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PaperclipPerfector  3d ago (text post)   2852 thread views

Small-Scale Question Sunday for January 12, 2025

Do you have a dumb question that you're kind of embarrassed to ask in the main thread? Is there something you're just not sure about?

This is your opportunity to ask questions. No question too simple or too silly.

Culture war topics are accepted, and proposals for a better intro post are appreciated.

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There's modest consensus around here that Vivek & Elon firing half of the government would be a good thing, and that most of those workers are largely vestigial parasites/culture warriors who don't productively contribute to society.

What would the practical effects be of Trump pulling a Xi and dropping the hammer of god on wall street and hedge funds, HFT outfits, etc.? Say you can keep venture capital and bank loans to businesses and all the other stuff, but the 'quants' who make a living with options, trading commodities and the like? I'll leave it to someone better versed in that world to carve out precisely what should or shouldn't be banned, or try to convince me that this is a mistake.

The friends I have in that space freely admit that they don't believe that they contribute meaningfully to society. They have advanced degrees in physics, math and CS; wouldn't society be better off pushing them towards engineering, manufacturing, company creation? And redistributing capital from the non-STEM people at these places who contribute nothing of value to society?

There's modest consensus around here that Vivek & Elon firing half of the government would be a good thing

Elon and Vivike can't fire anyone directly because DOGE isn't an official government department, so all they can do is make budget recommendations to Congress.

Most HFT shops are mostly doing market making. Market making (i.e. quoting bid and ask prices and making a profit when other people cross your spread) is essential for well-functioning markets, and computers do it better than humans (and have done since shortly after 2000). The problem is the sheer amount of elite human capital going into a competition for speed which is now effectively zero sum because computers are placing and cancelling orders faster than a real-money investor can make decisions. To fix this without chasing away the market makers the markets rely on to function, you would need microstructure-level reform carried out by someone who knows what they are doing.

The most interesting proposals I have seen are:

  • All orders entering the market place are held until the end of the second, and then orders arriving in the same second are processed in a random order
  • Allow pricing in units of 1/10th of a cent per share (for trades which are not a multiple of 10 shares, the total price is rounded to the nearest cent in favour of the market maker) - this makes it an order of magnitude easier for a later order to outbid an earlier one on price, reducing the incentive to compete on speed.

Thank you for having tactical answers to this question. From the basic research I've done, it seems like the primary way to fix this stuff is to slow things down.

The only convincing steelmen I've heard for keeping things "as fast as possible" is:

  • Sub-second trading helps prevent more massive price swings
  • If US markets artificially slowed trading or rounded prices, activity would move to other countries

Any others you can think of?

The steel man for keeping things as fast as possible is that anything artificial we impose might be worse and fucking up market making would be a pretty big deal. So much money hinges on that a regulator really cannot afford some dumb solution that benefits a single arbitrary party or is open to abuse. It's not an unsolveable problem, but just letting people compete on speed does solve it pretty well, so there's not a ton of incentive to fuck with what currently works.

Crypto is trying a bunch of different things to solve their version of this (They refer to it as MEV, basically the problem of block producers reordering transactions to extract value by front-running), and solving it algorithimically at the protocol level in a way that doesn't have some sort of drawback is currently proving really difficult.

"vast majority of parasites" is a massive overstatement, even though I largely agree that many could probably be fired. Most are nice, pretty normal people who work in a social context that does not properly reward - often even punishes - hard work and efficiency, so they don't. And because that's how people are, they have some clearly (to me, at least) self-serving believes why their work can't be made significantly easier.

Primarily imo government work needs to be re-structured significantly, and while doing that you can fire many, which is part of the reason why they resist efforts to change (why do you want to take away my nice & safe job?). But if you just fire them without changing the culture, you get the problem Scott described in his latest essay.

On your question for wall street, I'm still an ordoliberalist at heart; So while I think that correct pricing is very valuable, the degree to which some capital companies are both central and arcane is enough to allow substantial abuse, especially if they introduce ever-more mystic instruments. There probably is some way to limit them without hurting the overall economy in practical terms and as you say redirect their tremendous human capital to better endeavours. But at least for the time being, I don't really trust any current western government to not fuck this up massively, and any practical consequences are impossible to predict without knowing the details of any such plan.

if you are interested in some defenses of HFT's social value, here it is, from the horse' mouth. and even if you don't buy any of that, realize that it's a very small industry. the number of particle physicists being stolen away is absolutely miniscule.

hedge funds and commodity trading are a quite different thing - efficient price discovery is good, actually.

I would be all for this. Some amount of financial sophistication is needed to make sure that markets work properly, loans are available etc. but things have long since switched to a place where the vast majority of the work seems to be intra-financial ‘bigger fool’ games where the market is just betting on the market and value isn’t created but shuffled round and disguised. That expertise could be used to produce value instead.

