It is hard to formulate a coherent opinion about the optimal level of activity $W without discussing the concrete details of activity $W.

There is a saying in the Beltway, "those who talk don't know and those who know don't talk." The same is probably true in this line of business.

It is hard to determine whether our financial markets do enough/too-much of whatever it is that tier-one liquid market buyside quants do. They probably do a lot more than you'd expect.

GP is in agreement with you on the last point, and the highlighted conflicts of interest are not related to DE Shaw:

"brokers and exchanges are much worse [than DE Shaw] since they're fiduciaries and semi-regulatory entities, respectively, and riddled with conflicts of interest."

I understand that - what I'm hoping is that dcaisen will clarify what exactly their concern is with DE Shaw. I'm claiming that other than conflict of interest, having firms like DE Shaw make lots of money is not a problem. I'm hoping that if there is some non-conflict-of-interest reason why it's harmful, they'll explain and I'll learn something useful

Oh I don't disagree with you, and I think your points are all very valid - a firm like DE Shaw is much less bad than the market participants with active conflicts of interest. Perhaps my rant is a bit misplaced on this thread.

Some basic arguments against are:

1. They are providing a service that adds no (or at least dubious) value to society. And again, I do think it's possible to have highly liquid, highly efficient markets where the amount extracted by prop trading firms is much smaller. But you're right that's an arbitrary statement, and who am I to say it's not already down to a reasonable level. 2. They do extract a lot of value. Maybe they're just siphoning it from banks and other hedge funds, in which case kudos (not to pick on hedge funds - they're just not a sympathetic victim). But probably at least some of it is extracted from mutual/index funds, pension funds, etc. Not the worst thing in the world and good on them for figuring out ways to make money, but it doesn't feel great. 3. Opportunity cost to society of the brilliant folks who wind up working there. Meh.

Way less bad than conflicted parties hurting their clients for their own gain. But I don't think they should be glorified either.

I'll let dcaisen speak for himself, but I don't get the impression that he believes DE Shaw is actively harmful; just that the service they provide (market liquidity, low spreads) comes at a relatively high cost. "How?" is a perfectly legitimate question, and it looks like a problem he's actively working on as the CEO of Proof Trading.

If he believes that, then he doesn't understand what DE Shaw's business is. It's like confusing a bakery for a flour mill.