Does Trading Really Need to Justify It's "Societal Value"?

I go to a target where everyone and their little sister wants to go finance, and an interesting trend I've noticed is that people that I know are interested in finance frequently cite their reason to go pursue investment banking over trading because it creates "societal value", or something along those lines by helping companies access capital to grow and whatnot.

This opposed to trading, which they view as much less valuable - market making and providing liquidity isn't apparently as societally important as being one of Facebook's 100 syndicated underwriters.

Obviously, when it comes to things like high frequency trading, the criticisms are even more severe - that it "does nothing to provide societal value". I held my tongue when I wanted to respond that if they really wanted to create societal value they should go volunteer to teach in inner city schools, but whatever.

What I don't understand is why trading is always trying to justify it's "societal value", whenever this issue comes up. Especially for HFT, why does it matter if something provides societal value or not? I've read some posts by some people on WSO, and they're also critical of HFT and the like.

Yet, if you're able to capitalize on opportunities and make money without doing too much bad in the process - why must you go about launching a PR campaign to justify why what you're doing provides some sort of intangibles? I feel that having to justify trading (and it's automated cousins like HFT) is laughable when you've got industrial companies doing things like dumping their chemical waste into rivers and the like.

What are your thoughts on all of this - banking vs. trading's value to society, does trading even need to justify it's societal value, etc? Just to cite - I'm not an expert on HFT, algo trading, etc and might be misusing the terms, but run with it anyways.

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Comments (34)

May 5, 2012 - 7:03am
Zafrynex:
Running a portfolio and being up 12% in 4 months with a few thousand pounds has nothing to do with running a HF with billions under management.

I'm up 37% with my portfolio in a few months because I jumped on the Apple bandwagon. Does that make me a genius ?

This! I'm so fed up of people assuming that trading is easy because they got lucky on a few trades or are up 500% in 2 weeks on a paper account trading 3x leveraged ETFs.

May 5, 2012 - 5:18am

You have to remember that HFs move around hundreds of million dollars and often have less liquid positions than you have. You may be able to cut your position by 100% within a couple of seconds, for them it will take weeks depending on the size of the stake and the liquidity of the stock. And when they move, you can bet your ass that a lot of others will be moving too and thereby draining liquidity. Its a whole different ballgame.

May 5, 2012 - 11:35am
nauprillion:
You have to remember that HFs move around hundreds of million dollars and often have less liquid positions than you have. You may be able to cut your position by 100% within a couple of seconds, for them it will take weeks depending on the size of the stake and the liquidity of the stock. And when they move, you can bet your ass that a lot of others will be moving too and thereby draining liquidity. Its a whole different ballgame.
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Best Response
May 5, 2012 - 11:31am

two thoughts

(1) you are entirely correct. anyone who compares banking vs. trading in re: "societal value" is a complete douche and is delusional. there are indeed jobs that truly selflessly benefit society and can improve the lives of individual people when done well, e.g., teaching inner city youth, starting a homeless shelter, fixing cleft pallets in africa, whatever. for a banker to claim he adds more societal value than a trader, even if true, misses the fucking point entirely, because the amount of societal value that the banker supposedly adds is several orders of magnitude below the jobs i listed, which are truly noble causes. i know a guy like this. he's a banker in clean tech and acts like he's saving the whales. it's like, bro, if you care so much about saving the whales, how about you join a fucking wildlife conservation society. you're in finance for the money/status/whatever, just like everyone else, so shut the fuck up and do your job. i would personally love to be a math teacher at an inner city school, but unfortunately that pays about 1/20th of what i made in HFT, and a man's gotta eat, drink, and fuck.

(2) a fun thought experiment: say on monday, every single person in the world whose job is "______" decided to stay home. which job would cause the most chaos? "market maker" has got to be way up there, if not #1. certainly surpasses "banker".

May 5, 2012 - 3:40pm

I'm not sure what "Societal Value" is, but if you wanted to measure that you'd probably look at how much wealth society allocates to people who do various activities. If "society" stops valuing trading, you'll know because "society" pays traders less.

Of course, you could say that society is wrong here, but that just means you personally don't care about what the rest of the world wants.

If someone seriously thinks that trading doesn't create wealth, they can short GS and wait for the rest of the world to recognize their brilliance.

