Do traders add value to the economy?
Do traders add value to the economy?
How would you respond to the average person crying "traders just push money around to make more money, they don't add VALUE to the economy" etc.
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Liquidity in the markets is an obvious one.
Until they blame the lack of liquidity when the market crashes.
Of course traders add value to the economy. Instead of moving goods from one place of low demand to another place where high demand exists (very old school, like trading food), they move securities from one time of low demand to another moment in time of high demand (as in a long position).
In any case, I believe a great trader shouldn't worry too much about it, and would be more concerned about how to squeeze the competition or client for more profit.
Out of curiosity... who the fuck are you? I'm just interested in finding out a bit about you because I know a guy here on WSO who goes by t4s for short...
Mind clarifying shit for me brosephus?
People who take that sort of stance are not the sort you will be able to explain reality to.
The best thing you can do is nod and move on, while recalling:
Do not argue with an idiot, he will drag you down to his level and defeat you with experience.
IF, and that's a big IF, you get someone who's reasonable, there are a LOT of reasons and they're covered on this forum AD NAUSEA. Here are a few to get the ball rolling: 1. All of the above post 2. Companies often hire them to help manage costs: airlines hire fuel traders for example. 3. They make money for your precious 401K. The most hardened communist can't even refute this point. 4. In public markets, traders are the ones that if nothing else maintain the market prices: they are professional pricing agents and the reason they're so good and so committed (well, hopefully, they're only human) is because they have skin in the game. Imagine an appraisor who got paid/punished on each call. Why the prices matter is a 'capitalism conversation' and best not broached with a commie......
Are there traders who really don't 'contribute' anything to society? Yeah. Sure. There are people in every profession who don't. But they do collectively form a key part of the open markets that an open society must have to thrive.
Think of it like cops v firemen. Everyone loves firemen, lots of people don't like cops. Why? Firemen rescue you when your ass is stuck in a burning building....they're heroes. Cops, while also saving your ass, do a range of other things that people find unpleasant: they're the ones that write you a speeding ticket while you're trying to get to work on time for example. But they are both necessary for society to function as it does. So, it comes down to where each person sees themself fitting into the system.
And there you go.
Traders, the supposedly cream of the finance crop, are supposed to push money or bid up prices for firms that deserve it and reduce the economic power of firms that do not. They should be the experts who convey a firm’s value. Well run, competitive firms deserve capital and should be worth investing in more than shitty firms that operate pervasively and ineffecienttly. Traders provide liquidity for that well-operated firm. AS firms become more efficient with the investments they have received, that firm can charge less to that "average person" who can allocate his capital to other stuff he may need (so in that vein the average person who says that is an ungrateful little shit). Traders are champions of capitalism and bring exponential benefit to the average consumer. Imagine if APPLE couldn’t get capital in their nascent times. We'd still be using big ass Walkman and walk around with floppy fragile CD's. Thank you Traders!
LOL, in reality, we use capitalism because it is most pragmatic, not because it is perfectly fair. The planet produces a lot of resources as it stands without humans; capitalism allows us to use them most efficiently. People who are unhappy about capitalism aren't necessarily ungrateful- they might very well do much better under a different system. But overall, capitalism maximizes wealth most efficiently.
Mark Cuban wrote up a great article years ago that I partly agree with.
http://blogmaverick.com/2010/05/09/what-business-is-wall-street-in/
I mean cmon, are HFTs and algos providing TRUE liquidity? If they are, then what is happening when liquidity dries up in these flash crashes? Where are they to provide the quotes when they are needed most?
Churning around stocks in the secondary market is NOT providing capital either.
"Its primary business is no longer creating capital for business. Creating capital for business has to be less than 1pct of the volume on Wall Street in any given period." - Mark Cuban
Market efficiency!?!? What are you guys crazy!?!? With how far trading has come, you think the markets are operating well right now!? There is so much uncertainty and volatility in the markets right now that everybody is paralyzed. Imagine buying out Aeropostale to then see it crash 25%+ in a matter of days.
I don't think oil speculation helps the average consumer either. LMFAO!
Think about this. Traders LOVE volatility. Do consumers? Do businesses? Any MOMO trader would love to push commodities through the roof if they were long, but that would be disastrous for businesses and consumers.
