The point the author was trying to get at was not that finance geeks don't provide any social utility.

Just that in any rational category of needs, the value they provide would have to rank far below the value provide by nurse practitioners (and schoolteachers, police officers, lawyers even... a zillion other working categories, in fact).

If today's financial wizards went away,

It's not just a question of "if." To all intents and purposes, the financial services sector as we know it today (both in its technical prowess, and in sheer size and scope) did not exist 30 years go. True, we didn't have Facebook or iPads then. But people managed to live healthy lives, raise children, have careers, buy houses, fight wars, etc, just the same.

So from one point of view, yes the financial services sector can be seen to grease certain wheels (like IPOs, M&A). But in the larger picture, (in the view of many) it doesn't seem to provide all that much value, in proportion to the resources (and brainpower) devoted to it. It also seems to generate no end of collateral damage (the recent mortgage crisis being just one example).

1. There would be a substantial impact... for the better. You and I would see the benefit as lower spread between cost of production and price of purchase of goods and services (the spread is where the "financial wizards" take must come from).

There is a huge benefit from proper distribution of resources - which used to be the job of financiers and brokers. But now, they work not on "proper distribution", but rather on "distribution which is the most profitable for themselves".

2. And if the "financial wizards" did not go "away", but instead into professions where their intellect could be used for good instead of for evil (e.g.: science), that would be even better.

If not, why do you believe insurance mechanisms are damaging in finance?

From Jaredsohn's link further in the thread: http://en.wikipedia.org/wiki/Derivative_(finance)#Economic_f....

In the context of a 2010 examination of the ICE Trust, an industry self-regulatory body, Gary Gensler, the chairman of the Commodity Futures Trading Commission which regulates most derivatives, was quoted saying that the derivatives marketplace as it functions now "adds up to higher costs to all Americans."

As a relatively ignorant layperson, my guess is that derivatives allow productive businesses to hedge against uncontrollable risks.

A business with less risks requires less capital buffer, which encourages & allows for more capital investment and profit-taking.

In a nutshell, derivatives allow businesses to run and grow on less capital, by reducing the amount of capital-on-hand required to buffer against risk.

Is there some other way in which derivatives serve an ostensibly positive function in society? Am I missing something here?

I think the largest benefit is for organizations like pension funds which are required to minimize risk. Being able to hedge against specific types of risk (e.g., via a "longevity swap") allows pension funds to allocate their limited "risk budget" in ways which yield higher returns (thereby allowing them to pay out higher pension values).

Derivatives are nice, in that sometimes its possible to separate the risk out from the asset. Consider a $50k loan at 5% with a 1% risk of default.

A pension fund and a hedge fund both have capital, but the pension fund have extremely conservative investors and the hedge fund have extremely risk hungry investors. That loan is not a good investment for either.

So a derivative is created: the hedge fund agrees to make the pension fund good if the loan-taker defaults for a one-time fee of $550 (the cash-value of the 1% risk + a $50 fee). The pension fund now has a $49,450 loan (actually, it will be booked as a $50k load both paying a bit less that 5% interest - the exact amount depends on the running time of the loan) and a $0 risk budget and the hedge fund just made $50 + a 99% chance of $500 more. All are happy, including the loan-taker who might have struggled to get someone to load him money.

(Numbers pulled from thin air for illustrative purposes and lots of details omitted)

I resolved not to play poker again until I understood the game much better.

Ditto for derivatives. If you don't understand the game, you should invest in something else.

There would certainly be an impact if all that stuff went away but it wouldn't be because of it's absence it would be because of the pain of unwinding it all.

http://husky1.stmarys.ca/~gye/derivativeshistory.pdf

Forward contracts in Sumer http://www.realmarkits.com/derivatives/3.0history.php

I think the point of "the world goes on without Wall Street" is that banks and stock markets will still provide speculative capital to expensive ventures whether or not high frequency trading is around, and agriculture will still grow and sell food whether or not hedge funds are buying and selling futures.

My understanding, which is tiny and very limited, is that you can think of the role of finance operators as "liquidity providers". They're the grease in the wheels of capitalism; by either providing access to capital (via loans, or investment) or by matching buyers with sellers.

A classical example is you're a farmer that wants to hedge the risk that your crop will fail due to random weather events or that there will be such a glut in the market that you won't be able to sell your crop profitably. So, you enter a contract to sell your crop at a fixed rate long before harvest comes along. That's a future contract, and it's a kind of derivative.