May 6, 2012 - 12:53am

I dont know of I am right but the profits traders earn for the bank is then used to finance other operation like investment banking. i.e they create more jobs for bankers So bankers have to depend on traders{ at least a little bit} to do add "Societal Value". So indirectly traders add societal value.

correct me if i am wrong.

DR
May 6, 2012 - 1:51am

I don't think most people on here know what they are saying when they just generally throw around the word trading. People are trading in all kinds of fashions and forms, and this is not a job like accounting that is understood by the majority of society so there is problem number one.

Trading definitely needs to justify it's value in many arenas. There are quant firms out there who attempt to jump into investments just before pension funds buy the product. Derivatives market is 4 times all financial assets on the planet and only certain banks are allowed to trade those products because they are "too risky". Meanwhile banks themselves didn't understand the products and yet they continue to trade them. people are apparently pricing derivatives solely on the underlying security. Goldman employees talking about ripping clients faces off for the good of the firm...People can come on here and try to act like tools and sociopaths but I don't think 95% of this pussy population would last on an etrade account.

Only an idiot would say trading has no societal backlash which may outdo any of the good it provides.

May 6, 2012 - 3:49am
jktecon:
I don't think most people on here know what they are saying when they just generally throw around the word trading. People are trading in all kinds of fashions and forms, and this is not a job like accounting that is understood by the majority of society so there is problem number one.

Trading definitely needs to justify it's value in many arenas. There are quant firms out there who attempt to jump into investments just before pension funds buy the product. Derivatives market is 4 times all financial assets on the planet and only certain banks are allowed to trade those products because they are "too risky". Meanwhile banks themselves didn't understand the products and yet they continue to trade them. people are apparently pricing derivatives solely on the underlying security. Goldman employees talking about ripping clients faces off for the good of the firm...People can come on here and try to act like tools and sociopaths but I don't think 95% of this pussy population would last on an etrade account.

Only an idiot would say trading has no societal backlash which may outdo any of the good it provides.

1.- Only certain banks are allowed to trade derivatives? Everyone can trade derivatives. If you meant structured products (which is not the same thing) again, no. Many companies and funds trade them. If a pension fund can't trade them is generally because THEY considered it too risky and promised investors not to do it. But there's no law or anything.

2.- Apparently some banks did understand the products and made some money out of it. Which you are also criticizing btw. The one's that didn't are not around any more, so....

3.- People don't price derivatives only based on the underlying. No one. For sure. Seriously, have you ever been on a trading floor? An options desk? Or are you just repeating everything you see on TV? Or did you mean structured products again?

4.- Show me some proof that someone actually said that. It might be true, but I've been some time around trading floors and have a decent number of friends in the trading industry and I've never ever heard anyone say anything like that.

5.- You think it takes balls the size of Texas to trade an etrade account? lol

6.- Trading has it's problems, and sometimes we do things wrong, but that doesn't mean that the industry is not necessary or that we're all out there to destroy the financial system and rip off old people and kids. We are just like anyone else with any kind of job. We do it the best we can. Of course sometimes we make mistakes, everyone does. The same way doctors kill patients accidentally, or don't know how to cure certain diseases, or an engineer builds a bridge that crumbles. That doesn't mean we don't need doctors and engineers and we should kill them all. Of course we all should pay for our mistakes, but that's it.

May 6, 2012 - 3:40am

Providing liquidity has value because it makes it cheaper to raise capital. HFT doesn't benefit society though. It's basically a money game between other HFT firms (see HFT Apology parts 1 and 2).

Finance only indirectly contributes to society. You're not directly producing wealth, you're merely helping someone else raise money while you extract a fee (I know I'm generalizing). I'm not picking on finance though, most jobs don't have much societal value (marketing, lobbying, luxury goods, etc). Unless you're an engineer or scientist, chances are that your job doesn't have much societal value.

Actors like Will Ferrell get paid millions to appear in atrocious films like Semi-Pro. Money != value contributed to society.

May 6, 2012 - 10:40am

Who the fuck cares what some kid with no knowledge of the real world thinks?

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

  • 1
May 6, 2012 - 10:51am

1)When I say derivatives market it is not options and futures trading it is known that derivatives market should imply that I'm talking about the OTC derivatives market. Otherwise I would say options or futures. And no not everyone can trade them they will only take on certain customers.

