It makes perfect ironical sense too, we should have seen this coming. Developers are some of the best armchair economists, or like to think they are. Add in the libertarian political strain with some VC/startup evaluations and you've got what we have now: an inflated decentralized currency with a market run by a centralized tech company with infighting of developers (miners) over very shaky economics who have formed into political factions over technical decisions to make even worse economic decisions, all while the people who know whats going on profit massively.
... and this is why I didn't get on the Bitcoin train when I was first fascinated by it in 2009. Too much RonPaulnomics in the community, a refusal to discuss Gresham's law and an unwavering optimism in that transaction costs melt away magically.
Then, me and my intellectualism lost big to the australopitheconomists-with-crypto.
If nothing else blockchain creates tons of entertainment value. Something completely crazy seems to go down every day. It is like a reality show on a criminal channel
Maybe I'm too "left wing", but if you ask me short selling, complex products and high frequency trading are among technological "improvements" that have led actual stock exchange to an ugly mess where biggest profits are made by "scamming" efficiently other users.
Should regulators forbid (or tax more) some (or all) of this mechanisms markets will quickly resume to what they should be, places for people to invest money on companies that produce value.
So yeah pretty impressive to see that currencies based on unicorn blockchains of the future jump right into the old bandwagon of making up complex financial instruments that few people really understand on top of an experimental core concept.
I wouldn't call your views "left wing", just a bit ignorant of market theory, history, and practice.
I mean, the Dutch Tulip Bubble was driven by derivatives (and in particular, a law change forced by the politically connected that retroactively changed some future contracts into option contracts), so if you're looking for some halcyon age prior to "complex products", bailouts, and people using lobbying to reap outsize profits, you're apparently thinking of the 1500s, if not earlier. :)
Similarly, short selling is integral to markets correctly performing their role of allocating investment. Saying "we should ban this thing required for A to work so we can get back to having A work" is...not a compelling argument.
Ok so how on earth does the fact that derivatives permitted the tulip Bubble is an argument in favor of derivatives?
It might a question of point of view. Maybe you focus more on tulip frenzy financial opportunities while I focus more on people that have been burned by it...
And yeah if you want to trace it back to 1500 no problem with that, old does not always equal good. It like copyright laws written prior to widespread of computers. Is it right to let them unchanged because they are old while humankind could technically share knowledge and arts at a scale never envisioned just 10 years ago?
> Ok so how on earth does the fact that derivatives permitted the tulip Bubble is an argument in favor of derivatives?
It's not, not was I making an argument in favour of derivatives. (I'm generally in favour of them; I just wasn't making that argument.)
Rather, I was responding to your argument, which I would paraphrase (I hope not unfairly) as "I hate these new inventions, we should go back to before they existed, when markets worked properly!" by which I suspect you meant the 1950s, but really it's the 1550s. :) (And given how different markets were back then, I'd even go further and say there has never been a time when markets worked the way you imagine. I'm not even sure they could.)
In short, if you don't understand the history of financial markets, your conclusions based on your flawed understanding of that history will have greatly diminished value.
> old does not always equal good
Quite right. But it's very different to say "the last 500 years have been a mistake" versus "the last 50 years" or (especially) "the last 5 years". For one thing, it's a lot harder to imagine the counterfactual.
I can guess what the world would be like if the Gramm–Leach–Bliley Act had never passed (probably very similar to the current day, but again, that's a separate argument); I can't imagine what the world would be like without derivatives, because they have been a part of the past 500 years of development of our economy, laws, and culture. A change of that magnitude requires extraordinary justification.
I suspect it is even older than 1550s. I'm a farmer with land who needs seed. Another farmer is willing to front me seed in exchange for grain in the fall. That is a contract.
Simple derivatives like calls and puts are unbannable.
Observe that I can replicate the payoff of a call option by borrowing money to buy the stock [1] or replicate a put by shorting a stock and lending money.
I'd say you don't really understand what you're critiquing; you think those things are bad because you heard they were, from someone else who likely doesn't understand it either. There's absolutely nothing wrong with short selling or high frequency trading. Short sellers help keep prices fair and companies honest, HFT makes trading cheaper for everyone.
The markets are worse without them, the market was worse before HFT which is the only thing new here, trades used to cost way more due to wall street middle men taking a big cut of every trade, far far bigger than HFT's take now. The only people who have a logically valid reason to hate HFT are the old school manual traders who were displaced by them and can no long make a living trading chart patterns. As late as the 70's and 80's there were people getting rich with strategies as stupid simple as buy the 10 day high and sell the 10 day low. Those people hate HFT, it took away their cash cow.
HFT is a sign of a healthy free market, better traders came in and offered to take your trades for far less money than the manual traders could, and took over; that's healthy competition, and they competed with each other driving the prices lower and lower until they hit the penny. Now they all fight over that penny to see who can be fastest because congress won't let them compete on price anymore (the sub penny rule) so they compete on speed instead.
> I'd say you don't really understand what you're critiquing
I'd say that you are assuming that optimizing for price is good, and presupposing how a market should be judged. Cheaper is good when it represents new innovation, less energy waste, and similar improvements. Cheaper can also mean cuts to wages and jobs, or a reduction in quality.