So, derivatives can be really socially useful instruments. They can act like certain kinds of insurance, or allow you to capture different dimensions of value on assets that you already own.

However, and here's where the argument comes in, it's not clear that all kinds of derivatives provide socially useful forms of gambling. The prime example here is that of the collateralized debt obligation in which huge portions of the US mortgage market got sunk into.

Mortgage backed securities are probably not in of themselves terrible ideas but the way CDOs were structured made it impossible to objectively value the risk behind the instrument. It's just not clear how a dip in the market might affect the value of your CDO tranche. It's actually an np-complete problem - https://freedom-to-tinker.com/blog/appel/intractability-fina...

Another example is high frequency trading - where you're a day trader on steroids and have computers exchanging massive quantities of stocks based on fluctuations of fractions of cents. HFT people will argue that they provide more liquidity in the market - it's easier to sell your stocks because HF traders increase the overall volume, etc. However, it's in effect launched an arms race between different trading firms and some people say that they're literally making money by skimming off everyone else who trades stocks. There's a very reasonable argument that we don't want markets to operate faster than human perception. If you have to make a decision about selling something, placing a ground foor and minimum transaction time of say half a second isn't going to harm anyone who needs that liquidity for their business, or anything else that touches the "real economy".

To summarize: certain kinds of financial instruments seem to provide no value above and beyond letting well-connected actors to place (potentially ridiculous) bets. Using your money, one way or another - whether it's your farm, the mortgage on your house, or your pension fund.

--

If we accept the above as true, we can go further on a limb and ask questions about why is the wealth that passes through financial markets so liberally redistributed to people in the industry? Some people talk about it being a function of volume, but individuals are rarely if ever liable. When do they stop providing a service, and when do they start skimming off the top?

  HFT people will argue that they provide more liquidity in 
  the market - it's easier to sell your stocks because HF 
  traders increase the overall volume, etc.

http://en.wikipedia.org/wiki/Market_maker

HFTs provide liquidity when the market's good, but you always have plenty of liquidity when the market's good. You only really need liquidity during a price crash, which is precisely the moment all the HFTs head for the exits, and the exchange seizes up.

HFTs are essentially a tax on stock transactions, and if you actually wanted that, why not have a legislative tax, rather than giving 5% to whatever stock trader has the shortest fiber optic cable to the exchange?

  I think it is very stupid to allow a system to evolve where half the trading
  is a bunch of short-term people trying to get information one-millionth of a
  nano-second ahead of somebody else. It’s legalized front-running; I think
  it’s basically evil and it should never have been able to reach the size
  that it did ... why should all of us pay a little group of people to
  engage in legalized front-running of our orders?

To make this concrete:

Say Charlie & Warren wake up one day and decide Company X is undervalued and that they want to by 5% of it. They start buying stock. In the old pre HFT days it would take a while for the market to notice all this new demand so they could get a lower price. But now HFTs are really good at noticing this so the price rises faster.

But wait you say! This is the "front-running" that Charlie is complaining about and that's bad! He's getting screwed!

But what if you were one of the people selling to Charlie. Before HFTs made the price faster you were the one getting screwed! There was all this new demand and you didn't know about it yet so you weren't getting as good of a price as you otherwise could have.

HFTs aren't front running. They just move the stock to it's true price faster than the humans doing the job before could.

If I'm buying, the HFT buys ahead of me and resells it to me at a higher price. If I'm selling, the HFT shorts ahead of me and buys from me at a lower price.

This isn't about liquidity or efficient markets, it's about gaming the system through preferential access to data and executions. It results in higher prices for buyers and lower prices for sellers.

They cannot jump ahead of you except by offering a better price.

I wrote a blog post a while back that explains the mechanics of matching engines, you might find it helpful: http://www.chrisstucchio.com/blog/2012/hft_apology.html

There was a big trade for a while where people had different account types. the CBOT matching engine, for example, had customer orders prioritized over marketmaker or firm, so customers actually COULD jump the line.

Some companies had customer accounts specifically so they could insert orders in higher priority in the queue (the tradeoff is that customers pay for CXLs, but you can just do the math to see when you should be using which account)

to @panarky of the comment, its not on the order of microseconds -- the stuff people used to rip on were flash orders, which are exactly 30 milliseconds.