2)Great a market that was meant to spread risk in a healthy fashion ended up killing some and leaving others maimed and injured, while taxpayers were billed for the cleanup, very productive.

3)People do price more illiquid derivatives on pure fluff, or if lazy, just the underlying. perhaps you just don't understand mathematics to know what the fuck you're looking at. How else could the OTC derivatives market be worth 4 times the world's financial assets. People don't know how to price them and if you're lucky they'll take an ignorant kid like you to make you think you're adding value somewhere.

4) Goldman Sachs report and documentaries, ripping faces off is a phrase for overpricing derivatives to people who don't understand what is happening.

6)Stop talking like you are a trader for interning on a desk where you fetched coffee.

7) stop rebutting opinions on forums with a numbered list, It's annoying to respond to and stop referring to "friends" who are traders.

The argument is not that trading as some other useless functions in society(e.g. acting, marketing, dancing on the streets) is rife with a lack of value added. The argument is that it has augmented itself to take the little positive that it used to have by matching buyers and sellers in order to commit theft against the unsuspecting. It has become one of the most destructive forces in the world.

and jdawg I like that bit of python code you threw in

May 6, 2012 - 1:20pm
jktecon:
1)When I say derivatives market it is not options and futures trading it is known that derivatives market should imply that I'm talking about the OTC derivatives market. Otherwise I would say options or futures. And no not everyone can trade them they will only take on certain customers.

2)Great a market that was meant to spread risk in a healthy fashion ended up killing some and leaving others maimed and injured, while taxpayers were billed for the cleanup, very productive.

3)People do price more illiquid derivatives on pure fluff, or if lazy, just the underlying. perhaps you just don't understand mathematics to know what the fuck you're looking at. How else could the OTC derivatives market be worth 4 times the world's financial assets. People don't know how to price them and if you're lucky they'll take an ignorant kid like you to make you think you're adding value somewhere.

4) Goldman Sachs report and documentaries, ripping faces off is a phrase for overpricing derivatives to people who don't understand what is happening.

6)Stop talking like you are a trader for interning on a desk where you fetched coffee.

7) stop rebutting opinions on forums with a numbered list, It's annoying to respond to and stop referring to "friends" who are traders.

The argument is not that trading as some other useless functions in society(e.g. acting, marketing, dancing on the streets) is rife with a lack of value added. The argument is that it has augmented itself to take the little positive that it used to have by matching buyers and sellers in order to commit theft against the unsuspecting. It has become one of the most destructive forces in the world.

and jdawg I like that bit of python code you threw in

First of all, calm down, I haven't insulted you or anything. Seriously, I just want a civilized discussion, if that's possible on this site. Sorry if the numbering bothers you, but you made many points I wanted to discuss and it seemed a way to do it in order.

It is known that derivatives means derivatives. That includes options and futures. By the way, not all options are traded through exchanges. In fact many of them are OTC. You still haven't answered my question. Like I said, structured products are not derivatives. So could you please tell me what kind of derivatives were you talking about in your first post? Not options or futures. Forwards? Swaps?
I'm not defending bailouts, that's a completely different discussion. You misunderstood me. All I'm saying is some banks made quite some money in the subprime mortgage crisis. So some people clearly knew what they were doing. You haven't rebutted that point.
There are many factors that affect derivatives prices, not just the underlying. No derivatives/exotics/structured prods desk makes prices just by looking at the underlying. For example, in the more illiquid derivatives you talk about that lack of liquidity is a major factor on the derivative price. You can find quite illiquid derivatives on very liquid products. Have you ever heard about basis risk? Delta? Gamma? You think all the derivatives traders in the world haven't?
How can the OTC market be bigger than the underlying? Because derivatives are not only used to hedge cash positions, they are also used to take positions in themselves. Many of them are cash settled, nor physically settled, so there's no need for the derivatives market size to match the underlying. How is that related to how people price them?
I don't know what you mean by "they don't know how to price them". Of course not. There's not an objective right answer there. Like there's not a correct answer for how much a stock is worth. Or how much a bond is worth. You have to try to quantify things like liquidity, volatility and risks. You have pricing models, experience, information, etc... and you decide on a price. That's exactly a traders job. And yes, sometimes people fuck up, and that's when they lose money. But again, this is a completely different argument, I'm just saying that people don't price derivatives based solely on underlying price, and if you say there are please let me know where.