Cuban made a few bucks from a business that he built from scratch, good for him. (For the record, Mark Cuban once worked as a disco dancing instructor) Then a buddy of his asked him to join the board of their internet startup because he had a few connections to money in Dallas. Cuban didn’t invent anything or develop anything. The only value he provided was the business connections, which worked out to be great for everyone involved. But that is, in my opinion, as much a matter of lucky timing as it is anything else. The genius behind Broadcast.com was Cameron Jaeb.
Broadcast.com set a record at the time for IPO’s and the valuation of the company was totally out of whack. Yahoo at the time was trading somewhere around $150-200; another crazy valuation driven by speculative traders. But that is what provided Yahoo the leverage to buy his little company. The greedy traders that he is now railing against are the same people that made him a billionaire.
Liquidity tends to dominate the answers. But what about risk? If you want out of a security it is because you perceive risk. If you want to buy into a security, it is because you see more advantages than risks. The trader is taking the risk out of your hands.
Think about this- Does a wheat farmer think that traders driving up the price of wheat is bad for his business?
UFOinsider,
I can agree with a decent amount of that. There are traders that serve a purpose. For example, traders that hedge for a business obviously serve a need. Similarly, investment advisers also serve a purpose.
However, think about this. What percentage of the volume are they? As Mark Cuban points out, Wall Street has gone far beyond the purpose of hedging business operations and providing capital.
Speculative trades and HFT are an overwhelming amount of the volume right now and they don't necessarily have direct "skin" in the game as you say. If you are speculating with OPM, then you are going to be taking excessive risk.
While you assume that most of Wall Street is the good kind of trader, I think the proportion is flipped these days.
Investors on the primary market would never buy if they knew they didn't have the option of selling their investments later to secondary traders.
Supermarkets don't create value either. All they do is push goods around without creating any of it. Those scumbags.
Eh, there is certainly value in having liquidity, and more is better, but conceptually there is some limit to that value even if it's difficult to quantify. The fact that I can buy and sell stuff any time I want / need to is critical to a functional market, but nobody seems to make an attempt to analyze the cost we collectively pay for that liquidity. Another thing that isn't discussed - is there more liquidity than needed? i.e., what value is provided by algorithms that buy and sell in microseconds? I would argue that we've passed a line in the sand, where the "liquidity" argument is no longer sufficient. The amount of money withdrawn from markets by liquidity providers, I think, far exceeds the value of that liquidity. In other words, we could do with less liquidity and most investors could still buy and sell whenever they needed to.
A few thoughts..
Here's a quick explanation of value added by market makers, in case not everyone is on the same page. As a retail investor, I pay at least the ask price to buy a security, and receive at most the bid when selling a security. Thus I pay at least the entire spread every time I want to invest in anything. The tighter that spread, the less I pay, and the more wealth I have after my investment. And this is not some trivial amount of money, because I have to pay a spread EVERY time I invest. And since we invest nearly all of our wealth, perhaps many times over if you change your portfolio, we pay that spread on nearly all our wealth, or even multiples of our wealth. Competitive market makers result in tighter spreads => more wealth for investors.
On an unrelated note, I don't know why everyone seems to think HFTs cause market crashes. On the contrary, many HFTs are market makers that provided far more liquidity during the flash crash and other crashes than they do during any other time. But the demand for liquidity is so great that even these firms, which thrive on providing liquidity in times of low liquidity, reach risk limits and stop trading. These firms in general are not on the liquidity taking side during crashes..
Juked,
Most people won't argue that market makers provide a useful service, but thanks for the explanation of what a spread is lol.
I think you're looking at HFTs from a very basic perspective, far from the role they're really serving. Certain HFTs may provide liquidity as a strategy, but they are not DMMs that are obligated to be there when the shit hits the fan. So liquidity is provided in times of good, but the second things go haywire, liquidity dries up = crash. HFTs often provide a false sense of liquidity since they're simply churning shares for fractions of a penny, which adds no value IMO.
Juked, I'm not sure how an explanation of spreads (whether they are tightening or not) is relevant to quantifying what liquidity is worth? All you've done is explain one component of a transaction cost for retail investors. On a macro scale, that doesn't even touch on the subject of what markets pay for liquidity.
At a high level, it could be approached like this:
1) Which firms provide most of the liquidity across markets? 2) How much profit do they extract, in aggregate (we know it's an absurdly high number) 3) Given that number, can we find a way to determine if we are overpaying?
