What value do we create here?
astatespacetraveler.com
astatespacetraveler.com
Second of all, providing liquidity is very important. Sure, you are only shaving off a few basis points, but multiply that by a few trillion and you are creating serious value. How much value does a silly time-wasting video game provide relative to the efficient allocation of the world's capital?
Finance is an extremely exciting field, where machine learning, econometrics, physics, and just about everything else converge. Imagine a world without car insurance, where startups cannot offer equity, where there are no IPOs. Finance facilitates co-operation, trade, and, yes it is cliche, but world peace. If you are interested, please don't let the media and finger-pointing politicians turn you away from this exciting line of work.
I definitely agree that finance is an exciting field where a lot of interesting topics converge. However, the examples you give are way exaggerated. The full complexity of the modern financial system isn't really needed to facilitate trade/provide insurance/provide financing/whatever else. Those things don't go away if fewer people are trading inside spreads.
Yes, liquidity is important for a market. But it's not an end in and of itself. There is no value in liquidity. There's only value in what liquidity enables. It's like what Paul Graham always talks about, you have to make something people want. Liquidity is kind of like ball bearings. No one really wants ball bearings, but they're useful because of what they enable. Liquidity is the same way.
Edit: I'm also not suggesting that there's no value in making ball bearings or intermediate products, just that they are not the ultimate goal.
Liquidity, immediacy or anything else in the financial markets don't have any intrinsic value. The only reason the financial system exists at all is to facilitate the efficient allocation of resources towards the production of things that have real value.
And the people creating farm equipment fully realize that. When they create new equipment they do so in order to help farmers create food more easily.
In finance, there is a whole lot of effort and innovation, but it's hard to say how much of it is helping people create real value.
Burrito? Yes. Clothes? Yes. Art? Yes. Money? No. Liquidity? No.
People don't want liquidity the same way they don't want a tune-up in their car. Nobody wants "a tune up", but people want a working auto that doesn't break down. No one wants liquidity, but a heck of a lot of people want to sell something they have so that they can get on with their life, move somewhere else, buy a new home, invest in something exciting, and so on. If you think freedom and mobility are valuable, then liquidity is valuable too - because liquidity can be very important in letting you do go where you want and do what you want when you have something important you need to sell or relinquish before moving on.
"Burritos" beget nourishment.
"Clothes" beget modesty.
"Art" begets pretension.
The irony here is that the liquidity provided by our financial system permits the use of money to acquire all of these things. It is this very liquidity that also permits the allocation of work to those with the best skill sets and solutions for the problems at hand.
I would add that (IMO) anything which diminishes suffering (in all forms) and increases compassion has value.
The value of farm equipment is in more crops being produced.
The value of liquidity is less clear. An upward sloping yield curve means people are willing to exchange more money for shorter term debt. That money can then be used to invest in the creation of more products. It's not until that point that it's clear what "real value" is being produced.
My point is that liquidity's value comes from its secondary effects of allocating resources more efficiently. It's important to have this awareness because increasing liquidity might not always be the best way to increase the efficiency of allocation.
Same with software. Software tools have value equal to (amount of things produced with them) - (value of things produced without them).
It doesn't matter whether it's the best way, just that it's effective. You typically get better results by applying many improvements than you do by just applying the "best" improvement.
And, liquidity isn't just about improving allocation.
> Software tools have value equal to (amount of things produced with them) - (value of things produced without them).
Actually not. The value of anything is the benefit of said thing minus its cost. It's otherwise independent of the value of other things.
You may decide between two things based on their relative value, but that's different.
The person who buys and holds for some time wouldn't notice the fractionally smaller spread. The majority of trading today is done automatically, and it's all this trading that sees the benefit. But, again, how useful is this sort of trading? Surely at some point it must move from "efficiently pricing securities" to gambling with the froth.
How would trading change if the goal weren't to flip your security to someone else a bit down the road, but to hold it for its intrinsic value, as higher transaction costs would encourage?
I define a "flipper" as someone whose sole purpose in owning a security is to pass it off at a higher price to another "flipper" down the road.
It was an offhand comment and my terms were non-standard, I apologize. I wasn't so much defining "flipper" by the length of time one holds a security, but the motivation for doing so.
