Flash Boys is deliberately set up to suggest a “perfect world gone bad” scenario: As if, prior to the advent of HFT, … nobody ever got bad fills and liquidity was provided by a fairy godmother who never skimmed. It is … irresponsible, … dumb and deceptive, … to … talk about HFT without talking about what HFT replaced.
… Why … did floor traders and market makers play a key role in the function of markets for multiple centuries? Because floor traders provide liquidity. Liquidity provision is a service, and it has a cost. A discussion of what HFT replaced—with examination of new systems, old systems, and continuity between the two, with attendant pluses and minuses [would have been better]. Yet for Lewis it barely [merits] a paragraph.
… Liquidity has always been an issue. The more size you want to move, the more of an issue it becomes. There has always been a need for middlemen to provide it, and friction / incentive issues in doing so, ever since the fabled meeting under the Buttonwood tree.
In the late 1980s, the Justice department busted 46 traders and brokers in the Chicago trading pits. The stealing had gotten so bad, the FBI came onto the trading floor.
Flash Boys reveals itself as a tempest in a teapot on pages 52 and 64. (I speak here of the hardcover edition from Amazon.) When Lewis … uses real numbers, the frivolity of his case is revealed.
On page 52 … an HFT “tax” that amounts to $160 million per day on $225 billion worth of volume. That is significantly less than one-tenth of one percent.
It’s much easier to destroy than to build. I can destroy not just one £20,000 car, but all the £20,000 cars in a car park, with a little planning and maybe a few hundred expenditure (accelerants and matches). And I could do a decent job of destroying a car with only £10 (crowbar).
Nothing in his pockets but knives and lint.
Same with houses—fire for example is a very effective tool per-effort for ruining lives. Four skinny pirates with a modicum of guns & ammo can hijack a vessel that cost $10 million or $100 million to build.
Despite it being so easy to destroy, where I live things are quite peaceful. Nobody slashes all the tyres in a car park, for example. Why? Economic theory says that when the cost of something goes down we’ll see more of it. Shouldn’t this be true as well for the destruction of other peoples’ lives & property?
Let’s reflect for 11 minutes on a specific market, rather than on “free markets” in the abstract, for a real-world perspective on economic theory.
Simple fact that’s apparently obvious to everyone who trades muni bonds but not to me: 1 December is a common payout date, meaning that January & February usually have lower yields as there’s more money (tagged “for investing in bonds”) looking for its next home. So much for optimal selection of the best securities throughout all time or statistical arbitrage of the rates.
Not that there’s not an efficient-markets explanation for this or that Marshallian S&D is irrelevant. But there are some obvious kinks to it, right? You might thumbnail this as “institutions” if you have an economic-theory label gun in your holster.
Besides the regular cyclic dependence (I can easily imagine some theorist who doesn’t participate in the market assuming it must “obviously” be arbed away. Some papers on asset switching come to mind),
in this market we talk about fixed supply coming onto the market at a given time window, very different than a posted-offer (retail) or
so your econ 101 S&D picture wouldn’t quite capture let’s say $AMZN’s decision of how to list its bonds. There’s some invisible demand curve
(I drew this for an older post, not gonna re-draw an S&D curve.) that $AMZN is going to try to guess at (and they might hire some “banksters” to help them). Then they can delay or move forward that fixed vertical supply curve (they probably have pre decided how much they want to borrow based on their internal models and decision processes). So there’s a time element (try to list in Jan/Feb, if you “can” wait! Do or don’t list along with this other major issuance. Competing for the analysts’ attention. Etc.) and much less of a price element, since that’s pre-decided before listing.
Sure, maybe there’ll be an OTC secondary market that changes the price afterwards. But now already we’ve split an adze through the “perfect efficiency” idea, simply by questioning whether it’s the primary auction or secondary trading we’re calling efficient. Now it sounds much more plausible that markets with more volume and smarter participants are going to price more “accurately” (which we haven’t defined and couldn’t, since defaults are one-off probabilities) and simply by questioning the axiom we’ve undermined the theorists’ go-to assumptions. If you wanted to model this market, you might start with something quite different to “Assume fully informed traders and no arbitrage condition”. You might start with, like, actual facts or data on trade records, look at legal documents, record phone calls, ….