So @panarky has a bit of a point about knowing the order in advance, but its still damn hard to profit from it. The narrative of just front running trades by having order information in front is just not feasible because of the bid-ask spread (the flash orders are to try to help maintain some semblance of BBO consistency across exchanges)

So as yummyfajitas says, it's not possible to sell ahead (saying "short ahead" in that way exposes you as not really knowing the trade, btw) or buy ahead in a way that necessarily affects price.

So, basically, you're paying for your own decision.

The sellers sell at their ask price (or at my bid), it's their decision to sell. If you offer to sell something to me at $10, I haven't "screwed" you just because someone else was willing to pay $11.

It absolutely is front running. Moving the price of a stock to your advantage because you know my intentions is exactly what front running is.

Incidentally, if it's acceptable for Charlie Munger to sell in such a way that others will suffer the price impact of his trade, why is it not acceptable for HFTs to do the same thing? In both cases, it's just one trader playing short term games against other traders in order to make money.

It's not uncommon at all and I've seen it happen quite openly in many situations. It's tricky business outside of the pure electronic game.

Also what does it even mean to "Move the price of a stock to your advantage" ?

That is the definition of "front running".

I'd like to see a 1 cent tax per share per transaction. That'd dramatically limit HFT.

HideNotSlide does not cause an order to "jump to the top of the order cue[sic]." It preserves your order entry time at a price that is contra the NBBO if there is not an order at Direct Edge at the NBBO (if there is an order at Direct Edge at the NBBO the incoming HideNotSlide order is filled).

I doubt "HFT" would be dramatically limited by a transaction tax. I believe that it would lower trading volume by some amount and widen the bid/ask by some amount. The number of "HFT" firms and their trading habits would look mostly the same though.

http://www.directedge.com/Portals/0/04Support/Membership/EDG...

The point is that no special license or membership is required, although you may have to do some work to implement this type of order.

Source? I believe you but I'd like to be able to quote an authority if I'm telling someone else about this. I've gotten into this HFT debate with colleagues, and I'm pretty sure none of us knew about this nifty trick.

http://online.wsj.com/news/articles/SB1000087239639044481270...

The non-populist argument these days seems to be less about fast, electronic market making and more about whether there should be a fixed, minimum trading time, e.g. by discretizing trading into intervals of a certain length.

The fact is that would never happen. I'm all for investment.. hell, I'm all for gambling, sex, drugs and rock and roll for that matter. I don't think most things should be illegal... but labeling the stock trade and wall street as investment companies is ludicrous.

Instead of making money by choosing stocks, market makers make money by providing a concrete service to the market: they make it easier to buy and sell for people who are investing. They are more like the merchants or shipping companies of finance, rather than speculators. And there is nothing wrong with this!

In fact, calling it gambling is just wrong: most market makers actually take on very little risk! While their actions are not felt by the company directly, they are felt by people who own the stock and people who either want to buy or sell it. And knowing that it's easy to buy or sell a stock makes people more likely to participate in the markets, which is definitely a good thing.

Also, it's very important to note that even non-trivial investment strategies do not involve buying and holding on to large blobs of stock for months. Instead, you likely want to micro-manage your portfolio following some sort of mathematical model every day to minimize risk and exposure. Again, there is nothing wrong with this! But it does involve quite a bit of buying and selling stock, and the liquidity created by market makers really helps.

Viewing the stock market as solely a means to invest for long periods of time is really missing most of the picture. Your suggestion would actually increase most people's risk, leading to more gambling rather than less--or just significantly less investment over all!

I would argue that investors with a 3 month holding period are actually exerting a pretty corrosive influence on businesses: emphasising a focus on the next quarter's results at all costs.

After all, the investor needs to understand the business strategy, the operating conditions, and the particular risks and opportunities available to that business. The company and (particularly) it's management have an interest in increasing demand for the stock, so they normally oblige.

The conversation is not one-way. Stock options mean that the personal financial interests of the senior leadership team are normally well-aligned with that of the investors, so all the parties to these discussions have a mutual interest in the performance of the stock.