If most of the trading boils down to huge groups of firms selling back and forth to each other, it doesn't seem to matter to me whether the spreads shrink or not. It's a zero sum game and it's just a matter of one side ekeing out more money or the other.
Also, speculators add value to the market because they push prices toward the true values. If an asset is expected to be more valuable in the future, speculators will buy it now, raise the prices, thereby encouraging consumers of that asset to use less of it. This ensures that more is available for future use.
Also, speculators also add liquidity for consumers. Unless demand for a long hedge exactly matches demand for a short hedge, you need speculators to pick up the slack.
Like what the people flipping houses did to housing prices?
Huh? The vast majority of people own stock because they think that they'll be able to sell said stock for more money later. (Yes, they'll take dividends along the way, but since there are short-term traders who "harvest" dividends, that doesn't change things.)
With bonds, there are folks who plan to hold to maturity, but they're in the minority. Other folks are just looking for fixed income for "a while" until they come up with something else to do with that money.
> If most of the trading boils down to huge groups of firms selling back and forth to each other, it doesn't seem to matter to me whether the spreads shrink or not.
Sure it does - you benefit from the decreased spread whenever you trade.
If you really think that the spread doesn't matter to you, feel free to throw $1/share my way every time you buy or sell.
Practical measures can be put in place to mitigate the negative affects of marketplace irrationality, but please do not behave as if people lack a profit motive. This extreme Ayn Rand style thinking is what drove our economy into a ditch in the first place.
I might be projecting, but having hung out with Carter (the author) a few times while he spent this past summer out here in Palo Alto, I can probably assure you that it's just an un-stated assumption that's causing you guys to differ. The reason he's asking that question of "what value do you add?" is because it leads to personal fulfillment. Some people are personally fulfilled by shaving basis points. Hell, I could be one of them if not for the the lost forests of entry-level finance work.
Carter is talking to people that want to have huge impact on society. They dream to be Rockefellers, Jobs's, Brins, and so on. In those cases, it's always worth stepping back and thinking about what overall impact you're having. If all you're doing is shaving basis points you're probably not changing the nature of society.
And no, this doesn't rule out finance; J.P. Morgan diverted the vast holdings of Europe into the burgeoning economy of these United States (http://en.wikipedia.org/wiki/J._P._Morgan#Treasury_gold) during a crisis.
In other words:
"Do you want to spend the rest of your life selling sugared water or do you want a chance to change the world?"
http://www.pbs.org/wgbh/pages/frontline/president/players/sc...
What does intelligence have to do with it? Sweeping the streets is an honorable job and makes the world a little nicer. Writing a botnet for spammers isn't and doesn't.
For some people, it's hard to escape the soul-sucking nature of working in finance. The super-high salaries are a kind of anti-filter: they attract people who really don't "love what they do." And eventually money isn't enough to keep such people working. That's why i-banking has such a high burnout rate.
Speaking of Nietzsche, I know someone who quit i-banking to teach philosophy, of all things.
Considering how many in the world aren't starving, ill, undereducated, and unemployed, I'd say we're doing an utterly frigging amazing job of 'efficiently allocating the world's capital'.
Seriously - the question isn't, "Why are some people poor?" It's, "Why AREN'T some people poor?" Poverty is the natural state of humanity - we evolved from being apes and crawled out of forests, jungles, and caves. The fact that there's any literacy, lifespan over 30 years, immunization from disease, infrastructure, and knowledge is marvelous in and of itself. The rate that those things are growing lately is astounding. Humanity is doing a pretty amazing job lately.
And yet there's still so much more to do.
I guess it depends what you mean by efficiently allocating capital. What's the end goal? Just to produce as much as we can?
The problem isn't distribution - it's a couple of different things.
Forgive me if this seems obvious, but the biggest reason some people are poor is lack of production - by and large, the poorest people aren't producing very many things that their fellow man wants to trade them things for. Even looking at charity as a short term bridge, to be independent and emancipated person you need to produce as much or more than you consume. So, why aren't they producing? That's a heck of a complicated question. I'd say the number one most common reason is bad government, and the number two is time.
