It's difficult to say 'things would be X% more expensive' because of the interconnected complexity the GP was talking about, but there is definitely a very apparent benefit.
If a security could only be traded once per 10 years then it's obvious that its lack of liquidity would make it less valuable. Holding it would tie up your capital quite significantly.
However, if you had a turn-based market where every trade got cleared at the top of the minute it's not clear to me at all whether that would effectively be less liquid than what we have now.
It seems to me that a model where traders all compete for how many nanoseconds away their HFT servers are from the action doesn't really benefit the market as a whole. If anything it just makes things like flash crashes more likely.
The general consensus at this point is - no one actually knows - and it's up for serious debate. We know lack of liquidity absolutely has negative effects (because we've experienced it), but we don't how much liquidity is "too much".
One day we may decide to turn that knob from the millisecond range to 1 second and see what happens. If it's bad, we can always turn the knob back.
It's not necessarily clear whether it could be reduced to seconds of liquidity, or minutes, but it's clear that milliseconds is too short. The money isn't remaining in the market long enough to provide value -- especially when the market has already been made and they're just trying to figure out who gets the surplus between ask and bid.
The primary problem with that is that it pools order flow into a homogenous, undistinguished pool.
HFT heavily rely on profiling order flow into the informed and uninformed. A typical uninformed trader is Joe Sixpack who's rebalancing his 401k. A typical informed trader is a hotshot hedge fund manager, who's invested enormous resources in gaining an informational edge. If Joe's buying a stock that doesn't tell you anything about the value of the stock. If hotshot hedge fund manager is buying a stock, that in and of itself is a credible signal that the stock's worth more than you thought it was.
Liquidity providers love being the counterparts to Joe, and hate being on the other side of the hotshot hedge fund managers. The more you can profile the order flow, the better prices and more liquidity you can offer to Joe, by charging the hotshots more. Think of how life insurance companies can offer better premiums, particularly to the healthy, if they require a physical exam before underwriting a policy.
Even on a millisecond by millisecond basis, there's a ton of distinguishing characteristics regarding the informational content of order flow. Uninformed flow basically looks like a bunch of small, randomly spaced trades. Informed flow is more likely to cluster together in small time windows, move sequentially in the same direction, try to sweep liquidity with huge trades, and immediately follow similar moves in other securities among other things.
If you pool all orders into a homogenous one minute pool, HFTs would lose much of their ability to segment order flow. The end result would mean that the hotshot hedge fund manager would see his trading costs reduced, and Joe Sixpack would see his trading costs increase.
However, you postulate that the introduction of a turn-based system would effectively transfer money from Joe Sixpack (who'd face higher costs) to hotshot hedge fund manager (who'd face even lower costs).
Maybe, though, we'd see HFT shops go out of business (and not building micro wave towers between Chicago and NY anymore), and see a transfer from HFT shops to hotshot hedge fund manager and Joe Sixpack, both facing lower costs.
How do you know it's not this second scenario?
These systems are already running in many markets, typically at a rate of one trade round per day, but using them is optional.
Once you disregard the rapid transactions that do not have a significant effect on the price, your average human investor is probably putting down some fill-or-kills or limit orders and actually benefits from HF liquidity trading.
It's hard for me to understand, let alone explain, why milliseconds would matter for the human investor, but I what I can tell you is that GS is not investing 100M USD just for buying derivatives every other minute.
Sure, that's almost tautologically true, but that does not mean that the benefits to society materialise:
* Traders getting faster access to an exchange have an advantage against other traders (and might make more money), but that does not imply at all that the market will be more liquid.
* The volume of actual utilitarian trades (investing, borrowing, asset exchanging, hedging) is relatively small compared to overall trading activity. A pension fund investing, someone taking out a mortgage, people exchanging currency for the holidays, the often cited farmer hedging his crop - they trade infrequently, and certainly don't care about some milliseconds.