And what about the ubiquitous government-versus-markets dichotomy? Oh, snap! This is private investors lending small (not federal) governments money to build highways. Hmm, I guess that “four legs good, two legs baaaaad” dichotomy is incoherent.
As far as politics goes, GARVEE’s must be a really important political issue (how to arrange for surface transport across the United States), but as it’s not a sex scandal or on either American party’s agenda to trash the other, I guess it’s unfit for discussion in the news.
Any market I look a little closer at, if you squint you can see the EMH in the outlines. But the details are more complicated and much more like a transaction you can imagine real people (who can afford lawyers) engaging in. Very head-to-head, can-we-make-a-deal, size-matters, quantity-over-price, get-it-done-rather-than-optimise-the-exact-details, ….
Equally as much as I might want to show this to overzealous, oversimple free-marketeers, I’d show it to the anti-capitalist zealots too. Does this sound like a monopoly of power by either large corporations or plutocrats? There’s a competitive playing field gunning for however much money is out there, you have to argue your case (marketing) for why the people with investors’ money (let’s say a pension fund) should trust you’ll pay them back, in general a lot of “power” floating around but sounds like they keep each other in check. It’s not like $AMZN can force people to subscribe to its bond issuance. And I can even imagine a legitimate, contributive role for high-powered lawyers and investment “banksters”. Do the computer programmers at $AMZN know how to market and list securities, track down and convince the people safeguarding the big sacks of money to lend it to them? Other than a prejudice toward large size, Doesn’t sound very plutocratic to me.
Anyway. I listened to this and got the feeling I have many times on learning just some basic obvious stuff about real markets. Like wow, grand economic theory is missing details that are obvious to actual market participants, mired in overgeneralisations and simplifications, and the theorist who gets all tooth-and-claw about their holy assumptions needs to get more exposure to the real world.
Just from the merest actual facts about this market regime I’m already thrust into a “middle ground” where, sure, the price system, self-interest, and competition seem like they’re going to be pretty good and robust-over-time and so on. But certainly not “optimal”! And certainly not full Intrade-worshipper style, where price corresponds to exact probabilities and markets are a crystal ball | prediction engine. So the extremists on both ends lose, on this story.
Amazing what you can learn about the world when you actually observe it before writing the theory.
PS Obviously I don’t know anything about munis or corporate bonds. All of my “you“‘s and “I“‘s above can be interpreted in a strict sense as “Now that I’ve learned the very first thing about this real market, how does plausible do various abstract economic-theory ideas sound afterwards?” If you work in these markets and I said something wrong, please correct me.
1. “The sale begins when the customer says no”.—Randal J Kirk, billionaire.
So here you have a billionaire saying the same thing that all of my bosses in sales jobs said, and the same as Glengarry Glenn Ross’ famous line (which another sales boss send me the video clip as if it’s the realest advice ever), and it agrees with my experience doing sales.
Coffee’s for closers only. Of course I can’t know if I change the free will of the customers I’m working opposite towards, but it certainly feels like it. In retail sales, door-to-door sales, and less aggressive stuff that still counts as “selling” in the more abstract (but, thankfully, more respectful / refined) way, it feels the same: I’ve been through this transaction many times, I’ve honed my pitch, I’m ready for all the directions your mind could possibly go (“objections”), and my bread comes from making you do what I want instead of what you want. If you’ve done well in sales and don’t agree with Randall Kirk’s quote, please leave a comment sharing your experience.
If sales is an aggressive head-to-head game where I, the seller, am playing against you, the potential customer, and your limited cognitive space you’re dedicating to not being manipulated by me, then that’s very different to the Edgeworth story where you only buy something if it suits you at the price.
I just find it very hard to believe that all of the sales tactics you can think of — rebates, $x.99, fuel points, upselling ("get you to agree to a little more, then get you to agree to a little more"), deals that aren’t really deals, mail packets, catalogues sent to your home, commercials — aren’t effective in getting people to buy what they wouldn’t of their own accord buy. Why are these idiot millionaires "wasting" ad budgets year after year after year? Aren’t they actually more likely to be rational than the consumers since they dedicate more headspace to it, they team up, they organise, they research, they practice, they test, and they analyse their own performance quantitatively?