Investors have a mandate to maximise return and minimise risk. They have a limited ability to predict the future; an ability which drops precipitously the longer into the future they look. Investing client funds based on unreliable long-term predictions would be an irresponsible dereliction of duty on the part of the fund manager. In addition, measuring the performance of fund managers is also notoriously difficult, so there is a very human need to get as much feedback on performance as possible as quickly as possible. All of these factors combine to exert incredible pressure on the institutional investor to focus on gains in price over shorter time-spans (months rather than years).

This interest and short-term focus will naturally come across in discussions between the investor (=owner) and the senior management in the company. It takes an unusually self-aware, self-confident and self-assured management team to recognize (let alone resist) this inexorable pressure.

What I have seen far more often is smart decisions delayed to please the investors, or costly decisions taken, at all stages: before or during Series A, B or further, before or during an IPO, etc. The most common ones are related to HR: contractors costing double and won't be here when what the set up breaks rather than employees to set-up a strategic asset because, otherwise, accounting practices would show increasing long-term duties to said employees. More generally, many companies suffer from a lack of investment because of the short-term focus — this I can describe in details in repeated cases, for the dozen of more companies that I’ve worked with. The single exception was when investors used the product themselves and behaved more like end-users.

There are a lot of products, especially outside equities, where that's not at all true.

Providing liquidity in all situations might be useful, but it is an added bonus. If you don't do this, you are still a market maker.

The numbers are made up here, but that's the principle.

One is that the seller loses on additional value. The other is that the HFT has bought from a seller who would have sold to you, but sees a higher buy price and sells to that instead, so you miss your trade.

For low-volume traders these aren't huge issues, but for institutionals or others looking to make or exit a large position the costs can mount. Again: HFT wouldn't be undertaken if there wasn't value to be extracted in doing it, and that value is coming directly from other buyers and sellers, just as when you introduce a middleman to any other transaction.

It's the same kind of automation we've seen in many other industries.

That's ... an unsubtantiated assertion. Lots of evidence to suggest the situation's otherwise, at least in large part.

There was an excellent ACM paper posted to HN a few weeks back:

http://queue.acm.org/detail.cfm?ref=rss&id=2536492

http://www.stocktrading.com/HFTDennis.ppt

http://online.wsj.com/news/articles/SB1000087239639044403240...

Broker-dealer internalization, queue jumping, flash trading. Regulators are years behind the traders on methods.

Trading center proximity is a big one. The Internet travels at the speed of light (actually, somewhat less than that). Which is finite and within the bounds of algorithmic trading. The HFTs get pricing data before the general public, even if it's just a few thousandths of a second (5000 km is about 0.01 light seconds, 500km is 0.001 ls).

With HFT operating at the 250 microsecond level, 75 km is significant.

http://queue.acm.org/detail.cfm?ref=rss&id=2536492

Or just plain cheating. Remember the Chicago Faster-Than-Light trades?

http://www.theverge.com/2013/10/3/4798542/whats-faster-than-...

"Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01."

So, 2 possibilities, you don't say, but you are sending a limit order to buy at $100 or a market (or marketable limit, or fill-and-kill) order to buy at $100. Apparently, you seem to be suggesting that there is a seller in the market, presumably offering at $100. Now, you seem to be suggesting that the HFT sees your order before it hits the matching engine (nonsense) and also that they can somehow re-negotiate with the seller and get him to lower his limit sell to 99.99 (I'm not sure how, do they send goons around to kneecap him if he doesn't? All in the 20 milliseconds your order is on the way to the market?).

" and offers you $100.01"

...but let's assume that somehow the magic omnipotent packet-sniffing HFT knows your order is enroute to the exchange, can force market participants to lower their offers, now you're claiming that it can force you to buy at $100.01. Why didn't you send a limit buy at $100, if that's the price you wanted, you saw, and were prepared to pay?

>wrapped in condescension

If you want to write entire paragraphs about something you know nothing about, you're not really adding to the conversation are you? So you'll open yourself up to a little condescension.

I'll freely admit I find this confusing. And that's with having studied this shit in school and worked in the financial industry (in trading no less).

There are a number of methods of getting inside or around the order book, most of which involve breaking rules. But the regulators aren't even playing catch-up, they're so far behind.

HFT is very time sensitive, operating at or within the 250 microsecond window -- that's the time a light beam takes to travel 75 km. So one way of jumping in on the order is being, say, a few thousand km closer to the exchange than some other trader.