> There's absolutely nothing wrong with short selling
Leverage can be used for good, and sometimes it's used irresponsibly. As this thread's article demonstrates, short selling also creates systemic risk.
> trades used to cost way more due to wall street middle men taking a big cut of every trade
Eliminating middlemen and/or reducing transaction overhead costs do not require high frequency. You're seeing effects of technological improvements and better regulations. The same improvements also benefit "slow" trading.
> chart patterns
> getting rich with strategies as stupid simple as buy the 10 day high and sell the 10 day low
"Buy low, sell high." is the foundation of any successful trading strategy. HFT (when successful) is literally the same thing at much shorter time scales and improved heuristics. Machine learning can probably provide more detailed at a much finer-grain than a simple 10 day sliding window. Again, this does not require high speed.
> HFT is a sign of a healthy free market
It tells you little about the health of the market; HFT is a sign of a market uses short-term transaction ordering heavily when reconciling trades. It's entirely possible to have a healthy market batched trades that all execute at the same unified price.
> I'd say that you are assuming that optimizing for price is good,
No, capitalism assumes that. HFT traders offer a product to the free market, they sell liquidity and they do it cheaper than their old school competition, there are willing buyers, that is the only justification they require to exist.
> Leverage can be used for good, and sometimes it's used irresponsibly. As this thread's article demonstrates, short selling also creates systemic risk.
Leverage and short selling are different issues, that leverage can be dangerous is not a valid critique of short selling, you're trying to move the goalpost, this is a fallacious argument.
> Eliminating middlemen and/or reducing transaction overhead costs do not require high frequency.
No one said it did, however HFT does do that, which is what was claimed, so again, a fallacious and baseless critique.
> "Buy low, sell high." is the foundation of any successful trading strategy. HFT (when successful) is literally the same thing at much shorter time scales and improved heuristics. Machine learning can probably provide more detailed at a much finer-grain than a simple 10 day sliding window. Again, this does not require high speed.
Again, baseless critique, no one said it required HFT. HFT trading sells liquidity cheaper than those old school simple traders, the market chose HFT.
Do you have any actual critique of HFT, or do you simply presume it's bad and then employ fallacious arguments that X doesn't require HFT? You quite literally have added nothing to the conversation. That it's possible to have a healthy market without HFT is irrelevant, it asserts HFT is bad without evidence, HFT traders have the same right to trade that anyone else does, you don't just get to ban them because you don't like them without cause. That something still works without HFT is not evidence against HFT any more than the fact that I can still travel without a car is evidence against cars.
"Leverage can be used for good, and sometimes it's used irresponsibly. As this thread's article demonstrates, short selling also creates systemic risk."
What critics of short selling are often unaware of is the role that short holdings play in dampening a market crash.
The act of unwinding your short position involves buying the stock which means that for every tick downward in stock price there is new upward pressure on the price as buyers step in to cover their short position.
Were these constant, ready buyers not extant, market downturns can turn into precipitous crashes very quickly.
I should have used more specific language; I'm not trying to argue that short selling is "bad". The benefits - such as dampening a crashing market - are large enough to accommodate some risk. I'm primarily addressing the claim that, "There's absolutely nothing wrong with short selling". Ignoring small, acceptable risks is normalizing deviance[1].
HFT doesn't front run trades, that's a misconception and really just a way to slander HFT as evil. Calling their misconceptions legitimate is an abuse of language. Front-running is a crime, it has an actual meaning and you are misusing the term. Front-running is when a broker buys or sells using advanced knowledge of trades they're making on behalf of their clients, i.e. it is risk free and is theft. HFT does not front run their clients, they attempt to trade faster than their competition at risk, these are vastly different things and to call HFT front-running is dishonest slander.
There are no legitimate complaints against HFT trading that aren't simply misconceptions about what they do or how markets work.
No, front running is risk free because it uses inside information, that's why it's illegal. Trying to trade faster than someone else is not risk free, requires guessing, is gambling, and is not illegal, and is thus not front running. What you're claiming is simply wrong. So please do explain why you think HFT is doing something wrong. It doesn't matter what we call it, you're claiming HFT is doing something they are not doing, they are making educated guesses and trading on that guess, same as any other legitimate trader.
There is no risk involved in HFT frontrunning. There is however an investment cost for having lower latency connections than others. There are no guesses. And not sure how what I'm claiming is wrong. This has been the entire reason why IEX exists.
False. If there were no risk, it would be illegal, and your'e still tossing out that incorrect term without explanation as to what you mean by it since you clearly can't mean the illegal practice of front-running that we've already agreed they aren't doing.
> There is however an investment cost for having lower latency connections than others.
Not relevant.
> There are no guesses.
False.
> And not sure how what I'm claiming is wrong.
Because it's simply not true. Once again, you've ignored my question, you still cant' explain what HFT's are doing wrong, my guess is because you don't actually know what you're criticizing so you toss out flash boy hyperbole like front-running without actually being able to explain what you mean.