At least for me, I don’t think I can convince someone to buy something they truly don’t want — and very infrequently I’ll get called out on a subtle trick I’ve pulled (with no cost to me, so I’ll just do it again on the next person) — but I do believe I can “shade" or "influence" people to spend more, and while I’m probably top .001%, I am at least top 50% at that…and I’d guess maybe top 20% or even top 10%.
A business that solves a problem may be a good place to start if you’re trying to come up with a completely new product or service. May. But obviously the ultimate test is whether sales > costs by a wide margin. In other words I don’t need any assumptions or hypotheses to say that sales are the foundation of a business, whereas to do some kind of welfare theorem I do need to assume a lot.
2. “I could have done that”.
This is a big one for me because, like Bryan Caplan, I’m bitter that I didn’t have the perfect milk round. No BCG, no McKinsey, no Goldman, no Bear for me. But if you ask me, of course I would out-compete those lazy Harvard MBA’s who landed the good jobs! … Well, of course you can’t really believe me since I’m biased. But it’s no stretch at all to believe that not everyone gets a Bloomberg terminal so the competition to figure out who’s the best trader eliminates a lot of competitors before they can even be tested. Same with every job at a large organisation (and, of course it’s important to note that large companies control a lot of money and have a lot of profits … that’s how they got large).
There’s no dynamic, cutthroat competition where I, with my CV listing factory jobs and menial labour, get to challenge Consultant Who Makes Six Figuresfor his job every day. In fact, Consultant Who Makes Six Figures got a lot of special training (and got paid to have it) just by being let in the gates at Megacorp C.
I wasn’t picking up anything about financial markets at the salmon canning factory, and if I want to scrape together a trading account on my own to challenge a trader who had the right-looking CV to get past Megacorp's HR flacks, it would take me years of saving to get the kind of AUM that he was vested with after a year of pouring coffee for some senior person who really knew what she was doing. I never got to watch Senior Trader, I never got a fraction of Megacorp's AUM, and it's not because I was measured to be objectively worse or because I was outcompeted at the job in question, but rather because I wasn't judged good enough due to my Yorkshire accent, charity-shop suit, and ugly face.
Point being, just because you make a lot of money, doesn’t mean somebody else couldn’t do your job equally well, close to equally well, or possibly even better than you could. Converse to this, I’ve often seen bourgeois people assume that if they weren’t doing their specialist high-paying job, they would be kicking *rse equally well at something else. I find that hard to believe. Nobody hiring for construction cares if you used to be an MD, they want to know if you have any actual trade skills. So what if finance is “above” construction in pay? Being good at finance doesn’t translate to being good at everything else in the world, and actually I think there have to be some tradeoffs so the people who are good at one thing have to be worse at something else.
Anyway, winning the HR game and therefore acceding to a position of power where you’re hooked up to capital structures that allow you to contribute more to society, doesn’t imply that you deserve more money than the people who aren’t hooked up to the capital structures. Yes, your productivity will be higher and your output will be higher. But you didn’t win a fair fight to get access to the capital structure, you won the “looks good to HR” fight and even if you consider throwing ‘bows to get to the front of the line “fair”, it’s hard to square that kind of behaviour with “I’m an upstanding citizen who contributes to society and you’re a garbage collector”.
So OK, technically the richer people here are contributing more, so my title is not apt. But they aren’t better people than the lower earners. Given that it’s well-known that people who have to go through zillions of CV’s a year have other concerns than administering fairness, social justice, and moral dessert—why should we be surprised about that?
3. “There’s no money in taking care of the homeless”.
So you think you contribute more to “society" because you make more money? You must mean "the society pages" society! If your goal is to receive pieces of paper that are going to induce shopkeepers and airlines to provide goods and services to you, then you should probably provide services to the people who have the most pieces of paper to give. Duh. On the other hand, let’s say you don’t care about providing for yourself and invest all your capital in installing water purification systems for poor people around the world who die of cholera (the sh*ts). What are they going to give you? Goodwill, sure. But money? They don’t have any! The same principle applies in less exaggerated form to any consumer situation, which is why the other weekend I got a solicitation from a “dating website” with income categories >250k, >350k, >500k, >1M. It’s people looking for the easy score: dumb people with too much money. Not that I believe the people got to be rich by being so dumb; whenever I see a business with that air (except for iAmRich the iPhone app) I smack my forehead. But for example it’s smarter to go into B2B hedge fund services and bring together a bunch of secretaries to do all the paperwork for fund managers, than to start a coffee shop that needs to do volume and can’t charge much per customer. Again, duh.