* The dynamics are those of an arms race. Arms races are wasteful, by and large. Building a "straighter" fibre glass connection between NY and Chicago, and then building a series of micro wave towers (because the speed of light in the air is greater than in the fibre) - how does that benefit society? Just postulating higher liquidity and lower costs is not enough to justify it, I think.
(I am reminded of the earlier discussion about advertising - once Cola does it, Pepsi has to do it, too. Are we thus better off, or would we get cheaper sodas if both didn't?)
Sure but, does a couple of milliseconds to or from affect that?
For example your typical Joe Sixpack rebalancing his 401k is uninformed. His trading does not tell you anything about the underlying value of the stocks. The typical informed trader is a hedge fund manager, who's investing tons of resources in gaining an informational edge. If he's buying a stock at a particular time that is in and of itself a signal that said stock is worth more than you thought it was otherwise.
Liquidity providers love trading with uninformed traders. The problem with informed traders is that you don't want to be on the other side of their trades. Since liquidity providers are the immediate counterparties to most order flow, they're the ones that primarily eat this cost.
To counter this, liquidity providers invest enormous resources in profiling order flow to try to identify when to what degree its informed. This allows them to provide lower costs and more liquidity to uninformed traders, like Joe Sixpack. It's analogous to how requiring a checkup allows life insurance companies to provide lower premiums, particularly to those who are healthy.
One of the most important ways to profile order flow is to quickly adjust quotes as market conditions evolve. For example said hedge fund manager may be trading a thesis that the chipmakers are all undervalued. He may come in and buy Intel, AMD and Nvidia in one swoop. If an HFT sees a huge buy hit Intel, it can bump its quotes on AMD for a few milliseconds.
If its a cigar-chomping hedge fund manager executing a basket algorithm, it's quite likely that he'll try to hit AMD and thus pay the higher price. But if its Joe Sixpack the probability that his trade just coincidentally lands in a 5 millisecond time window is vanishingly small.
If you place an ask and the price moves down it might not fill, so you have to move it over time while the price slips.
People provide liquidity by seeing your new sell order and filling it quickly, or by leaving a large number sell orders that people can take immediately, which results in money moving more quickly and consistently.
(It's a common term on internet forums -- I learned it from Slashdot years ago)
The comment directly above is the parent, and the comment above the parent is the grandparent—in this case the GP they’re referring to was 1e-9’s comment.
Finance is an online multiplayer game.
They are two weakly-connected systems.
But finance is also products & services.
Think of a corn farmer. It's easier to think of him adding tangible value to society because "corn == food".
In contrast, finance just seems like useless office workers copy pasting numbers around in Excel spreadsheets. (This is probably true in many cases.)
But the farmer often wants to sell "futures" which is a product & service provided by the financial industry. Instead of using the jargon of "futures", we can just say the farmer wants a product/service to give him a "guaranteed-selling-price-regardless-of-future-volatility-of-corn-prices-so-I-can-sleep-at-night".
Other examples of desirable finance products that farmers want include crop insurance and equipment loans/leases.
>They are two weakly-connected systems.
Farmers' food crops and the financial products/services of of futures is an example of how businesses making tangible products and the finance industry are strongly connected.
Largely because most of the trade strategies live in ancient xls files no one dares edit.
The real reason are competitors. You have an advantage if you have the faster line. In the name of fairness there are lines of the exact same length* in many trade centers precisely for this reason.
There are bots that feign transaction so that others react in a specific way. In the last moment these are canceled again, too late for competitors to still react. This is an example for when you need a faster line.
To suggest this arms race in high frequency trade has a serious economic benefit is ridiculous in my opinion.
* I do literally mean cable length. Yes, they have become that crazy
In stock exchanges at least, what you describe is called spoofing. The regulators are not friendly towards it, because spoofing enables to skew price discovery.
It's generally hard to detect and hard to prove, but there have been cases where the regulators have proved sufficiently well that in certain cases, there were orders never intended to be executed. And yes, if you get caught, there are sanctions.
Wider spreads just makes it more expensive for everyone. Personally, I'd like my pension money going towards the actual investment rather than paying for a wider spread, but I'm just strange.