The proper pricing of commodities and equities is actually of great value to society. The Physics Ph.D in a Manhattan office building high-frequency trading corn futures doesn't see anything except numbers on a screen, but corn farmers in Iowa (and consumers of corn like chicken farmers) benefit greatly from accurate and liquid futures markets in corn.

In order to consistantly make money in trading, one has to buy low and sell high. This inherently provides a price-stabilizing effect. Buying when prices are low causes prices to rise; selling when prices are high causes prices to fall.

The Physics Ph.D in a Manhattan office building high-frequency trading corn futures doesn't see anything except numbers on a screen, but corn farmers in Iowa (and consumers of corn like chicken farmers) benefit greatly from accurate and liquid futures markets in corn.

You can have extremely accurate and liquid corn futures without high frequency trading, and without sucking thousands of man-years of the highest human capital down the drain. We're not arguing about banning future markets, but I'm pretty sure corn farmers still can grow corn if you take away synthetic collateralized debt obligations and other modern financial vehicles.

There is also great value in market depth and liquidity, which these actors also provide.

Intuitively it does seem like there's some point past which there isn't any more "real" value being added (like the difference between transaction in a second vs a quarter of a second, or whatever), but the processes which get to that point are what enable all the good stuff that came before it.

I feel similarly about LBOs: they seem like a stupid legal trick, but all the conditions that allow them to happen are things you want your economy to have.

A good thought experiment I heard from Russ Roberts to help think about the tradeoffs involved is to consider the extreme possibilities. On one end, we could extend open market/active trading hours to be 24/7/365. On the other end, we could just have one market at one moment each day, say, everyone brings their orders at exactly noon every day, all the orders that can get filled, do, and then they go home until the next day. I don't really have all that much of a personal opinion, but it helps one think about possible tradeoffs.

A tool here would be to look at how this worked in the past, before HFT was enabled. Were things better or worse in terms of pricing?

I think the markets not functioning as effectively on weekends is pretty garbage, for instance, but we've long passed the point where HFT software can lead to major failures, not to mention the thousands of smaller ones that bugs can introduce. The capabilities of AI to analyze and make decisions with HFT capabilities is only going to make things worse.

Maybe I'm just latching onto it for the heck of it, but the fidelity of time a second provides should be slow enough to keep a human in the loop and reduce the iterations for software failure.

As I talk through it, though, I'm still unconvinced that this sort of regulation is possible. With the time horizon of a second, I have little-to-no doubt that shadow markets would develop between traders, even if explicitly outlawed.

I'm actually largely with you that the minute optimizations that these guys build in "The Market" are generally pretty worthless, and probably outstripped by the other perverse incentives and distortions they create.

I view them as an inevitable side effect of capitalism, and I don't think anyone's smart enough to carve out what should be banned and enforce it. I think China would more effectively compete with us overall if Xi didn't treat their economy the way he does.

It is always satisfying, though, to read about what China does occasionally to stomp on corruption or other frivolously antisocial bullshit like this. No pussyfooting around with fines: people go to prison, get tortured, or executed. The second order effects suck I think but my paternalistic/animalistic monkey brain loves it.

There’s something instinctual about hating people who make lots of money off of not highly visible or hard work things. We love NFL players and moviestars, we hate investment bankers.

In the historical record, we see merchants being hated and nobles being loved. Granted, this is partly because nobles are writing things down. But noblemen seem to also have been genuinely more popular among the commoners than merchants. Every society replicates the distinction in rich people between nobles, who are wealthy for visible, high status reasons, guild masters who are wealthy for visibly working hard(even if the hard work is mostly someone else’s- think titans of industry that build companies), and merchants, who are wealthy for moving value around. As a general rule the commoners love the nobles, admire the guild masters, and hate the merchants. And, obviously, stewards code as a subset of merchants; making a living off of managing somebody else’s money or property is- well, it’s not yours, it’s gotta be at least mildly dishonest.

Today we see that Elon and Trump had popular fanbases before their political turn; Wall Street types never do. There are villain professional athletes, but in equal measure there are those beloved by the public. I think this explains a lot of todays political divides that confuse the PMC(is there any definition for that word?). But it’s a deeper thing. The peasants think, and always have, that the stewards and merchants are there to screw them for personal gain and if the nobles and guild masters knew they’d stop it.

Like yes, cultural affinity explains some of the Republican gains with the working class, but can you imagine Trump driving a pickup truck? Democrats used to get this- they had union reps that worked their way up from the shop floor campaigning for them, not professional managers. No amount of hunting photo shoots can get around the issue there.

I'm with you, but I don't know for how long he can keep evading assassinations.

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