As to limit orders (and you really haven't explained how the order book avoids this), by beating others to the trade on both sides of the order, the HFT can get in and spin the equity, taking a cut, or stealing your trade (you look to buy at $100, seller is at $99.99, HFT buys at $99.99 but finds a buyer at $100.01).

The point is that by inserting themselves between other traders, by virtue of speed, HFTs skim a proft. It's small (and was enabled largely by decimalization), but can be made up for in volume.

The saving grace is that the HFTs are up against one another (at least until they start colluding), so they're weaving complexity traps against one another that wear down the advantage. Though there's the risk of more flash crashes and other disasters resulting from processes they barely understand themselves.

Or flip this around: instead of telling me how HFTs can't arbitrage their trades, tell me what's actually happening. Because HFT's like deepwater oil drilling: it's an awfully expensive hobby to be doing if there's no profit in it. Where's the profit? And who's that coming from? Because in the world of the financial market, it is a zero-sum game, where one set of traders extracting value means another set isn't getting it. It's not as if they're building widgets for a value-added proposition.

I've seen the HFT trade price-seeking patterns -- bandsaw and crop circle visualizations from NANEX (this is now a few years old, so ancient history, but):

http://www.nanex.net/FlashCrash/CCircleDay.html

The point is that by being able to generate thousands or millions of buy/sell orders, across a band of price points, the HFT is getting in on any movement faster than any slower trader.

You're also not addressing straight out fraud where book is open, which is what I understand queue jumping to be. It's one thing if everyone's playing by the rules. Something tells me that's not the case. Oh yeah. That's my former officemate doing time at Club Fed for insider trading.

What's the mechanism for matching buyers and sellers?

Does HFT provide a benefit to the HF trader? If so, from whom does that advantage accrue?

What's the net effect on a non-HFT buyer with and without the presence of HFT? For market orders? For limit orders?

What's the net effect on a non-HFT seller with and without the presence of HFT? For market orders? For limit orders?

HFT provides liquidity to all other traders, including other HFT. They are paid in either the bid-ask spread (in the case that HFT is passive) or arbitrating bid-ask spreads between different exchanges, e.g. they aggress and take out an offer on exchange A which is below the bid on exchange B, providing liquidity to the standing offer on exchange A immediately instead of letting the prices disjoin.

The answer to the last two lines are the same -- there is no meaningful difference between a buy and a sell. The net effect is more liquidity than without any short term market making, for both market and limit orders (IMO market orders should simply not exist, but that's a small aside).

http://online.wsj.com/news/articles/SB1000087239639044398920...

Relevant quote: "He became convinced exchanges were providing such an edge after he says he was offered one himself when he ran a high-speed trading firm—a way to place orders that can be filled ahead of others placed earlier. The key: a kind of order called "Hide Not Slide."

Whether it is legal is highly questionable but it appears that exchanges indeed offer this feature to sophisticated traders.

That aside, Hide not Slide orders are an interesting case. They exist only in US equity markets, and they're a great study in unintended consequences. US equities are quite fragmented (the same security can be traded on several different exchanges), so well intentioned US regulators introduced something called the NBBO (National Best Bid Offer), ostensibly to "protect investors" from getting a worse price on one exchange. What this meant is that different exchanges trading in the same product could never be "locked" - you could never have one exchange showing say 101 on the bid when another has 101 on the ask (because in theory then they are crossed and should trade). Pretend the tick size is 1 for following discussion...

This leads to a situation where every equity exchange in the US may be trading 100/102 (with an empty tick in the middle), but as long as one remaining exchange is trading 100/101, you aren't allowed to insert a bid at 101 on the other exchanges (since the interpretation of the rule is that this would be unfair on the resting 101 offer). But HFTs are all very keen to be the first to fill that 100/102 gap in the spread - to be the first on that new queue is an advantage since you get filled first. And obviously that one holdout exchange will soon get filled and the price will tick up. But the other exchanges legally can't accept a bid at 101 yet.

So exchanges started to either reject orders or "slide" them - you submit that 101 Buy and they slide it down to a 100 Buy. Which leads to this:

10 SUBMIT BUY@101

20 IF RESPONSE = "SLIDE TO 100" THEN DELETE, GOTO 10

All of a sudden the exchanges are being flooded with messages, as algos are pinging the exchange constantly wanting to put that 101 bid in. Which leads us to 'Hide not slide' - the exchanges promise to sit on your order until the NBBO ticks up and put it in the queue then. The problem is that these order types, while documented and available to all who are connected to the exchange directly, aren't usually going to be available to someone who is trading through an intermediary - a broker or some retail trading platform. So that's the story of how a well intentioned bit of regulation ended up disadvantaging US investors.