Presumably you also object to academics working on entirely abstract problems? After all, they could be doing something else much more useful.
Who gets to decide what the most useful allocation of resources is?
> Do I understand this correctly: the alternative is that somebody else would randomly pocket this money, without working for it? Doesn't sound so bad to me
If that doesn't sound so bad to you, I suggest you haven't thought it through enough. We've been there, in the past. It was worse then.
Yes I do. But at least there isn't a large monetary incentive to push people into it. They push themselves.
> After all, they could be doing something else much more useful.
I doubt it. Maybe.
> Who gets to decide what the most useful allocation of resources is?
Interesting question, but unrelated. We were discussing about the overhead versus benefits of high frequency trading. It's about the efficiency of the system itself, not about how to act within this system or where to direct the resources you get out of it. There is no conflict of values, I think.
My feeling is: it's an arms race. The profits that used to be randomly allocated are now either lost to you (if you decide not to participate in the race) or they are predictably spent on the race itself. Nobody wins, except those who enjoy the race for its own sake. Before that, someone was just winning randomly, and got to decide what to do with the profit.
Do those fast trades actually increase the overall efficiency of the system by more than their cost?
Spreads used to be much higher, sure, but that was not because there were no HFT shops around back then.
The counterargument is that there are diminishing and/or negative returns to increased liquidity and velocity.
Take just stocks. Liquidity is not a problem. You have liquidity whether trades take minutes or milliseconds. Pricing? I'd say we have pricing covered too, at least the pricing that more/faster algorithmic trading will contribute.
Meanwhile, all this stuff costs money, people, resources that aren't available for actual productive work instead of overhead.
That's a very high standard. What's productive? What's productive enough, in your book, to be worth the effort used here?
And in a market panic, your friendly HFT shop next door is there and offering to buy and sell to stabilise the price?
> Given that we benefit from realtime pricing
Yeah, if you assume the conclusion that we benefit from it, then we do. But have you shown this?
In which market do we benefit from milliseconds pricing, compared to, say, an auction every minute?
Some are. It's not that they are friendly, it's just that doing so can be highly profitable if one can estimate the mispricing with a sufficient degree of certainty.
> In which market do we benefit from milliseconds pricing, compared to, say, an auction every minute?
I argue that all of the significant ones benefit. The global market is huge and interrelated in complex ways. There are many trading entities with a variety of specialties. They communicate their expertise through the markets by placing orders. It's an iterative process and a lot of information must be conveyed. The faster the entities can communicate back and forth, the more accurately the prices can represent a weighted consensus. Constraining the trading to 1 minute auctions would reduce the communication bandwidth.
That’s a very biased view. Another view would be that improving the efficiency of the largest markets in the world have a much larger positive impact on society than the vast majority of the “productive” work you refer to.
For starters, is the evidence behind this Hayekian market efficiency really so strong as to warrant this kind of absolute confidence in the wisdom of markets?
> markets work by polling the expertise of many different parties who all understand a piece of how things should be valued.
…as well as orders of magnitude more people who do not understand how things should be valued. → noise, which is fine ("excess volatility"), but which can also become highly persistent in the presence of correlated expectations ("bubbles")
> This results in millions, if not billions, of interconnected price-discovery feedback loops.
Well, there are negative and positive feedback loops, only one of which is stabilizing!
> beneficial […] because the price discovery feedback loops get faster
This can also backfire. In fact, this is why a number of stock markets have instituted a trading stop if an asset moves "too fast". Slowing things down / reducing liquidity can stabilize a situation. Actually, this reminds me of
 W. A. Brock, C. H. Hommes, and F. O. Wagener. More hedging instruments may destabilize markets. Journal of Economic Dynamics and Control, 33:1912–1928, 2009.
where you have a similar counterintuitive argument.
The history of the idea of market efficiency is long and the idea remains controversial or contested. See e.g. Philip Mirowski's writings.