Greg Smith is not Goldman Sachs reports and documentaries. There's one guy who wasn't very good at his job that when leaving said that he heard things like that at the office. GS checked the emails and denied it. My point is I tend not to believe that, because I have friends who work as traders and no one speaks like that or hears people speak like that. It's not a very profitable long-term strategy to rip off clients. And it's not easy to do when you have clients like Tudor or Bridgewater or whatever. And I know you told me to stop referring to friends who are traders. Change friends for ex-classmates/roommate/colleagues/people I have beers with.

The argument is that like you said, traders match buyers and sellers. If buyers and sellers want to buy and sell something that is going to blow them up it's their fault, not the traders. By definition, derivatives and many structured products are a 0 sum game, which means that if someone sells/buys you something, they expect you to lose money. Otherwise they would lose money. And no one wants to lose money. If you do lose money, then that's not their fault, it's yours for buying/selling something you shouldn't have. As an example, if AIG wanted to sell enough CDSs to GS to bankrupt them, it's their fault for being stupid, not anyone else's.

May 6, 2012 - 2:53pm

Of course some banks made money in the mortgage crisis, the issue here is that only a rare group of bankers have I ever met that truly know what is going on in the banking world. People think because they are in hedge funds and banks getting nice bonuses, they're somehow brilliant and of the same cut. The latter group is most likely just on the bandwagon catching scraps. Anyone who really understands this capitalistic market we are in can recognize that powerful banks are capable of manipulating the entire economy with all the tools available to them so how could no bank profit; it was a deterministic event.

You think Greg Smith resignation is the first account? What about "Blood in the water" by Frank Partnoy. How the hell can you want to work on wall street and not know ripping people off has been a business model since "reminisces of a stock operator"?

You keep trying to attack my lack of clarity of derivatives market which is ironic since it is clearly the main issue, namely, what the hell is it and why is it there. Yes options can be traded OTC but why wouldn't they be traded on the market, unless they were "structured" differently? I'm trying to say, defining it as a structured OTC derivative market adds no more clarity than by just saying the derivatives market; because you just start getting redundant. I'll be honest, I don't understand the OTC/derivatives/structured/quant/illiquid/non-option(forward,future,swap) market but I'm wondering who does. It is a world casino and any trading profits in my opinion are based purely off of probability.

The fact that you throw around words like delta and gamma when speaking of pricing tells me you don't know how functions in math are derived in the first place so how could you use them for derivatives outside of options? e^π is transcendental yet e^iπ is -1. Things may appear similar in there outcome and yet the model does not need to relate in some general form. And you have become confused from being thrown into a situation beyond your understanding. It's funny because an eighth grader would tell you it should never be possible that a market be bigger than what it represents(they would probably think of a grocery store which sold more ice cream than it had and people still bought Ice cream that wasn't there). A derivative of a derivative is a paradox. The fact that you believe a financial derivative of a derivative should exist tells me there is a lack of understanding.

I'm glad you brought the standard argument of "if someone buys this from me they are the idiot if it blows them up". This is the kind of toxic stupidity that will destroy this society once and for all. If Mcdonald's pumps out hamburgers filled with mad cow disease and you buy one under this logic they should continue to sell them even after they find out since you should have watched the news. When a drug company finds out its pill causes heart attacks why should they stop selling them if they have warehouses of a million pills? Completely ignorant argument, keep trying to defend it.

May 7, 2012 - 11:40am

With all due respect, the problem here is that you don't know anything about derivatives, so you're not getting what I'm saying.

jktecon:
Of course some banks made money in the mortgage crisis, the issue here is that only a rare group of bankers have I ever met that truly know what is going on in the banking world. People think because they are in hedge funds and banks getting nice bonuses, they're somehow brilliant and of the same cut. The latter group is most likely just on the bandwagon catching scraps. Anyone who really understands this capitalistic market we are in can recognize that powerful banks are capable of manipulating the entire economy with all the tools available to them so how could no bank profit; it was a deterministic event.

I actually agree with you here. Many people rode the bull market without actually being very good. They don't really knew what they were doing and that's why the number of HFs that have blown up is immense. The point is that really doesn't have anything to do with the way trading serves society. Those people wanted to buy something, and the market provided them with said something. So it served it's purpose.

jktecon:
You think Greg Smith resignation is the first account? What about "Blood in the water" by Frank Partnoy. How the hell can you want to work on wall street and not know ripping people off has been a business model since "reminisces of a stock operator"?