Bad government - well, you know how that works. I was just in Cambodia last month - no matter how much you'd like to produce, you're not going to be able to to under Khmer Rogue Agrarian Communism. You need basic free action, liberty, human rights to produce.
Most people agree with that well enough. But they don't necessarily like the second answer - time. It takes time for people to grow into producing and succeeding. The fastest it happens is 1-2 generations, but those are people coming from cultures with high priority on education, industry, and family ties (I'm thinking of Ashkenazi Jewish and Han Chinese as my first examples - people from those cultures regularly go from nothing to fairly wealthy in 1-2 generations). Most more normal cultures, it seems to take 3-5 generations of incremental lessons and improvements to get out of poverty. My great-grandparents were dirt poor - literally had nothing, my grandparents were quite poor, my parents came up poor and moved into middle class, and I've got a shot to break upwards from there.
I think you can help people out with that cycle, but only so much. I mean, the track record of foreign aid is really, really bad. (I can dig up some citations and studies if you don't know about it - but foreign aid has basically failed to end poverty in the countries it was sent to; poverty actually increased in a number of places that got large amounts of aid) I think it really does take 3-5 generations under normal circumstances for people to get into the right mentalities of produce things, consume and save wisely with the money, educate your children, delay gratification, etc, etc. Much of this happens in the home. These lessons take a while to learn.
It's not a consumption problem first - it's a production problem. It's not that there's not enough food to eat - it's that people aren't growing and cooking enough food. If they were, they'd have enough to eat. When we keep giving people food, that doesn't seem to get them into learning how to grow and cook, which is what they need to be emancipated and independent, living, producing, and getting wealthy on their own.
> It's pretty appalling that with our current levels of productivity there are still so many people whose basic needs are not being met.
First and foremost, I think you've got to be an optimist at how great things are. Flush toilets are a luxury in Cambodia, man. I think it's marvelous that we have so many flush toilets in the world. Seriously, I'm in Hong Kong now, and I'm walking into nice hotels and using the men's room there and just really enjoying the experience. After Cambodia, using a nice bathroom feels like incredible luxury to me.
But I digress - first and foremost, there's the problem of bad government. Bad/corrupt/stifling rule = no progress. So the people of Burma, North Korea, Venezuela, Cuba are in trouble until then. You need protections of human rights and liberty, and some sort of sanity about allowing people to produce and keep what they produce. No mass murdering, arrests and tortures, confiscation of property at the whim of some bureaucrat.
And then you need time. Cambodia's rapidly improving since the Vietnamese government overthrew the Khmer Rouge in the early 90's. It was an utter wasteland under the Communists, now it's poor but improving every year. In two more generations (40-50 years, they have kids young there), it'll be fairly prosperous. They'll have flush toilets, they won't have the same traffic accident rate, there'll be more hospitals and infrastructure and clean food and water and medicine. Things will improve. It does take time, though.
Actually, of all the things that improve nations, ironically, it seems like foreign investment into industry does the best. But maybe this is selection bias - industry is only built in stable places, and we already know stability is important. Still, I see a lot of the wealth in Cambodia coming from foreign investment in hotels, hospitals, and other infrastructure that was designed for Western visitors, but is also immense help to the Khmer people. (The hospital is half-price for Khmer, for instance, and those hotel jobs are highly sought after)
> I guess it depends what you mean by efficiently allocating capital. What's the end goal? Just to produce as much as we can?
Well, it doesn't hurt. Things we produce start out as luxuries and eventually become commodities. There's (slow) internet in Cambodia, which is a result of the people who made hardware and software and networking originally. There's cars in Cambodia. They'll import flush toilets eventually. (You can find them already at luxury places) Medicine that gets invented in the West gets genericized 15 years later, and is available for very little money in developing places at that point. All the knowledge we invent and innovate makes it's way over there. They can and do use modern agricultural techniques. New designs on cars and clothing and manufacturing make the way over to developing places.
Yes, actually, producing as much as we can is a pretty good plan for improving the world. That, and overthrowing bad governments I suppose. Then it just takes time - people need to learn little lessons about producing, saving, delaying gratification, and so on. It takes a little while - we're all of us still just overgrown apes and all - but we're moving forwards at a pretty remarkable pace.