US equity markets are full of weird quirks like this, the NBBO needs to be done away with.

HFTs pay brokers for order flow so they get orders before they hit the exchange and decide to trade on them from their own book (at NBBO) or pass them on to the exchange. Besides jumping the order book at the exchange they get advance information on orders about to hit the market.

http://www.optiver.com/pdf/FSA%20consultation%20on%20PFOF%20...

I believe brokers in the US are now legally required to reveal any such arrangements to their clients.

The curious thing is that you can do the same thing with your "socially useful instrument" example. Suppose that instead of selling mortgages, Wall St. had used the same tactics to sell crop futures. They had gone to farmers who promised to provide more food than their land could produce in exchange for cash up front, then resold those contracts at a profit to "investors" and walked away.

What would happen? At first food prices would fall, as in the mortgage crisis loan interest rates fell, because the supply of food on paper has increased. This would cause consumption to increase: Lower price, higher demand. The demand would have to be met from current food stocks because you can't eat securities derivatives, so food reserves would begin to deplete. It would also cause future actual supply to be reduced: Lower price, fewer suppliers. The farmers who can't profit at the artificially lower price would go out of business and stop planting.

Then, next season, the contracts would come due. The farmers who promised more food than they could deliver would default on their obligations. Their inability deliver wouldn't be able to be met from food reserves, which had been depleted when the price was low, nor from other farmers, who declined to plant crops last season when they expected doing so to be unprofitable. Instead of the housing crash there would have been a famine.

Allegedly, Wall Street did use similar tactics to sell crop futures, and there was a famine. See http://www.foreignpolicy.com/articles/2011/04/27/how_goldman... (note: annoying registration prompt, but registration is free or you can use your browser's webdev tools to remove the overlay) and http://www.independent.co.uk/voices/commentators/johann-hari...

(Disclaimer: I haven't checked any of the claims in these articles.)

[EDITED to add: of course maybe AnthonyMouse's "Suppose that ..." was a rhetorical trick and his whole point is that it really did happen.]

The article you link to merely shows that under certain circumstances, a CDO market can become a market for lemons. Everyone already knows this, which is why the standard industry practice was for issuers/packagers to keep skin in the game - sell off the AAA tranches but keep the risky ones for themselves.

If you actually want to learn about CDOs, go read this paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1421837

It was not impossible to objectively value them - they were simply valued incorrectly based on assigning low probabilities to the possibility that house prices go down.

Your claims about HFT are simply ignorant. No one has to pay the spread (which is lowered by HFT), you can always post orders at the bid/ask and use ALO orders if you want to avoid it. People choose not to because they don't want to accept execution risk.

When you borrow money in order to buy a house, it isn't your money that is being used by others. My mortgage got regularly sold to different entities, the only effect it had on me was I wrote the monthly payment check to someone else. The terms did not (and could not) change without my consent.

I'm a buy & hold stock investor. The machinations of HFT have no effect on me, they only really affect other HFT traders.

It would not take to great a stretch of the imagination to imagine regulation covering the maximum frequency at which trades could occur.

We would have to decide what sort of delay we consider tolerable, then (perhaps) hold auctions at that frequency - perhaps once per millisecond, perhaps once per minute, maybe even once every 10 minutes?

It's also a very broad question, kind of like asking "Is science good?". On the one hand, science has brought us all sorts of good things but it's also yielded weapons of mass destruction. (Ironically, Warren Buffet once famously - and presciently - described derivatives as "financial weapons of mass destruction"[1].)

> So, you enter a contract to sell your crop at a fixed rate long before harvest comes along. That's a future contract...

Technically (and pedantically), that's actually a forward contract, which is, admittedly, very similar in nature to a futures contract[2] (and, typically, a forward contract will often underpin a futures contract) and a perfectly excusable error to make. The reason I point it out is not to score a point but to highlight the distinction in order to illustrate how esoteric the financial markets can be.