I think we disagree about what ripping of a client means. Of course banks sell stuff to clients that makes them lose a lot of money. What I mean by ripping off someone is to give them an objectively unfair price. As a simple example, if the street is pricing smth at $1 and you sell it at $2. This can happen in moments/products with very thin liquidity, where there are no real public prices because no one is in that market (like if you try to buy a greek bond today). But if you give your client a fair price and he decides to buy smth which makes you a lot of money at his expense, that's not ripping him off. Because the alternative would be for you to lose a lot of money.
Don't get me wrong, the whole giving absurd prices to clients thing does happen in the street. But people don't scream proudly about it. In fact, if it's a decent account you generally are pressured into making it up to him by correcting the price or smth like that.
I will concede that if you do this to a small client no one will care and you would have ripped him off. But my point is that is not the business model, that's not smth people openly talk about or brag about, people are not all day looking for small unaware investors operating in illiquid markets to try to con them. They will just give them a decently fair price and try to make as much money out of the trade as possible.

jktecon:

You keep trying to attack my lack of clarity of derivatives market which is ironic since it is clearly the main issue, namely, what the hell is it and why is it there. Yes options can be traded OTC but why wouldn't they be traded on the market, unless they were "structured" differently? I'm trying to say, defining it as a structured OTC derivative market adds no more clarity than by just saying the derivatives market; because you just start getting redundant. I'll be honest, I don't understand the OTC/derivatives/structured/quant/illiquid/non-option(forward,future,swap) market but I'm wondering who does. It is a world casino and any trading profits in my opinion are based purely off of probability.

The fact that you throw around words like delta and gamma when speaking of pricing tells me you don't know how functions in math are derived in the first place so how could you use them for derivatives outside of options? e^π is transcendental yet e^iπ is -1. Things may appear similar in there outcome and yet the model does not need to relate in some general form. And you have become confused from being thrown into a situation beyond your understanding. It's funny because an eighth grader would tell you it should never be possible that a market be bigger than what it represents(they would probably think of a grocery store which sold more ice cream than it had and people still bought Ice cream that wasn't there). A derivative of a derivative is a paradox. The fact that you believe a financial derivative of a derivative should exist tells me there is a lack of understanding.

Options are traded OTC because there are vanilla options and exotic options, and you don't trade exotic options in exchanges because they don't want to.
I attack your lack of clarity on derivatives because you don't know the difference between a derivative and a structured product. You keep talking about OTC VS Exchange traded and it has nothing to do with that. Derivatives are things like options, swaps, futures or forwards. Vanilla options and futures are exchange traded, swaps and forwards aren't. But everyone understands them, they are fairly simple products, and extremely liquid, unlike what you said. Structured products are things like ABS or CDOs, which is what you were referring to in your first post. The way structured products work is very different from the way derivatives work, which is the point I was trying to make.
Don't attack me or my math knowledge if you are the one who doesn't know how to derive outside options, and not even that. You are looking at it from a very narrow perspective, which comes from the fact you think only the underlying affects a derivative price. Like you said, you don't understand the derivatives markets. As you know, you can derive any function respect to one of it's variables. You use this because you want to know how a product price will behave with a change in one of the factors you used to price it. Delta and gamma in options. How much does my call price move if the stock moves? But also, how much does the price move if the implied vol moves? That's why you have Vega. How much does the price move each day that it becomes closer to expiration? That's why god created Theta. And you use duration and convexity in rates. How much does my swap/bond/etc.. price move if there is interest rates (the underlying) move 1 bp? So yeah, you derive outside options, and as you can see, many things affect a derivative price, which is where you were wrong in your original post.
A derivative of a derivative is not a paradox. Don't you know what a second derivative is? The first derivative of a first derivative. I don't believe they should exist, they do exist. The fact that you don't know that tells me you know shit about derivatives. For example, in rates your cash product would be bonds, derivatives would be swaps, IRFs, FRAs and Bond Futures. Second derivatives would be options (where the underlying is a bond future or a swap, so yeah, options on derivatives) or swaptions. Don't believe me? Look at interest rate swap futures here if you want: http://www.cmegroup.com/trading/interest-rates/files/IR-245_Swap_Futures_Fact_Card.pdf You can also check options on bond futures if you'd like.

