Geeks trump alpha males on Wall Street • Hacker News Board

Re: Geeks trump alpha males on Wall Street

#21

Post by tree5 » Thu, Dec 03, 2009, 5:21 AM UTC

pwnstigator wrote: post #13

redcap wrote: post #2

Sure they're making money particularly from being smart, but would someone be able to explain to me how making money from money contributes to something worthwhile to society? Is it just that they're being that much quicker in smoothing out prices of stuff on the stock market? I'm not being snarky, would just like to know. Another slightly different topic: the trend during the Bush boom years is that the so-called 's…

The trader self-justification spiel is that traders provide liquidity; they tighten the spread, so you get a better price if you trade on the market. However, the actual effect of arbitrage is to make things that are already reasonably liquid much moreso, which means that the benefit to buy-and-hold investors is low. Illiquid stocks are avoided by arbitrageurs (too risky). So the net benefit to society is nonzero, bu…

You're right that the value of a trade is minuscule. But, a trade's value only amounts to only a handful of cents.

The top high-frequency traders though multiply that minuscule effect by millions (amounting to a much higher-value add as a whole to society), which IMHO justifies their high earnings.

Re: Geeks trump alpha males on Wall Street

#22

Post by jakarta » Thu, Dec 03, 2009, 5:28 AM UTC

nostrademons wrote: post #18

jakarta wrote: post #14

Earlier quoted context omitted.

It's pretty well documented that value investing in general will beat the market over the long term. See: The Super Investors of Graham and Doddsville http://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-an... How the Small Investor Beats the Market by Greenblatt, Pzena, Newberg (Journal of Portfolio Management, 1981) More recently, James Montier has released research at Societe Generale reflecting the fact that…

Take a look at the publication dates of those articles. 1981 and 1984. Right after the "U.S. is going to hell and stocks will never be a good investment" years of the 1970s, and right before the "If I put my money in a good mutual fund and leave it there, I'm guaranteed to make money!" years of the late 1980s and 1990s. Any investment strategy becomes less useful when large numbers of people pile into it. They bid up…

"I ran some cross-market analyses of stocks in 2006 when I was working at a financial software startup. I found that basically everything was overvalued: there were no values to be had in the stock market at that time."

I guess you weren't looking at special situations/event driven investments were you? Because I know plenty of people who did well during that year taking advantage of inefficiencies like spinoffs, merger arb, and cap-structure arb, and so on... these are typically the types of investments that Buffett refers to when he said that if he was managing 7 figures he could do 50% a year.

Re: Geeks trump alpha males on Wall Street

#23

Post by leelin » Thu, Dec 03, 2009, 5:38 AM UTC

Tangurena wrote: post #20

leelin wrote: post #7

Earlier quoted context omitted.

I won't defend all of finance / trading, but maybe this analogy will satisfy you. Think of sports tickets. There is massive inefficiency in the primary market, meaning tickets you buy directly from the arena or on TicketMaster. One inefficiency comes from all the season ticket holders who skip the majority of the games and only go to the ones they actually want to see. We can fix this inefficiency on a secondary mark…

If this were the only way that scalpers operated, then I would agree that they'd be a social good. Instead, there are a number of scalpers who wait in line, knowing full well that they're not going to the game/show and they'll sell the tickets to someone who wasn't fast enough to get in line. This sort of thing happened in Dubai, where some folks would buy shares in some real estate venture, and then flip it to someo…

True, but as much as we HATE those guys who line up for the first Xbox360 / Wii / Playstaion 3 trying for the ebay flip, they are technically not doing evil. The ebay flippers allow MSFT / Nintendo / PS3 to charge $1000 on launch day so that demand == supply, but the game companies won't do it for social / PR reasons.

Re: Geeks trump alpha males on Wall Street

#24

Post by dtby » Thu, Dec 03, 2009, 5:41 AM UTC

leelin wrote: post #7

redcap wrote: post #2

Sure they're making money particularly from being smart, but would someone be able to explain to me how making money from money contributes to something worthwhile to society? Is it just that they're being that much quicker in smoothing out prices of stuff on the stock market? I'm not being snarky, would just like to know. Another slightly different topic: the trend during the Bush boom years is that the so-called 's…

I won't defend all of finance / trading, but maybe this analogy will satisfy you. Think of sports tickets. There is massive inefficiency in the primary market, meaning tickets you buy directly from the arena or on TicketMaster. One inefficiency comes from all the season ticket holders who skip the majority of the games and only go to the ones they actually want to see. We can fix this inefficiency on a secondary mark…

scalper can buy all the tickets to a popular game and sell them all at 10x the price

How is this a problem, especially one requiring regulation? Nothing has changed from your original formulation, except apparently that he's now making 'too much money.'

