That some in the industry consider it "mandatory" is pure self-justification, a way of passing the moral buck.
With technology it should have shrunk by a couple of orders of magnitude. You don't need a room full of old men in green visors cranking away at adding machines to get anything done anymore. Instead technology has only made it bigger.
I ended up leaving mainly because it was an unhealthy, high-pressure environment where a lot of the most celebrated people were giant dicks. But I stayed away because I realized that we weren't making anything better. We just situated ourselves near a river of (other people's) money and tried to siphon off a bit of the flow. It was depressing.
I'm glad I never went back. I honestly think the finance industry could be half the size it is with no real harm to the rest of the economy. And given what a mess the 2008 crisis was, trimming the industry way back might be overall beneficial.