Do you know the difference between cash settlement and physical settlement that I referred to in my previous post? Because your example is ridiculous. Physical settlement requires the delivery of the underlying. So if you have a call option, I'll give you the stock and you give me the money. But cash settlement doesn't deliver the underlying, it delivers the difference in cash. So if you have a call option for $5 and the stock today is worth $6, I give you $1. But I NEVER give you the stock. Therefore, the limit is not the amount of underlying, the limit is my balance sheet. The physically settled market can't be bigger than the underlying market, but the derivatives market can. The number you are throwing around is completely meaningless because of this and because of the way some derivatives work. Do you know what an interest rate swap is? In an interest rate swap, the principal is never exchanged, just the difference in rates, so the fact that the market is around 400 trillion doesn't mean anything, because it's money just used for calculations. The actual cash flows and the value of the swaps is measured in bps of that.

jktecon:

I'm glad you brought the standard argument of "if someone buys this from me they are the idiot if it blows them up". This is the kind of toxic stupidity that will destroy this society once and for all. If Mcdonald's pumps out hamburgers filled with mad cow disease and you buy one under this logic they should continue to sell them even after they find out since you should have watched the news. When a drug company finds out its pill causes heart attacks why should they stop selling them if they have warehouses of a million pills? Completely ignorant argument, keep trying to defend it.

Please don't call me stupid and ignorant when you don't know what the f*** you're talking about and you use ridiculous examples. When I sell you a MBS like the ones that caused the crisis, you are disclosed the details of the mortgages that compose it. Since you know nothing about MBSs, I'll explain it rephrasing your examples. If McDonalds pumps out hamburguers made of mad cow meat, AND THEY TELL YOU it's made of mad cow meat and because of that they only cost $0.01 and you buy them, it's your fault if you get mad cow. If Pfizer sells a pill that causes Heart Attacks AND THEY TELL YOU it causes heart attacks and because of that it costs $0.01 and you buy it it's your fault. There's a huge difference. Banks didn't tell clients they were selling them American and German bonds and then gave them subprime mortgages. Clients wanted to buy subprime mortages because they wanted the extra yield and were comfortable taking the risk. If they miscalculated the risk it's on them. The same way that if you feed on mad cow meat knowing it's mad cow because it's cheaper and you think you might not get the disease or someone will find a cure before you die, then that's your decision.

May 6, 2012 - 3:48pm

I think the main argument against trading is that beyond a certain level of liquidity (edit: probably the wrong word, whatever) - it doesn't really make society wealthier.

I like HFT because it's going to make a lot of traders unemployed and they will half to go into other professions (ie: ones that actually provide value).

Finance is shrinking and automation is the reason.

May 6, 2012 - 6:11pm

Reading some of these responses reminds me why I never post much on WSO these days. What is it about human nature that makes it so hard to say "Ya know, I'm really not too knowledgeable about this subject. Let me not spout out stupid bs."?

  1. Some responses have danced around the issue, but one way of wondering if traders add value is by asking the question "is the labor market perfectly efficient or at least efficient enough?" If you think that the labor market is efficient enough, then the fact that the trading industry is still around and generally profitable, argues it does add value. While this could be a whole post on its own, I tend to think that the labor market is efficient enough (at least on an industry-level, rather than an individual participant-level). Like any other market, it all comes down to supply/demand. People hate on the huge salaries of the top pro sports players, but people cast their vote by attending the sporting events, buying the merchandise, and being entertained by them. Similarly, people think teachers / soldiers / other public services jobs deserve to be paid more. The fact of the matter is though, the supply of people to those professions is high enough that the demand doesn't raise the price. If the trading industry didn't add value, I don't think the market would, after this long enough time period, still be compensating it as well as it does. Whether the demand is for algorithmic execution, hedging, market-making, or whatever else may be, the consumer demand still exists. The thought experiment of which job not showing up to work creates the most chaos is interesting, but it ignores which job not showing up to work destroys the most beauty. Imagine if all entertainment industries disappeared - there wouldn't be much chaos, but there wouldn't be any more music, movies, or plays that bring happiness to millions of people daily.