Re: Geeks trump alpha males on Wall Street

#25

Post by dzlobin » Thu, Dec 03, 2009, 5:52 AM UTC

As a soon to be graduate, how do I go about getting my foot in the door of a high frequency trading shop?

Re: Geeks trump alpha males on Wall Street

#26

Post by leelin » Thu, Dec 03, 2009, 6:04 AM UTC

dtby wrote: post #24

leelin wrote: post #7

Earlier quoted context omitted.

I won't defend all of finance / trading, but maybe this analogy will satisfy you. Think of sports tickets. There is massive inefficiency in the primary market, meaning tickets you buy directly from the arena or on TicketMaster. One inefficiency comes from all the season ticket holders who skip the majority of the games and only go to the ones they actually want to see. We can fix this inefficiency on a secondary mark…

scalper can buy all the tickets to a popular game and sell them all at 10x the price How is this a problem, especially one requiring regulation? Nothing has changed from your original formulation, except apparently that he's now making 'too much money.'

Because then the very wealthy scalper has a monopoly, and the monopoly power allows for profit-maximizing pricing, which causes dead-weight loss.

It's better the scalper sell 50% of the tickets at 10x (and let 50% rot) than all of the tickets at 2x (and have nothing rot).

The scalper will let some tickets rot to preserve the 10x pricing because this is a repeated game. If people know that he'd rather let tickets rot than lower prices at the last moment, they'll have no choice but to buy at 10x or miss the game.

Re: Geeks trump alpha males on Wall Street

#27

Post by wglb » Thu, Dec 03, 2009, 6:16 AM UTC

cameldrv wrote: post #17

pwnstigator wrote: post #13

Earlier quoted context omitted.

The trader self-justification spiel is that traders provide liquidity; they tighten the spread, so you get a better price if you trade on the market. However, the actual effect of arbitrage is to make things that are already reasonably liquid much moreso, which means that the benefit to buy-and-hold investors is low. Illiquid stocks are avoided by arbitrageurs (too risky). So the net benefit to society is nonzero, bu…

That depends. Their profit comes from somewhere, and it's everyone else's trades. The average investor is giving the HF traders a few pennies on each trade.

Actually, it comes from the people (brokers) who were making a killing on (by today's standards) enormous spreads between buy and sell. The end buyer is likely ahead.

Re: Geeks trump alpha males on Wall Street

#28

Post by wglb » Thu, Dec 03, 2009, 6:17 AM UTC

dzlobin wrote: post #25

As a soon to be graduate, how do I go about getting my foot in the door of a high frequency trading shop?

Learn c++, real-time programming, finance math, move to chicago.

Re: Geeks trump alpha males on Wall Street

#29

Post by redcap » Thu, Dec 03, 2009, 6:18 AM UTC

pmorici wrote: post #5

redcap wrote: post #2

Sure they're making money particularly from being smart, but would someone be able to explain to me how making money from money contributes to something worthwhile to society? Is it just that they're being that much quicker in smoothing out prices of stuff on the stock market? I'm not being snarky, would just like to know. Another slightly different topic: the trend during the Bush boom years is that the so-called 's…

I think that's a little high horse. Most "internet" companies don't bring us any new blow out technology or societal benefit. Twitter for example is basically just a way for narcissist to talk about themselves. Not that there is anything wrong with that but to claim an Internet company is a better way to contribute to the greater good than is stock trading is just silly.

While there is a lot of horseshit being fed into the twitter system, I do know that it's being used as an alternative communication mechanism (maybe just because it's a fad?) and quite sucessfully in some areas - wasn't it doing at least some good in Iran?

I don't have a beef against stock trading in general, just the uber hyped money generating system that it fuels and the fact that it seems to make the rich richer and drain the brain market who in my opinion should be doing something more productive - making stuff that could be helping people even if it's in often unremarkable or in a horseshit fashion like Twitter can.

Re: Geeks trump alpha males on Wall Street

#30

Post by redcap » Thu, Dec 03, 2009, 6:22 AM UTC

pwnstigator wrote: post #13

redcap wrote: post #2

Sure they're making money particularly from being smart, but would someone be able to explain to me how making money from money contributes to something worthwhile to society? Is it just that they're being that much quicker in smoothing out prices of stuff on the stock market? I'm not being snarky, would just like to know. Another slightly different topic: the trend during the Bush boom years is that the so-called 's…

The trader self-justification spiel is that traders provide liquidity; they tighten the spread, so you get a better price if you trade on the market. However, the actual effect of arbitrage is to make things that are already reasonably liquid much moreso, which means that the benefit to buy-and-hold investors is low. Illiquid stocks are avoided by arbitrageurs (too risky). So the net benefit to society is nonzero, bu…

I believe liquidity is a good thing, but can there be too much liquidity?

These computer algorithms seem to be really good at making things very liquid, is there any inherent danger in that? I seem to remember reading an article that the automated nature of the high-volume trading machines posed a danger in and of itself.