What Business is Wall Street In?

"It is getting increasingly difficult to just invest in companies you believe in."

You're interpreting that sentence literally. His point is that investing in a company used to largely be based on how successful you though that company would be. The market has changed in a way that an overwhelming number of external factors can have a negative (or positive) impact on that company's share price, making the evaluation of risk far more difficult. At the same time, the barriers to getting into the market have been lowered making it far-easier for anyone to participate. That sentence has nothing to do with how your initial trade was executed.

Wall Street's business is facilitating the capital markets, not "creating capital". Equity underwriting, a white shoe Wall Street activity, involves simultaneously facilitating a series of transactions we call an IPO. Creating capital is not really anybody's job - you can create capital/money by agreeing to take an IOU in lieu of cash for services rendered.

Also, Wall Street != algo/program/high frequency trading. That area of the capital markets, which requires sophisticated market infrastructure to exist in the first place, is exceedingly small by headcount and profit share.

>"The best analogy for traders? They are hackers."

Traders are hackers, and so are entrepreneurs. The kind that likes to tinker with data, play with mathematical models, and find nuances previously un-noticed or empirical anomalies irrational. The dream is to, in the process, find a way of modelling phenomena presently deemed unpredictable, i.e. to discover something new.

>"Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks."

Adam Smith didn't write about economics, he wrote about the political economy. The post-War trend of having a secular divide between politics and markets is historically unprecedented. Discussion has shifted because the salient points have shifted; beta is dominating alpha. A visual could be a slick of oil on top of an ocean - the oil is company-specific factors and the ocean the general market. In calm seas just watching the oil is fine. If you're in a Hellenic thunderstorm, however, the dominating factor is the rolling waves. Don't blame someone else because your model is obsolete.

>"I would be curious if anyone out there knows what percentage of transactions actually return money to a company for any reason"

I'm not sure what this means, so I'll take it as what percent of revenues came directly from capital raises (IPOs and debt offerings). This supposes that all other functions at the bank, e.g. asset management, making markets in stocks, providing brokerage and execution services, etc. are useless. From their latest GS 10-Q [1] we see that they earned $1.4 billion in underwriting for the first half of 2012. Not including net interest income their revenues for the same period were $14.5 billion; thus, underwriting represented 10% of Goldman Sachs's revenues for the first half of 2012. As a percentage of transactions I'm not sure how you'd work this out (is an IPO one transaction? Multiple?) nor what use it would be. For reference, underwriting represents nothing of Blackrock's or Bridgewater Capital's revenues.

>"Wall Street as a whole needs to be in the business of creating capital for companies and selling shares to investors who believe they are shareholders."

A healthy primary market cannot exist without a healthy secondary market, i.e. the success of an IPO, and whether it happens in the first place, is strongly related to how investors feel about being able to sell at some point down the road without incurring losses.

Let's examine the connection between holding term and governance mentality. The FT recently had a piece documenting that institutional investors, who own roughly 70 percent of U.S. stocks, despite having long-term positions and near total voting control, tend to by default vote with management and not participate in corporate governance [2]. Resolving our public capital markets is more complicated than fuck the facilitators; ape-handedly throwing taxes around before thinking through the consequences, intended and otherwise, isn't smart (though it will evidently get your article views).

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High frequency traders, in a race to the bottom, are in the short-term being run into the red by firms that trade time-consuming safety checks for speed. In the end the bad drives out the good and the market de-stabilises. The solution to this is having a series of pre, inter, and post trade checks that have to be run, e.g. monitoring the total dollar volume of trading over a time interval or the total dollar amount lost mark-to-market (yes, there are firms that took these functions out of pre-trade verification to save a few milliseconds). This puts a natural and non-arbitrary speed limit on the markets which accomplishing something meaningful in that time beyond feeling good about having conducted a witch-hunt.

[1] http://www.sec.gov/Archives/edgar/data/886982/00011931251234...

[2] http://www.ft.com/intl/cms/s/0/e19b6a54-fbf8-11e1-aef9-00144...

I think it's a miracle that you can ask for $500 dollars of a thinly traded stock and quite quickly get an offer to get it at $515.

That's how market makers make money. They match up investors who want to buy and sell the amount they want to sell at the time they want to sell it.

Contrast to the private corporation that I own shares in, where it's taken me weeks to broker a deal to buy some more shares from another shareholder -- including face to face meetings with many of the officers of the company. We had to have an accountant do the valuation and I ended up buying exactly the number of shares the other owner wanted to sell because this would mean more financing complexity and paperwork for the hardworking officers who should be spending their time building the business.

Maybe your broker gets $10 and the market maker gets $15 but this is a bargain when you consider how much it would cost without them. Imagine trading on the New York Stock exchange when you were in San Francisco in 1860!

Many low latency (high frequency) traders are market makers. Since the first successful offer gets the trade, you've got to be the fastest to survive at this game.

One reason it's hard to make money as a trader is that as people find discover deviations from ideality and exploit them, the deviations go away. "Market neutral" strategies we quite successful through the 90's but are no longer profitable. Today I'm worried about the options market because trading in volatility may alter the relationship between implied and realized volatility and ruin another family of simple strategies that have performed well lately.

This can actually happen with things like "breaking the iceberg"--playing tricks with the order book, but like you said, there clearly exist dangers with HFT, to claim that all HFT is evil is just flat out wrong.

Mark Cuban, go create your own exchange where you set the rules, or STFU.

That's why we live in a free society.

There is no valid reason or excuse for putting a gun to someone's head and telling them, "stop trading or else," which is what you keep insisting on.