  2. I don't think you can group all types of trading together. To me, the need for an efficient commodities market giving farmers/businesses the ability to hedge is much more important than what HFTs provide to the equity market. Similarly, I think the primary equity market is more important than the secondary equity market. I think Mark Cuban has it right: "Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings. What percentage of the market is driven by investors these days ?"
    http://blogmaverick.com/2011/08/08/what-business-is-wall-street-in-2/

  3. Stupidest quote in the whole thread was by ProspectiveMonkey: "Trading really isn't that hard if you understand the basics and minimize your risk exposures. It is just BS that people get paid to do a thing that is very easily considered a "second job". For example, I work in consulting and run a portfolio of my own (shitty brokerage account) and am up 12% in just the first 4 months. Given I am extremely young and able to take tons of risk I still beat 90% of the HFT and HF returns. " It is BS that traders get paid because other people trade on the side? I play sports after work, so all sports players shouldn't be paid? I go home and cook dinner for myself, so no restaurants should be paid? There was no need to tell us you are extremely young - we all realized that by the stupidity of your argument that trading is easy because your e-trade account made 12%. LAWLZ!

May 6, 2012 - 6:34pm

You were reminded of why you don't post so you fail to read the aforementioned posts and repeat everything that has already been said.Troll?

You are the idiot who is now grouping all traders together in your statements. Perhaps you should be so kind and stay on your course of not posting. You sound just as ill prepared to answer the question as any of the others which you amalgamated in your post.

May 6, 2012 - 7:28pm
jktecon:
You were reminded of why you don't post so you fail to read the aforementioned posts and repeat everything that has already been said.Troll?

You are the idiot who is now grouping all traders together in your statements. Perhaps you should be so kind and stay on your course of not posting. You sound just as ill prepared to answer the question as any of the others which you amalgamated in your post.

My post raised a bunch of new points, so I'm not sure you read my post at all. I was the first to explicitly propose that the labor market is industry-level efficient, but not efficient at the individual-level. I was also the first person to quote Mark Cuban. And I actually didn't group all traders together in my statements. I very clearly stated that I think the hedging done in commodity markets is very important, where as HFTs in the secondary market are not. I also argued that trading serves a very important service in the primary equity market, but maybe not so much anymore in the secondary equity market.

Also, as a professional trader and as someone who published research on this topic with the London School of Economics, I think I'm actually pretty qualified to argue this.

Yep, I'm definitely a troll. It's sad, but you actually win in the end because myself and others who are actually working on Wall Street do stop posting because of people like you. Guess I'll crawl back into my whole for another 6 months.

May 6, 2012 - 8:35pm

Congrats, on publishing a paper with LSE, however, I don't see where this ties in to anything that's being discussed. I would suggest you don't throw around credentials and job titles as a means of defense for your argument. There are plenty of situations where the simple-minded are better suited to answer more complex questions.

The Mark Cuban quote was not very impressive, sorry, I had already made the point of how wall street was about efficiently matching buyers with sellers so it seemed redundant. Your post seemed to mimic what I had said, unless that was just in my mind, you simply expounded on the positive facets of trading.

And if it wasn't clear I'm not really impressed by any trader just for a job title nor should anyone be. If there is a kid who made a great profit over the course of the last ten years by studying economic events he is far more qualified than you to answer such questions. Unless you accomplished such a feat as well? Chances are there is likely an equally if not more qualified candidate somewhere on this site. This was a question on trading, if you wanted your prestige to count for something you should be filling out excel sheets in the investment banking department.

May 7, 2012 - 2:03am

The primary market cannot exist without a functional secondary market
A growing economy with growing companies cannot exist without a functional primary market
A growing economy with growing companies thus cannot exist without a functional secondary market.

Trading does justify its societal value, just ask red lobster and macys and safeway grocery stores what they think about the volcker rule

http://compliancesearch.com/wallstreetjobreport/volcker-rule/macys-red-…

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  • 1
May 7, 2012 - 9:31am

Societal value as a unit of utility is rewarded primarily by monetary means. Hayek explains this best in his description of money replacing smaller, less complex transactions where a 'thank you' or simple gesture would have been the extent of compensation. So money is a societal "thank you" across distance and removed from familial limitations. For example, people like to think that teacher of all strips are of the highest social utility, but that is not the case. What society values is anyone who can contribute to the improvement of society as a whole. We don't value education as an end- it is a means that hopefully provides us with the tools to improve our world. Hence, why school teachers are not among the most highly compensated in most societies. Society values results, not intentions; and it rewards those involved in the results proportionately to their involvement them bringing about. Teachers may intend to do good, and many do. But, as far as they are standard practitioners of their profession, they are likely far removed from the innovations that have changed out world.