I certainly agree that we can't solve this problem by just trying to redistributing existing wealth (i.e. aid). It was never a viable long term solution, and not even as much of a short term one as I would have guessed.
But I stick by the point that we've made amazing strides in productivity, but overall we've not distributed this well. What I really mean by this is, IMO, it would be a better result overall if the world were less productive, but the minimum living standard were higher.
I agree that it's productivity we need to spread, not wealth. The former will bring the latter. But, I think it's fair to say that some parts of the world could afford to spend more of their effort towards facilitating this. Even if that means a drop in overall output, for a while at least.
> Things we produce start out as luxuries and eventually become commodities.
Sure, but the incremental benefits of these items to people tends to get smaller. These could be sacrificed at least until everyone reaches a flatter part of this curve.
This like medicines, sanitation, are not exactly in the same class as, say, an iPod.
> Yes, actually, producing as much as we can is a pretty good plan for improving the world.
In practice a decent plan, and perhaps even the only practical one given human nature and our political systems. But still not a goal in itself.
Maybe, but I think it's a bit of a non-sequitor. There's no either/or choice there. Consistently, a place producing a lot equates with a high quality of life. The only places that do better for quality of life are relatively small, extremely homogeneous societies (Okinawa, Switzerland, etc). As a general, large scale strategy, produce more is pretty good. Attempts to produce less and streamline it to where the governor thinks it should go have all ended poorly thus far.
> Sure, but the incremental benefits of these items to people tends to get smaller. These could be sacrificed at least until everyone reaches a flatter part of this curve. This like medicines, sanitation, are not exactly in the same class as, say, an iPod.
Definitely - and this is a choice we already get to make as individuals. You can choose how much you want to consume, invest, and give charitably. It's an individual ethical judgment, and one we must all make and live with.
> In practice a decent plan, and perhaps even the only practical one given human nature and our political systems. But still not a goal in itself.
Well, I think "produce as much good stuff as we can" is a good goal in itself, but improving the baseline of the whole world is good too. Actually, I think they're complimentary goals, and not really in opposition with each other at all. Working to build as much good stuff as possible in the world makes it easier to make more good stuff cheaper - I don't think there's any natural antagonism or choice between producing more and improving the baseline for the rest of the world. In fact, I'm pretty sure they're complimentary goals.
* Financial innovation does help here, such as micro-lending, although admittedly not something done by Wall Street
* It's a complicated issue. Maybe the best solution we can hope for at the moment is to not keep funneling resources to corrupt regimes, where the most starving happens to be in. For the record, foreign investment has been a huge part of China and India's recent success.
Having read through most comments below, I want to make a few points:
1. I am not implying a moral obligation to do some jobs over others. Nor am I suggesting a framework to judge the value of some jobs over others. If I had known this was going to be read by so many people, I would have spent more time making sure my message was communicated more clearly. I'm sorry for giving some people the wrong idea.
2. My point is actually very simple and I expect the vast majority of Hacker News readers already get it: for people considering what jobs to do, especially young college students, be wary of focusing on the value of fun and money. Fun and money can be very distracting when you are young and haven't experienced so much freedom before. However, the decisions you make when you are young can have consequences for the trajectory of your whole life. Always think about what will give you long-term and enduring happiness and satisfaction. Often, I think long-term happiness is connected with a cause greater than your own immediate satisfaction. Hence the consideration of value creation.
It's obvious advice, but I hoped my story would make it more digestible for college students.
I think the question "How do we add value?" is important, but only in the sense that it can help you figure out what are the key activities of the business, that you should be involved in. It can help focus you, basically.
i.e., "Am I doing something worthwhile?" -- which could mean different things depending on the context, the goals or principles of the person, or what have you. I guess it depends on how you define "value" :)
The first commenter posts to try and explain what value is being created.
Efficient markets -> lower transaction costs -> greater access to the markets by everyone. Why is that un-noble? Isn't Art.sy doing the same thing?
All true. Then Carter responds agreeing and writes a bit about what Art.sy is doing.
Art.sy is not saving the world, but our goal is to create a fundamental change in the way art is bought, sold, and appreciated. We envision a dramatically different future where artists can pursue their passions more sustainable, and where everyone else will be more inspired by original art.