> Well, there are negative and positive feedback loops, only one of which is stabilizing!
Absolutely. Entities that consistently contribute positive feedback cause harm to markets and they are generally doing something that is either prohibited or foolish. I don't consider either a good long term profit strategy. The market regulation departments work to remove one and large losses tend to remove the other.
> This can also backfire. In fact, this is why a number of stock markets have instituted a trading stop if an asset moves "too fast". Slowing things down / reducing liquidity can stabilize a situation.
Sure, exchanges use a variety of market integrity controls, including limits on rapid and/or large price changes that can trigger order rejections or trading halts. These controls can be beneficial when the price fluctuation was due to poor trading, but can be damaging to a market when the fluctuation was due to significant new information or because there is a natural high volatility situation such as a derivative that is about to expire or is rarely traded. Consequently, the exchanges have to be careful about how and when halts are invoked. Some exchanges often get it wrong.
The main point I was making is that lowering the latency of the multitude of price discovery feedback loops making up the global market can be very beneficial because it allows the pricing dependencies to be more fully determined.
That or moral apathy. At some point in the 80s we decided that markets driven by business profits should dictate every aspect of society.
I imagine 100 years from now they'll look back at today in disgust.
Ultimately "Corporate Profits" produce the economic value that people desperately want, and participating in the creation of something people want _should_ be a prerequisite for getting economic value in return.
I'm also proposing that in a wealthy first world country, perhaps nobody should have to go homeless. Crazy idea, I know.
What have these "corporate profits" you worship ever done for homeless people?
Right now most people have access to abundant food, cellphone in every pocket, access to a wealth of information, access to transportation, incredible medical advances.
I can't imagine that the progress we've made would be scorned. Like other market driven forces, bad players will not be rewarded as information about them increases.
However, if information is not increased because of something like a company buying a newspaper so investigative threats can be used against politicians to avoid information gathering, then we have problems. This is more crony capitalism than just capitalism.
If you compare real median wage growth in the West in the 60s and 70s with the last two decades though, it doesn't look so great. Maybe we can do better.
100%, both systems are great theories. However, the last few hundred years of actually trying to implement capitalism has "most people have access to abundant food, cellphone in every pocket, access to a wealth of information, access to transportation, incredible medical advances.", if by "most people" you mean "possible a majority of people in the richest countries in the world". Unfortunately, the cost of that is that we've done irreparable damage to our environment, are causing the worst Great Extinction ever, and have caused a climate crisis that may cause us to go extinct.
A huge amount of R&D happens in academia which isn't capitalism; but then is monetised by capitalism (but doesn't reinvest it back into the academia)
Without invoking too many absolutes, there's so much bullshit involved in the latter that people doing the former aren't willing to put up with. It's mostly two different kinds of people with two different skillsets.
I agree that "No true Capitalism" is just as bad a fallacy as "No true Communism". But our real life imperfect Capitalism has still had incredible results whereas real life imperfect communism has lagged significantly and failed more brutally.
> most people have access to...
Why is "most" a good enough metric? If most people have homes but my commute to work is littered with tents of homeless people, is that adequate? Should politicians just throw in the towel then and call it a day because "most" people have houses?
I think we can do better.
Why pick on traders? I know a lot of developers making well into six figures. I hear them talking about getting 3 new graphics cards for their gaming rigs instead of how they worked at a soup kitchen.
What is your point? That GS should be donating 100m to charity instead of reinvesting into their business?
Where do you think that money goes? Workers will be paid to implement their plan and taxes will be paid on those wages. In fact about 40% of that 100m will eventually end up being paid in taxes.
The problem is that if I have a company [and this is a systemic example, no exceptions, see #1], and I allow (central-)bank "friendly" people on its board, so that we can receive as many low- or zero-interest loans (with open due date or refinancing at will, i.e. free money, printed freshly from thin air) from the bank, so that we can under-price, destroy and acquire all our competition, become a monopoly AND finance a massive lobbying power in the DC so that we can get laws passed which increase our profits (at the disadvantage of the citizen), you can bet all your savings that such system's demise is written in the fabric of space and time, because the most essential feedback loops (and the ones that you mention, the ones in the market, work in exactly the opposite way) in that system have been disabled and its just a runaway train without brakes.