Put differently, is it possible to articulate liquidity in such a way that we define a minimum necessary volume, or some other measure that lets us talk about "what we need" vs. "what we currently have".
As for HFT firms providing liquidity during rapid crashes - ok, so what? The left hand unsuccessfully helps to fix what the right hand caused? Look at it like this. Say I show up at your house with a few buddies. 2 of us set your house on fire, and the other 2 pull out a small garden hose and try to put it out. Your house still burns to the ground. Do you care that we're scratching our heads wondering why the hose wasn't sufficient to put out the fire?
Of course there's a ton more to be said about liquidity than just about spreads. But we're talking about explaining the value add of a trader to non finance people. And for the retail investor, the tightness of spreads is perhaps the most salient aspect of what a trader contributes. It most directly results in wealth for the average person..
This isn't what I would say in a discussion with you guys, but what I would say to the average person, as prompted in the OP.
to put it simply traders do not add value to economy, BUT they are necessary to the economy... P.S. you can look at my statement whatever way you want
I'm going to call that out as an oxymoron. Anything that you define as necessary has some implicit value. Whether or not you can easily quantify that value is an issue, but it's a fallacy to conclude that because you can't quantify something, that its value is zero.
no, traders (including me) do not add value to society. This is a zero sum game and my gain is someone else's loss. But really who cares?
you clearly haven't read the thread. The fact that you gain at someone else's expense doesn't mean you aren't adding value. You are buying and selling frequently, which means those of us that don't trade professionally can sell anything in near real time. Even if I'm losing a bit of money, there's still some value in the mere fact that I'm able to liquidate instantly. Maybe I need the cash for something else that's very time sensitive, and if you weren't out there trading, I'd have to sit on it for 3 weeks until some one came along that happened to want what I'm selling.
Well I guess the real question is how you define value.
^ agree. Also, trading isn't always a zero sum game: a long investor who made money and is selling off to another long investor is a perfect example.
Who the hell said traders have to justify their existence anyway.....do 99% of the rest of the human race have to justify THEIR existence???
Everyone is talking about liquidity, liquidity, liquidity... how about price discovery? Is that not equally important to the global economy?
I mean, coming from the banking side we use trading comps all the time. If I don't know what someone is willing to pay for a security, how on earth am I supposed to price it?
I'm doing research on HFT and there are two camps: those who say that HFT add value by providing liquidity and price discovery, and those who say that they only increase volatility and magnify the effects of market movements.
Really, you can find ample evidence for both sides of the argument.
My personal opinion is that HFT is a necessary evil. They account for a huge % of trading volume and really do add liquidity and price discovery, but I don't think they 'add value' in the traditional sense.
liquidity is necessary. we had liquidity in markets before the advent of HFT. we have a lot more liquidity now.
the question is - is that increase in liquidity worth the cost? the cost can be measured in terms of how profitable the HFT shops are, in aggregate. deciding if it's worth that much is pretty subjective, hence the confusion.
since you are doing "research" on the subject, you might want to draw that distinction. It's not like markets would stand still if all the algos disappeared. That would imply that liquidity didn't exist before they came along, which is clearly false. there is "more" liquidity, but I would argue that we pay too much for it - I could buy and sell most, if not all, major securities in close to real time before HFT shops drove most of the volume on exchanges. If that's the case, why are they necessary? They extract billions and billions of dollars more from markets than used to be the case, and I don't see a good argument that the extra volume allows the rest of us to trade more quickly than we could before HFT's came along.
NYCBandar - it's valid to call out price discovery as separate from liquidity, but I think the conclusion is the same. Liquidity (volume) levels pre-HFT shops were generally sufficient to get very good price discovery for most, if not all, major securities.
The HFT industry made about $5 billion last year, down from $21 billion in 2008, according to TABB Group white papers. It is a lot harder to make money in that market because there are more venues and traders, hence more liquidity. It looks to me like it has become a saturated marketplace. And the ones that are shouting the loudest about the dangers of HFT seem to be the big banks that are losing their already slim margins. But there is more money flowing through the hands of smaller firms and not as much in Goldman’s vault. That sounds like a long-term positive to me.
If i disappeared tomorrow the liquidity of the products I trade wouldnt change at all. "Trading" and "markets" in the abstract sense certainly add something but on the margin individual traders add nothing.
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