Of course if you’re like me, you’ve read puff pieces in The Economist about how wonderful Unilever and Nestle are for marketing powdered milk to “the growing African middle class”, and the distribution is so wonderful and would be impossible by a government and the marketing department has figured out exactly the details of how to make a cheap product that suits them, and so on. Maybe that’s true. I don’t know, it sounds a little too heavenly on the corporations and like that kind of simplistic viewpoint The Economist likes to take. But I’m not trying to argue that capitalism doesn’t work. Just that it’s a fairly f*cked up state of affairs that some primates, because of possession of certain kinds of pieces of paper, get to eat caviar whilst others get to fish through trash. I’m not sure there’s a moral or ethical purpose to things being that way, in fact it would seem the opposite. But if you want to market to “the growing Indian middle class” you’re going to have to offer homogeneous products, find a way to make them very cheaply, and if you can really multiply it out times a billion then you win. But isn’t it much easier to make Instagram? Every iPhone app has as part of its business plan the fact that everyone who owns an iPhone ∈ the richest .1% of the world’s population AND has proven willing to spend large amounts of money on stylish, expensive toys. So who do you think is the easier mark: the hardened mother of 4 who has mastered the art of budgeting so that a small income can be stretched thin enough to support all 6 and even buy 4 presents at Christmas? Going to market 5 days a week and coming back empty-handed some of them? Or the brand manager with the expensive clothes and straight teeth owing to orthodontia, with loads of cash to blow, itself derived from providing services to well-heeled corporations staffed by well-heeled individuals? Yeah, I would rather have the rich client as my customer as well.
I’m not pretending I know everything about business or where all the opportunities are, I do recognise there’s money to be made in emerging markets, but just making the point that dollars don’t correspond directly to good deeds done. I would feel a little too populist using some finance examples of the “hatchet man” CEO coming in and firing a ton of people to make a lazy, sort of profitable company into a lean profit-smoking demon. That may or may not add a social value. But these kinds of examples should undermine the confidence of anyone who thinks that a band selling out is by definition a good thing because whatever the market rewards is whatever the market wants, and whatever the market wants is whatever’s good for society. No, that’s not even derived from neoclassical economic theory, it’s just a distortion that somehow went from doctors making more than sandwich fillers to an unwarranted and overbroad theory of every wage comparison in the society.
Fallacies are not simply crazy ideas. They are usually both plausible and logical — but with something missing.
Sometimes what is missing in a fallacy is simply a definition. Undefined words have a special power in politics, particularly when they engage people’s emotions. “Fair” is one [such word]. While the fact that the word is undefined is an intellectual handicap, it is a huge political advantage. People with very different views on substantive issues can be unified and mobilised behind a word that papers over their differing, and sometimes even mutually contradictory, ideas. Who, after all, is in favour of unfairness? Similarly with “social justice”, “equality”, and other undefined terms that can mean wholly different things to different individuals and groups.
He explained on Reddit that, regarding his Navier-Stokes paper, he submitted a paper about something else to a journal, and stuck the Navier-Stokes part in as a lemma. That way the journal wouldn’t label him a crank and reject the paper off-hand. (He needed to get the paper into a journal to claim the prize.) Sounds pretty smart.
But he also admits that the intent of the official statement of the problem is something different than what he proved — however "People should carefully check the wording before they promise a million dollars to whoever solves it."
I think that’s a serious flaw in his strategy. Is Clay Mathematics Institute legally obligated to give $1M to whoever achieves what they stipulated? I doubt it, because a promise isn’t a contract (no “consideration” in legalese).
It’s likely that they can just label him a crank or a crackpot without losing face. In that respect it was a terrible idea to publish more than one solution. If he claimed just one solution he might have plausibly played the “outsider expert” and got sympathy from those who couldn’t parse / check his answer. By submitting more answers, he probably lowered his total probability of getting paid!
(That’s autocorrelated error terms, i.e. a dynamical system.)
What are some more examples of that?
Hitting on lots of girls at the same bar / party.
Writing your resume so it’s general enough to apply in several different industries / positions.