But theoretically if the share is expected to go up at faster than the rate of compounded interest at the current interest rate, then it's a better deal for the seller to instead take out a loan using the share as collateral. And if the share is not expected to go up at faster than the rate of compounded interest at the current interest rate, then it might be a better deal for the buyer to loan out their money instead. The only thing that would make this a worse decision than the share trade are middleman costs.
Foreclosing on an asset doesn't happen in my example is not a cost, but a risk, which the interest rate should be accounting for.
Longterm lockup of capital is not a problem, as either party in my example are financially gaining regardless.
And I granted you the other uses for shares, which technically can be done without buying the share, but at a middleman cost (renting the share).
I really don't care to continue this. Mine was just a hypothetical in favor of the idea that there's always a "loser" (when compared to all possible financial alternatives) in stock trades, even if everyone ends up happy with the trade. Sure, there are holes in the hypothetical. I don't care.
Banks are intermediaries. They are not in the business of doing anything sophisticated.
No serious financial professional would expect their strategy or any strategy in existence to be 100% correct. A strategy that is correct 51% of the time is more than good enough. You diversify and hedge, and build up an uncorrelated portfolio. Suppose you've honed in on alpha strategy. You probably don't even want to optimize and fit in further, with past data. Instead, you find a beta strategy that is uncorrelated and run those two together. With the amount of capital firms the likes of Citadel are working with, it's impossible to trade in a single product, and so scaling up, in the case of an MM, is to trade everything all at once.
This is also repeated in the article. "[CitSec CEO] diversifies the firm’s earnings so it can better stomach an occasional loss in any part of its business"
> current strategies are not information problems that need new science, they are work problems that piece together solved ones, and whose efficiencies come from competency in related domains
Applied math is not about pushing mathematical theory, necessarily. Then there is a difference between theory and practice, and there is a difference between practice and sizing trades with this scale of AUM. Academics can talk and write papers about LLMs or CRDTs, but they aren't going to be the ones who will be affective at bringing it to market.
The most interesting exchange I had was with some derivatives traders, and I asked broadly what kind of math was being used at their bank. Was it graduate level, was any of it novel, and was it within the reach of programmers. The answer was "no, no, yes" and they wouldn't say anything else. I suspect the secrecy is creating an intellectual mean reversion, where you do a thing that works and run it until it is traded out, and then never say anything about it so you can cost your competitors the time thinking about it.
However if none of the math is novel, then current strategies are not information problems that need new science, they are work problems that piece together solved ones, and whose efficiencies come from competency in related domains. I could see how one could become seized by markets like that.