patrick.net

Liquidity is used to justify HFT in milliseconds faster than a human can even register numbers on a screen in their brain.

marcus says

Maybe we should also do away with all wholesalers and retailers and middlemen traders of of everything. Manufacturers could just sell their goods through some not for profit government run hub. All transactions would occur online, and be delivered by drones. Hey, it could just be a high tech expansion of what the post office does now.

No, you're right. Let's create "market makers" for every good and service. If I want to get my Corolla washed, I shouldn't be able to just go to the local car wash--I should have to pay someone to "discover" the price for this service. Otherwise, how would I know how much it costs to get a car wash???

a href="http://patrick.net/?p=1285606&c=1233284#comment-1233284">marcus says

Let's just make some assertions that this all makes sense, you know, because obviously it just does, and stuff.

Weeeeeee ! It's fun pretending to know a lot when one really doesn't know squat.

That's all you bud. You can't even have a normal conversation about the merits of liquidity in the futures market. Your biases have so clouded your judgment that it's impossible to have a discussion with you.

tatupu70 says

Your biases have so clouded your judgment that it's impossible to have a discussion with you.

You're the one that said this:

tatupu70 says

They add no value to the US economy. They're a cancer.

That's kind of extreme. Yes, I was offended. And it's too stupid of an assertion to be the basis of any real conversation. But in spite of this I did try.

After you said this,

tatupu70 says

It adds nothing to the economy. Commodity trading should be about hedging risk--not gambling.

I prefer to promote activities that add value to the overall economy. Gambling is not one of them.

I made a couple of my best attempts to help you (or others) understand. I know it accomplished nothing and that you are close minded on the subject. But your argument is no better than this assertion.

marcus says

we should also do away with all wholesalers and retailers and middlemen traders of of everything. Manufacturers could just sell their goods through some not for profit government run hub. All transactions would occur online, and be delivered by drones. Hey, it could just be a high tech expansion of what the post office does now.

How does anyone even begin to explain how wrong that is, even if it might seem reasonable to some naive idiots. Manufacturers being able to sell quantity at a discount to entities that will take on large volume and risk is to the manufacturers advantage, and it's all part of a refined system that has evolved over many centuries to what it is now. A rather amazing system for distributing good and services. One could make assertions that middlemen don't add value. But not only is that not a proof, it isn't even a reasonable assertion to anyone that's studied how the system works.

The same can be said for the way that markets work. But you're right that you can make any blind assertion you like.

By the way, traders do pay taxes on profits, if they are profitable.

tatupu70 says

We have huge taxes on other forms of legal gambling-why not this one too?

marcus says

I made a couple of my best attempts to help you (or others) understand. I know it accomplished nothing and that you are close minded on the subject. But your argument is no better than this assertion.

Yep, you made some arguments, but I didn't find them particularly convincing.

marcus says

marcus says

we should also do away with all wholesalers and retailers and middlemen traders of of everything. Manufacturers could just sell their goods through some not for profit government run hub. All transactions would occur online, and be delivered by drones. Hey, it could just be a high tech expansion of what the post office does now.

The reason this is so wrong is that the vast majority of wholesalers and retailers were needed for distribution. Getting the physical goods to the locations where customers are willing to buy them. Do market makers perform this function? In the case of commodities and/or stocks, the exchange is the retailer. It's the location where people can go to make the transactions.

Not sure if you think the drone analogy is so ludicrous that it makes your point, but Amazon is already moving toward that business model.

You're right that traders do pay taxes on income so my analogy was poor.

tatupu70 says

Getting the physical goods to the locations where customers are willing to buy them. Do market makers perform this function?

No they perfom a different (but similar in the abstract) function. They buy and sell, providing additional supply and demand for the purposes of providing depth to the market, providing a price discovery mechanism that usually decreases volatility, that is compared to what would happen if a big seller brought a lot of contracts to market and had to wait for buyers without having any sense of how low he would have to go in price, and increasing the likelihood of fear or panic causing him to sell too low rather than being patient, when he doesn't know how many buyers are there.

You make assertions about these aspects of markets which have a long history of existing and working without any evidence that you have done any real research into what I'm even talking about. I really do feel that it's worthwhile to explore the opposing view, maybe do at least a little homework, before making blind assertions.

Arguments about the benefits or not of modern day high frequency trading are a separate discussion from the more general question of whether speculative trading provides a benefit to a market.

On the most simplistic level, speculators help keep markets honest. Trust me, given a chance if people say on the sell side of some commodity market thought they could rig the market in any way to make the price artificially high when they are selling, they would. But in order to do that, they need someone to bid the price up. IF there is no supply there to sell to this guy who is trying to move the price up to a fake level, he can do it easily. But if informed speculators are there to sell to this cheater - because they know that before long the supply will be there and the price will be lower, then now it becomes too risky, and even a losing proposition to try to bid the price up to a fake level.

I understand that concepts such as this are maybe even too much too take in, if you aren't really interested in understanding how markets work, so I'll leave it here.

(as a side note: I'm not total a believer in efficient markets theory or the idea that markets can not and never do get to a "fake" level. I think that there has perhaps been too much indirect govt involvement in some markets in recent years, and certainly the concept I just described can occur sometimes in slow motion, that is over longer time frames. Still, I do believe in markets. For those who bring up the oil market craziness of 07 - 08 as an example a speculation gone crazy ? I actually believe the oil market was reflecting the fact that we would not be able to sustain the then current rate of global economic growth. That is, markets are forward looking and we were on a trajectory that was unsustainable. The oil market ended up being one of the precursors of the impending crash.)

marcus says

No they perfom a different (but similar in the abstract) function. They buy and sell, providing additional supply and demand for the purposes of providing depth to the market, providing a price discovery mechanism that usually decreases volatility, that is compared to what would happen if a big seller brought a lot of contracts to market and had to wait for buyers without having any sense of how low he would have to go in price, and increasing the likelihood of fear or panic causing him to sell too low rather than being patient, when he doesn't know how many buyers are there.