The first commenter isn't wrong about why creating liquidity has value, he just hasn't gone far enough. So there's greater access to the markets by everyone. What good does that do? There are several more steps before getting eventually to the production of things that have real value.
Art.sy does the same thing, but hasn't lost sight of the end goal. The reason for providing a more efficient and liquid market is so that more artists can create more original art.
Efficient markets -> lower transaction costs -> greater access to the markets by everyone -> farmer sells a futures contract to lock in price and hedge risk -> farmer uses capital to buy equipment -> farmer grows more crops
Your definition of utility is valid, but your desire to draw direct connections between end game utility is misplaced because there are millions of connections that can be drawn. Each market participant interacts with the markets according to their own definition of what is and is not important to them. You seek to define value for every human using financial markets in the world.
I think the most obvious creation of value comes from my view of how video games increase the value of technology. Video games tax the underlying hardware and software technology to its limits causing those underlying systems to shift towards greater utility under market pressure.
If value is seen by its utility, then I would say that it is inevitably the result of market pressure to have a better product. Where money is concerned, profit pushes improvement. This is just part of the underlying structure the economy.
If you are asking about social incentives, it is a personal one for the programmer. He feels fulfilled writing the program. Is it not the same self-fulfillment that his manager was seeking- the idea of meeting his ideal self's human potential? It may not be the same goal, but the main crux of the argument is in self-fulfillment.
But all of that is off-topic considering the headline.
If you are looking for an argument that would give merit that this job "creates value," I would say that it feeds the families of those who work at that company by making it more sustainably profitable.
I'd weasel my way out of answering the question directly. I would counter that you can ask the same thing about what value marketing gives. Sure the companies have useful products, but what does all that money spent on image branding and market testing product color and style pallets give? Hell, even the TV programming they place it against can be absolutely vapid and lacking in any moral or mental fortitude.
But back to my off-topic rant up above. When the general economy hires talent, we generally view that the use of such talent not only increases the talent pool by demand but also the training quality of future professionals by the increased use of such training facilities (universities, researchers, hardware, market). Relying on only measuring directly viewable metrics is a nice and dandy, but the big picture approach (although based on ideals and doesn't correlate 1 to 1 in reality) is a general notion that is hard to argue against.
tl;dr The more you use a resource the more it improves (towards efficiency). This includes talent.
What a thing to say with that username :)
I had an interview with one in the past and while the models that they used were fascinating and I could get lost in them forever driven by pure mathematical interest - it seems unbalancing.
While HFT does provide liquidity and the ability to instantly make a market, it also makes companies and trades look more liquid than they are. More than half of the stock exchange's trades are made by high frequency traders.
There are ups and downs and each situation should be weighed individually.
Overall, I'd say the epiphany that the author had is sadly something that many people miss. We then turn around and we wonder why the world is such a bad and dangerous place.
Actually, and considering value, I guess my ultimate dream job was building stuff that provided no value whatsoever but fun for me (and others as an added bonus).
I'm starting to find too frequently that stuff that provide value actually provide no value at all. Especially on the business software side of things, the idea is usually to ease the lives of the users but in reality, users hate whatever is thrown at them, and with good reason, it usually solves them an existing problem by creating two new ones.
Someone then comes in and says the spread is crazy. He offers to bid to buy at $70 and to ask to sell at $90. The few desperate sellers of course would sell to him at $70 instead of $60. And the few desperate buyers would buy from him at $90. He narrows the spread from $40 to $20, and makes $20 in between. He basically increases the buyer and seller pools by adding himself to them, thus increased the liquidity of the lawn mower secondary market.
The risk to the arbitrager is that he guesses the amount of potential buyers or sellers wrong and set the wrong narrower bid and ask prices. E.g. he could buy a lot of lawn mowers at $70, but there are much fewer buyers willing to buy at $90. He would have to reduce his offer price to $85, $80, $75, $65, or $60 to really get the buyers going. As you can see his profit margin erodes and eventually turns into a loss.
Very good read - "You and your research" http://www.cs.virginia.edu/~robins/YouAndYourResearch.html