And this works in trading, only more so. As the time scale is decreased from monthly to daily to a few seconds, trading is a negative sum game (factoring trading costs). The profits of one trader can be attributed, more or less directly to the loss of another. There is some question if the marginal increases in liquidity created by frequent trading are worth the net cost. But the money always goes somewhere, so tracking the 'benefit' becomes rather arcane and slightly arbitrary (Is society better off because MS or E*trade got some commission? Don't know, don't care) So, whether or not, trading is a societal value is kind of besides to point, with respect to the individual. All you have to be concerned with is: Are you better than the guy you are trading against?

Bene qui latuit, bene vixit- Ovid
  • 3
May 7, 2012 - 12:26pm

a financial derivative of a derivative is not a mathematical function derivative of a derivative. How could you even compare the two in this context? That's why I made it explicitly clear that I was talking about financial derivatives. Nowhere near the same, other than nominally, so again I don't think you know what your talking about. Do you think you're losing me by throwing around ABS,CDO,MBS acronyms? There are also options on these "structured" products so are those not structured?

You've allowed yourself to fall into a world you don't understand and you can keep attempting to justify it through formulas given to you but not even the banks you work for actually care about this garbage. It's a scam, a money-making tool not unlike the tech bubble of 2000 and as long as they can keep morons like you throwing around bull shit formulas they'll be more than happy to keep the train rolling.

Regards.

May 7, 2012 - 12:33pm
jktecon:
a financial derivative of a derivative is not a mathematical function derivative of a derivative. How could you even compare the two in this context? That's why I made it explicitly clear that I was talking about financial derivatives. Nowhere near the same, other than nominally, so again I don't think you know what your talking about. Do you think you're losing me by throwing around ABS,CDO,MBS acronyms? There are also options on these "structured" products so are those not structured?

You've allowed yourself to fall into a world you don't understand and you can keep attempting to justify it through formulas given to you but not even the banks you work for actually care about this garbage. It's a scam, a money-making tool not unlike the tech bubble of 2000 and as long as they can keep morons like you throwing around bull shit formulas they'll be more than happy to keep the train rolling.

Regards.

This post really shows that you honestly have absolutely no idea what you're talking about, and just assume it's a scam because it's on a much higher level than you understand. That's why you can't rebut any of his points--you have no understanding of any of these products, and just assume like all other sheep on main street that the products are a "scam" used to make money, rather than look for the actual truth. Maximus just took you to school, and you can't even begin to refute any of his points because you don't understand them or realize you were wrong and want to ignore that fact. Whatever.

oh, and options are not a zero sum game. so you're wrong about derivatives being zero sum.

May 7, 2012 - 12:50pm

Options aren't a zero sum game now wow haha. I wonder how black-scholes works now.

And ya I'm on main street making more money than you so no I don't really give a shit what building your huddled up in.

May 7, 2012 - 12:50pm
jktecon:
Options aren't a zero sum game now wow haha. I wonder how black-scholes works now.

I knew you would say something like that, and once again this shows how fucking little you know about how these things work in practice.

Google "delta hedging", idiot. a vanilla option is zero sum, but not when traders continuously delta hedge a position(WHICH IS ALWAYS DONE BY MARKET MAKERS). but you probably don't know what that is, or assume its bullshit, or something like that.

May 9, 2012 - 11:17am

Lol. No, an option on a structured product is not a structured product, it's a derivative. You still don't get it.

You haven't rebutted any of my points and it's pretty clear you don't know anything about derivatives, so I'm done trying to explain things to you politely so you understand what I'm saying because you obviously are too stubborn to listen and don't know how to have a discussion. You're just trying to discredit everyone without using any argument whatsoever besides "you're all idiots who don't know what they're doing". You are so full of yourself and so arrogant that you are arguing about things you don't know anything about, and when answered politely you resort back to insulting and preaching about knowing everything without arguments like you're 12 years old. I mean, look at you, arguing with an options trader like leveRAGE. about how options work. It's pathetic.

So I'm done responding to you. People charge for finance lessons. Go and read investopedia or something. Unless leveRAGE. wants to waste his time some more.

May 9, 2012 - 1:58pm

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