Buying laws starts and finances wars, relaxes food, water and environmental toxicity limits, enables false advertising, eventually raises taxes, enables trading of derivatives so detached from reality that a computer game pales in comparison, you name it. The days of this system are numbered and we should really speed up the development of trustless alternatives based on blockchain, or we're going to hit the wall really hard.
Assuming the market can be said to have a Nyquist rate, then once you hit that you have all relevant information. Increasing the sample rate past Nyquist does not make a system more stable unless you have a very specific system designed specifically to take advantage of that. More typically, it just increases your noise-bandwidth product and can decrease total system stability and accuracy.
This also skates around the issue of defining what a Nyquist rate of the market even means in real terms. But, if you want to use control theory to model the market, it's important to know that faster does not inherently mean more accurate. In the simple analogy, increasing trading frequency will improve measurement results, up to a point, after which it will actually likely result in decreasing accuracy.
I've also ignored the whole conflation of frequency and group delay in these analogies to keep things simpler as well.
In other words, Warren Buffet buying a huge portion of a penny stock will drive past that frequency tipping point easily while lil ol' me buying a few shares of an index fund will have effectively little to no impact?
That's really interesting, I never thought of it that way.
>> markets work by polling the expertise of many different parties who all understand a piece of how things should be valued.
Does the whole picture ever become apparent to all of the interested parties after the fact? Or do market movements remain subject to a high degree of interpretation even after they happen?
edit: Or asked differently: What do we have now with high frequency trade established compared to the situation before?
With HFT, people compete to offer the best market, and spreads are in the pennies.
To dilate on your feedback loop comment, physical systems may benefit from a higher sampling rate but usually only to a point. This point is often related to the physical dynamics of the system (e.g., natural frequencies). For example, a small thruster may benefit much more from increasing sampling rates from 1000Hz to 10kHz than a large rocket engine. I assume/wonder if there's a similar analogy to diminished returns in stock information systems, like more volatile markets benefiting more from higher frequency of data. It would be interesting to see where the diminishing returns are.
Additionally, what is the nyquist limit for such an ideally realised market, if it is indeed to be modelled as a recursive sampled approximator and how is this derived? Given an infinitely recursive network of arbitrarily connected market agents, is any such calculation convergent? If so, why? If not, how does the market ever converge to any appropriate price - a price which accurately reflects the market conditions excluding pricing operations and market costs which aren't directly related to the production of the instrument in question?
Keep in mind that, if the market is functioning ideally no market participant will exceed the nyquist rate as all participants knowledge of market conditions converges to zero. How is any sampling rate, excluding zero, convergent? If not, how is any such market realisable? If so, what is the loss function between ideal model and realisable, perfectly imperfect real world implementation? What is the minimum profit, if not zero, and why?
However, it does seem that arbitrage opportunities decrease when such high-speed trading is occurring and, does so even more quickly the faster trading speed and market sampling are increased. How can we account for this, if not by increased market efficiency?
I conjecture that, by ever increasing the sampling rate and the speed at which transactions complete, markets are not being made more efficient. Instead, I hypothesise that, as markets directly effect the price of the instrument reflexively, the feedback latency produced creates relative local pockets of perceived value - which are only profitable trades in relation to local information asymmetry. As the vast majority of high-speed trading holds market positions on extremely short time scales, shifting exposure constantly, this profit is immediately realised locally resulting in the gradual diffuision of this inefficiency as the increase in price of all instruments. This is a direct result of the cost of trading being factored directly into the agent's local acceptable sale price of held instruments. Every local agent trading action is ideal, but the global market is a divergently inefficient one. Indeed, it is a market in which its pricing inefficiency is maximally concealed from all market participants.