Yes, we've been over that already. You think they add liquidity to the market. I say studies have shown that the value is greatly overrated as they add zero liquidity when it is needed most.

marcus says

You make assertions about these aspects of markets which have a long history of existing and working without any evidence that you have done any real research into what I'm even talking about. I really do feel that it's worthwhile to explore the opposing view, maybe do at least a little homework, before making blind assertions.

marcus says

I understand that concepts such as this are maybe even too much too take in, if you aren't really interested in understanding how markets work, so I'll leave it here.

OK, Marcus. Let me see if I can sum up the arguments that I am too stupid to take in:

1. It's always been done this way.
2. It adds liquidity to the market.

If and when you want to have an adult conversation, let me know. I can assure you that I understand anything you can post here. I may not agree, but don't misunderstand disagreement for misunderstanding. You can dispense with appeal to authority logical fallacies too.

Give it a try Marcus.

tatupu70 says

I say studies have shown that the value is greatly overrated as they add zero liquidity when it is needed most.

You don't even understand what you are saying here. IF a price is clearly way too high, and everyone finds out the value is way different at a given moment, a given second then of course expecting people to step in and buy at that moment is asking way too much.

Logic flaw: If speculators don't add liquidity when it is needed most (for example at the very second when extreme market moving news is coming out), then therefor they don't add liquidity the rest of the time ?

This is beyond stupid.

I would love to see your study, but won't hold my breath. . Maybe your study was one of those bullshit studies out there that have only one purpose, to back up the agenda of some mindless liberal that thinks that because of their powers of magical thinking, they know what works better than systems that are in place and working.

Statistics aren't alway used to lie. And it's not true that all researchers are mindless assholes with an agenda. But it does happen every now and then.

tatupu70 says

OK, Marcus. Let me see if I can sum up the arguments that I am too stupid to take in:

1. It's always been done this way.

2. It adds liquidity to the market.

Where does this fit in ?

marcus says

providing a price discovery mechanism that usually decreases volatility, that is compared to what would happen if a big seller brought a lot of contracts to market and had to wait for buyers without having any sense of how low he would have to go in price, and increasing the likelihood of fear or panic causing him to sell too low rather than being patient, when he doesn't know how many buyers are there.

or this ?

marcus says

On the most simplistic level, speculators help keep markets honest. Trust me, given a chance if people say on the sell side of some commodity market thought they could rig the market in any way to make the price artificially high when they are selling, they would. But in order to do that, they need someone to bid the price up. IF there is no supply there to sell to this guy who is trying to move the price up to a fake level, he can do it easily. But if informed speculators are there to sell to this cheater - because they know that before long the supply will be there and the price will be lower, then now it becomes too risky, and even a losing proposition to try to bid the price up to a fake level.

tatupu70 says

I can assure you that I understand anything you can post here. I may not agree, but don't misunderstand disagreement for misunderstanding.

tatupu70 says

If and when you want to have an adult conversation, let me know.

No, I'm done. You've proven where you are at on this and where you're going to stay. What I wrote in argument with you was for the benefit of others, or perhaps myself. I have no illusions about what it is you wish to be true, or about the magnitude, depth and breadth what you are closed to learning on this subject.

marcus says

You don't even understand what you are saying here. IF a price is clearly way too high, and everyone finds out the value is way different at a given moment, a given second then of course expecting people to step in and buy at that moment is asking way too much.

Of course I understand. Market makers buy and sell when there are already many buyer and sellers available. At time periods when buyers or sellers are absent, market makers do not buy or sell either. They're in the market when not needed, and out of the market when needed.

marcus says

Logic flaw: If speculators don't add liquidity when it is needed most (for example at the very second when extreme market moving news is coming out), then therefor they don't add liquidity the rest of the time ?

Except that's not what I said. I said they add liquidity when it's not needed. Not that they don't add liquidity.

marcus says

providing a price discovery mechanism that usually decreases volatility, that is compared to what would happen if a big seller brought a lot of contracts to market and had to wait for buyers without having any sense of how low he would have to go in price, and increasing the likelihood of fear or panic causing him to sell too low rather than being patient, when he doesn't know how many buyers are there.

That is basically the definition of adding liquidity. If you don't even know the definition of basic terms, how can you think you know more than anyone on the subject.

marcus says

On the most simplistic level, speculators help keep markets honest. Trust me, given a chance if people say on the sell side of some commodity market thought they could rig the market in any way to make the price artificially high when they are selling, they would. But in order to do that, they need someone to bid the price up. IF there is no supply there to sell to this guy who is trying to move the price up to a fake level, he can do it easily. But if informed speculators are there to sell to this cheater - because they know that before long the supply will be there and the price will be lower, then now it becomes too risky, and even a losing proposition to try to bid the price up to a fake level.

Same argument. It's liquidity.

Here's one study for you:

http://www.jstor.org/stable/25656291?seq=1#page_scan_tab_contents

tatupu70 says

Here's one study for you:

http://www.jstor.org/stable/25656291?seq=1#page_scan_tab_contents

And the inferences you make or conclusions you draw from this abstract, that are relevant to our disagreement here, are ?