> This has been the entire reason why IEX exists.
The IEX exists as a reaction to traders who were displaced by HFT creating a desire for an exchange that doesn't allow it; it in no way proves HFT is doing anything wrong. It's nothing more than marketing capitalizing on fear to establish a new exchange, perfectly legal, but it doesn't make the irrational fear against HFT legitimate.
The risk is the same risk any other trader takes, they predict price will go one direction based on data they've seen elsewhere and it turns out they're wrong, or the misjudged the volume. HFT is not risk free, you're claiming it is is simply not based in reality, ask any of the many HFT firms that have gone bankrupt how risky HFT is. Claiming someone is trading risk free is essentially accusing them of a crime, where's your evidence to back up this slander?
Once again, you've ignored my question, you still cant' explain what HFT's are doing wrong. It doesn't matter that some people don't like them when those people can't even rationally explain why they don't like them. You still can't explain why you don't like them without falling back on false facts and I've asked many times.
Healthy competition optimizes for value, HFT is just optimizing for profit. These are not the same. It's paperclip maximizing, using an economic Maxwell's demon.
> Healthy competition optimizes for value, HFT is just optimizing for profit.
Value is measured by profit, if what the HFT's were offering was of no value, there would be no profit in it as no one would buy their liquidity. HFT sell liquidity, that there are willing buyers proves their value. Quite simply, you do not know what you are talking about.
Short selling is an incredibly important piece of any reasonable stock exchange. It also dates back to 1609 so it's not exactly a new technological innovation.
Short sellers were blamed for the Wall Street Crash of 1929.[15] Regulations governing short selling were implemented in the United States in 1929 and in 1940.[citation needed] Political fallout from the 1929 crash led Congress to enact a law banning short sellers from selling shares during a downtick; this was known as the uptick rule, and this was in effect until 3 July 2007 when it was removed by the Securities and Exchange Commission (SEC Release No. 34-55970).
So one is actually entitled to wonder if regulations are not needed. While the article fail to explain categorically in which way it is "incredibly important".
There's a really big difference between blaming short sellers for the crash, and short sellers actually being the cause for the crash. Short sellers got blamed, but weren't necessarily at fault. There's a further implication that the crash is the cause for the Great Depression, which is likewise fairly unfounded.
If there was short selling that could have been blamed for the crash of 1929 it was what is known as a naked short selling. Since non-market making short selling now requires having a locate, it is impossible to sell short more shares that one can reasonably borrow.
> me short selling ... are among technological "improvements"
that's why, to protect the pensions and savings of its citizens from a catastrophic collapse in equity markets a couple of years ago, the chinese government decided to ban short selling. up and up and up, baby!
i think the government should go one step further, and prevent anyone from selling stock lower than the price they paid for it. guaranteed profit for everyone!
> Maybe I'm too "left wing", but if you ask me short selling, complex products and high frequency trading are among technological "improvements" that have led actual stock exchange to an ugly mess where biggest profits are made by "scamming" efficiently other users
Short selling is what keeps the cheerleaders in check.
This. The market is supposed to be about circulating information (not necessarily making everyone well-off or saving San Francisco's Castro District or, or, or). And information that something might be overvalued is valuable information.
I'm not radically against regulation -- precisely because too often there are information asymmetries that markets (not only in capital but labor, consumer goods, etc.) can't penetrate -- but most people who think market economics should make things good (and be repressed otherwise) also think reality can be sustainably manipulated by good will, hope and faith in unicorns.
These types of valuations are exactly where we need short selling. There's no logical way to put downward pressure on these cryptos because the liquidity is impossibly thin and there's no real way to short them.
Or it's simply that people that invest in overrated value will get burned someday, instead of randomly anybody due to natural fluctuation being amplified by bots.
For exemple just look at the shape of AAPL in the long run, instead of a steady curve associated with profit growth, you have an unstable mess for no reason. And people that place selling stop (that brokers recommand because they it's "safer") happens to sell/buy at worst possible moment. And this is where profit from HFT actually comes... Not thin air random people getting burned.
If investing in a company mean more thinking because you could effectively bein burned by investing in bad stock I call that the normal state. Because currently the mindset of trader is more that even if it's non-sensical to invest in Unicorn-ass-corp, it still worth supporting it because they can make profits with options anyway as long as there is movement.
They are just exploring the solution space, with minimal baggage to hold them back. The real problem, is that people are trying to make a living off of something that is still experimental / alpha level maturity.
Seems like the people who do understand banking history are unwilling or unable to make any kind of improvements, at least in regards to the issues that digital currencies are working to address.
And why is so much money getting dumped into these constructs? AFAIK, it is speculators that are inflating that economy, not the coin devs hyping it as an investment.
If it's any consolation, money doesn't disappear, it just becomes someone else's. It's still in the economy. Think of it as an overpriced research project, that the media went nuts over.
Not sure if there are billions of dollars involved. For all we know, it could be just speculators trading crypto between each other.
I could not find any stats on the amount of fiat flowing in and out of these "exchanges", which, by the way, have zero oversight and tend to disappear every few months or so.