In a sense, I conjecture that the estimator is not functioning to increase market efficiency but is, instead amplifying local inefficiency globally, in effect, much like a charge pump would operate in a voltage multiplier circuit. In essence such a scheme acts to conceal increased market cost and overhead (including the profit of market participants) into market instrument pricing. However, it does so in an extremely small and diffuse way so as to make the rise in price of a single instrument, as a result of this activity, extremely difficult to detect as all instruments increase similarly on the same time scale.
This behaviour appears to be similar in nature to 'salami slicing', an often effective embezzlement technique - except that, instead of exploiting an information asymmetry created by lack of interest in small quantities in the part of auditing accountants, it exploits the information asymmetry created by the speed of light itself.
Of course, the faster the sampling rate, the more efficient the described amplification process would take place. Does this effect correlate between markets with differing but estimable information asymmetry? If there is no correlation, this hypothesis is invalid. It would seem to be an area ripe for research and analysis of market data.
Do you see any technical issue with this conjecture by which we may discount it immediately?
>This profit is immediately realised by the increase in price of all commodities globally.
This would only hold if there weren’t profitable short trades. The profit can also be realized by the decrease in global commodities that would have been slower before.
On further thought, the conjecture's behavioural outcome is actually not quite so analogous to 'salami slicing' as it is analogous to monetary policy caused inflation. In effect, the amplification effect would serve to create profit by creating an apparent valuable trade where none actually exists - such trades essentially print money. This activity would function much like the "profit" realised by a central bank when it chooses to print additional currency for redistribution at government prerogative.
However, monetary policy induced inflation is merely limited in effect to those exposed to any one central bank's monetary policy domain - and generally only occurs when the money supply is permitted to rise for all participants. The type of inflation produced by the activity outlined by the conjecture is inherently global - and would exert a pressure on all existing markets which permit this type of trading; and it is not governments, which are ideally responsible to those they represent, which benefit from this inflation - it is private market participants, in the profit they realise from each trade.
This would certainly seem to account for the new behaviour of central banks having to cut their interest rates to near or at zero to compensate for this asymmetric inflation to drive slowing market activity outside of the financial sector... if the conjecture holds - they appear to have entirely lost control of monetary policy to the global market - and those who are best placed to capture value in those markets as a gestalt - via this mechanism.
If the conjecture holds - and central banks and regulators are unable to reign in the behaviour globally - the economy will experience hyperinflation of Weimarian proportions. Unfortunately, such inflation will have vastly asymmetric effect - benefiting only those best positioned to participate in and drive the amplification behaviour itself.
Indeed, it appears to be a naturally occurring divergent state in a market permitting ever higher sampling and clearing rates. Such behaviours are increasingly profitable - seemingly without end - and so it will attract a geometrically accelerating amount of market activity until such activity is no longer profitable due to market collapse.
The analogy is a fascinating, and scary, thing. It's a bit like considering someone nucleating the economic equivalent of a false-vacuum collapse - or someone already having done so. I need to think about it more and find some way of formally stating and ideally disproving the conjecture.
We might disprove the conjecture by looking for anti-correlations in the growth, availability and capacity of high-speed trading and clearing in markets controlling for the returns of financial institutions instruments and portfolios and the changing monetary policies of various central banks under whose jurisdiction they fall. Simulation of economic systems with and without these elements might also yield some insights, when compared to market conditions at large.
Is anyone aware of any other similar research, work, and/or thought in regards to this concept?
Also, to sidetrack a little bit, may I ask how long it took you to gather these thoughts and post them? I'm trying to get a sense of how far along I am about gaining a holistic understanding of markets and trading.
All in all, about 10 minutes or so of consideration, followed by about an half an hour of editing.
That said, I'll likely spend much more time looking for existing models of financial markets under the information relativistic conditions created by HFT activity - it occurs to me that as trading moves closer to speed of causality in the market the models underlying market understanding may need to be adapted, perhaps using relativity as a prototype. With any luck they already have and I can elaborate from those to solve for conditions of such markets with information asymmetry and agents capturing value. If such markets are inherently volatile and that volatility increases geometrically nearing the speed of causality - presumably, the speed of light, then this may provide the mechanism for the apparent global inflation of instrument prices via distributed profitable high-speed trading activity while preserving lessened arbitrage opportunity and other visible market behaviours.