Their esotericness/esotericity (clearly not real words but I think you get my point) means that the specialised knowledge and skills are highly valued. We generally accept that a ninja/rockstar engineers can be 10x as productive as an average engineer. The distinction is even more marked in finance - not only can a more knowledgable, better-skilled, more talented person make more money than someone who isn't as good, but the latter can end up actually losing large amounts of money (e.g. JP Morgan's London whale[3]). I learnt this the hard way just a few weeks into my (short) career as a trader when I made a very simple mistake and lost $16,000. Do that once or twice a week, and you'll easily end up down over a million dollars over the course of a year. To avoid "fat finger" errors, you need to be capable of being very focused for (in my case) up to 12 hours a day (or, at least, being able to switch from "relaxed, joking with your work colleagues" mode to "laser-focus" mode in a split second). Not everyone is capable of doing that. Some people can't handle the pressure. Others simply lack the brain configuration required to do it - they may well be smart, intelligent people - it's just that it's a very specialised job and some people's brains are going to instinctively better at it than others.

Add to that the fact that the financial markets are, by and large, a zero-sum game (which means that the best guys can actually take money off the not-so-good guys) and you have a situation where the top talent are able to demand (and end up feeling entitled to) the sort of pay packets mentioned in the original article.

It's a bit like Mayer hiring De Castro at Yahoo![4] - if he'd turned Yahoo!'s advertising business around, the company would have earned $600m more revenue over the past year, and a $60m pay package wouldn't have looked so crazy. If a bank hires a rockstar trader away from their competitor by offering a salary of $3m and he makes a $300m trading profit over the course of the year, it's a pretty good deal. On the other hand, of course, they could lose $300m and this was traditionally an asymmetric, one-way bet (i.e. if the trader made profit, he got a bonus but if he lost money, he didn't suffer any downside, which meant that he was implicitly incentivised to make big, dangerous bets) until new rules came in around claw-back provisions (so previous year's bonuses could be reclaimed if it turns out they were based on phantom profits) and paying bonuses partly in shares (thereby linking traders' fortunes more closely to their employers').

I still work in finance but back on the technology side of the fence (I'm basically a freelance product manager for an in-house piece of software that's used by a couple hundred people globally). I spend 25% less time at work than I did as a trader (i.e. 9 hours maximum instead of 12), the work's a lot less stressful and I find it interesting/challenging/fun. Whether I'm still doing it in six months time (as opposed to, say, working for a startup) is anyone's guess but the perceived social worth (or, more accurately, the lack thereof) of finance in general wouldn't be a factor in that decision.

[1]: http://www.berkshirehathaway.com/letters/2002pdf.pdf

[2]: http://www.investopedia.com/exam-guide/cfa-level-1/derivativ...

[3]: http://en.wikipedia.org/wiki/2012_JPMorgan_Chase_trading_los...

[4]: https://news.ycombinator.com/item?id=7068455

To give an extreme example, let's say you stick a buy order for some equity at the best bid, and a large event happens shortly afterwards (say the employment numbers, the non-farm-payrolls are released). Consider two scenarios. a) Number is good, market takes off, you didn't get filled and you've missed out on profit you could have made had you just crossed the spread. b) Number really bad, everyone else is already out of the market, or fast enough to get out of the market, but your limit order is sitting there like a duck in a shooting gallery, gets filled instantly but the stock tanks well past that level, and you're already showing a loss.

Your expectation on a limit order is negative. It is more likely to get filled when you don't want it to get filled - this is adverse selection. Unless you really do have the tools to compete.

Even this assumes that you are directly accessing the market, it is even worse if you go through a broker. They get up to all sorts of shenanigans, including what they call "price improvement", where they'll jump in front of your limit order by some tiny increment.

That was the original author's point (give or take a few work categories, which I'm taking the liberty of throwing in for the sake of illustration).

Oh right, and then said entity can't actually allow 10% of all withdraws on itself else it is called a "run" on the banks and they close their doors.

What sort of innovation do you see here other than a banking cartel that completely controls the money supply?

Comments like yours make me sick because it shows the brainwashing the banking cartel has implemented is complete from the bottom up and unifying; you now have people like you strutting around calling criminal activity innovative.

When banks create money it is innovative, when the little guy creates money, it is counterfeiting. Pull your head out of the banking cartels ass for a second, and take a breath of fresh air.

But it's a nice, easy way to make the narrative work.