I really must formalise this so that it may be thoroughly and logically evaluated - both symbolically and under simulation. However, I'm at a disadvantage in that I am merely a dabbler in the field of economics and game theory. I also have no formal background in stochastic finance or physics. I am but a Systems Engineer. So, fun challenges ahead.
Of course, I welcome any contribution, furtherance of the analysis of this idea, or criticism of any reasonable kind.
> In effect, the amplification effect would serve to create profit by creating an apparent valuable trade where none actually exists - such trades essentially print money.
Trading is a zero sum game (notwithstanding the allocative function enabled by proper price signals), so I don't see how it would engender inflation.
> the new behaviour of central banks having to cut their interest rates to near or at zero to compensate for this asymmetric inflation
There are many theories about the persistent low rates ("secular stagnation") etc., but I've _never_ heard that particular problem linked to HFT.
> I conjecture that, by ever increasing the sampling rate and the speed at which transactions complete, markets are not being made more efficient.
That's fairly clear, and I can agree with that.
> Instead, I hypothesise that, as markets directly effect the price of the instrument reflexively, the feedback latency produced creates relative local pockets of perceived value - which are only profitable trades in relation to local information asymmetry.
> As the vast majority of high-speed trading holds market positions on extremely short time scales, shifting exposure constantly, this profit is immediately realised locally resulting in the gradual diffuision of this inefficiency as the increase in price of all instruments.
Not sure what you're saying there, but of course the idea is that traders with superior information can realise trading profits, and via such trading, information spreads through the market, until no such trading opportunities persist. However, HFT does not necessarily follow this kind of Hayekian vision, but is maybe more insightfully analysed in a game-theoretic framework.
> This is a direct result of the cost of trading being factored directly into the agent's local acceptable sale price of held instruments. Every local agent trading action is ideal, but the global market is a divergently inefficient one.
> Indeed, it is a market in which its pricing inefficiency is maximally concealed from all market participants.
> In a sense, I conjecture that the estimator is not functioning to increase market efficiency ...
> ... but is, instead amplifying local inefficiency globally, in effect, much like a charge pump would operate in a voltage multiplier circuit.
How is it amplifying it? Yes, we have seen flash crashes, sure, resulting in some transfer of wealth. But this does not explain or predict inflation, geometrically accelerating market activity, nucleated false-vacuum collapse, or any such things.
It is not very precise about the premisses, "the market", "the reward" or "the critical products"--variables in a non-linear equation, so to speak, that do not necessarily have a unique solution, or no solution.
Berkshire Hathway has couple of trades every minute and difference in bid/ask prices is huge around $1000+, yet you dont see people complaining about that.
Exactly, its the same with other stocks.
> The bid/ask spread is a separate issue from latency.
Yes but it also the second point made by HFT's that they reduce the spread.
In markets where many of those aspects can be minimized, market makers will end up very tight and the dominant factor becomes latency. a fast market maker can offer a tighter spread to counterparties and will see a virtuous cycle of increased trading opportunities leading to revenue to stay fast.
If the other factors remain significant risks, then the benefits of latency optimization fall off. So, spread and latency are related, but other market fundamentals do play a part.
Not sure whose revenue you assume to be fast.
Anyway I think you did not understand the point I was making, Berkshire's spread is huge and has been huge for decades, yet you dont see lot of people complaining.
If it leads towards efficiency, productivity, most beneficial allocation, as suggested, those are all biases.
Edit to add: I am not sure GP was using the term accurately, either.
An issue I have found with technical minutiae having,for lack of a better term, general names is that they are prone to being used wrong. And once a critical mass of persons start using it wrongly, there's no going back.
No, its deviations from the true value are essentially random.