The system itself is broken. Money is supposed to be a proxy for value added, yet these guys are adding nothing. Don't come at me with the "investing in winners" guff. They are taking real wealth.
If I manage to figure out that Company A is overvalued compared to Company B, and I short Company A in order to buy stock in Company B then by doing so, in a simple supply-and-demand model... Company A's stock will go down very slightly (because I shorted them), and Company B's stock will go up slightly (because I bought their stock).
A higher stock value helps a company - they can sell some of their own stock in order to raise more funds. Therefore, the value I've provided is I've made a calculated decision that the economy should be spending more on (for example) robotics and less on coal because robotics companies are going to more successful, and coal less successful.
Allocating funds to the more profitable companies and industries is one of the strengths of the market economy - it adds efficiency.
Price-finding in general adds value. Also market liquidity adds value. I wouldn't discount what these people do, even if they are narcissistic selfish assholes as a breed.
The system imbues certain players with monetary tokens far exceeding value added.
Without arbitrage, a wine shop that returns 15 tokens for every 100 invested might be able to sell shares at the same value as a meat shop that only makes 8 tokens for every 100 invested. Even though the wine shop is more popular, more profitable and providing more value to the market, it is forced to grow at the same rate as the meat shop.
We need a system of allocating resources efficiently, and the economy will provide the most value possible. This is what arbitrage does. And you'd want pretty smart people doing it, as these decisions can cause the success or failure of companies.
To put it in other terms, the footsoldiers might do the actual fighting, but I prefer to be part of an army with generals that decide where to place troops rather than one composed entirely out of 'actual fighting people' (or as you call it 'real things produced with real skill and effort, goods such as meat, wine, cars').
There are ways of cheating the system, and I support strong financial regulations. But that doesn't mean these jobs shouldn't exist in the first place or they don't provide any value.
They do not add this much value, they appropriate it.
Or we could just stick with boom and bust where the banks clean up every time and the west is slowly sinking.
This has nothing to do with allocation of land. If you have a land value tax there'll still be property companies with shares and people who arbitrage them.
> state issuance of money via basic income
Again, nothing to do with arbitrage.
> No income tax. No sales tax or not much of one.
Not sure property tax will match income + sales tax, but again, nothing to do with arbitrage.
Look, I agree there are people with wealth who don't deserve it. But in my opinion, these are people with inherited wealth. Or the people who got wealth through ill-gotten means. Or the people who avoid taxes.
But the people who are in finance? By the time they die they're usually multi-millionaires, not billionaires. And the market as a mechanism is not fundamentally flawed - it just needs careful and judicious regulation.
> Can you propose an alternative for capital allocation? Perhaps some magic central planning AI?
The system we have is fundamentally flawed.
I believe you are conflating the concepts of "currency", "wealth", and "value."
Here is an example I used with my kids once. Let's say you went the Pittsburgh Pirates game in 1978[1] and you caught the first home run hit by then rookie Barry Bonds. If you sold it in 1978 you would have been lucky to get $50 for it, if you sold it in 2007 when he retired with 762 home runs you could have gotten significantly more for it, perhaps several tens of thousands of dollars, and if you sold it in 2011 after he was tainted by steroids you would get less.
But in all that time, the ball was just the ball. It's value went up, its value went down. As it went up and down the value of other home run baseballs also changed in value, but in ways completely unrelated to the value of Barry Bond's first home run ball. If you owned every single home run ball from the major league the value of any one ball was only related to that ball's history and not to the other balls.
Quantitative analysis of markets is the art of figuring out how to recognize the value of something is changing before others do, and capture that value by acting on that knowledge. Whether it is offering to buy Barry Bond's first home run ball because your model suggests he could become an all time home run hitter, or selling it in 2009 because your model suggests Barry is likely to be tainted by the steroid scandal in baseball.
You didn't steal any money, you didn't change the amount of "value" in the market, and the amount of "value" in the market it not controlled by a fixed number, its controlled by other events completely outside of your control. You bought something before others knew it would be valuable, you sold it before others knew it would be less valuable. Definitely not a zero sum game.
[1] http://m.mlb.com/cutfour/2015/06/04/128375782/watch-barry-bo...
Of course, once you add in the realities of uncertainty and much longer time periods, you can make more subtle arguments about risk exposure, hedging, etc. But in the simplest case, trading on privileged information is absolutely zero-sum, at least in the sense that there's a clear winner and loser (and in the stock market, it's illegal!)
> Definitely not a zero sum game.
Grandparent comment is right and you seem to misunderstand the idea of zero-sum. A transaction is zero-sum if it doesn't change the amount of value. The stock market is mostly zero-sum. The only non-zero-sum transactions are when firms sell their own stock to get spending money. The only added value of the stock market is choosing which of these transactions should happen. Since front-running doesn't affect these transactions, I think it's safe to say that front-running is zero-sum.
Your definition is "A transaction is zero-sum if it doesn't change the amount of value." And I'm having trouble with that because I can't see the linkage between 'transaction' and 'value'. And then you state "The stock market is mostly zero-sum." which I don't understand at all, how can a system be fractionally zero sum by your definition?
This is the way I see it, a zero-sum system (note that I think of it as a system and not a single transaction) is one where the sum across the system of all events is zero. So for example if you have have a series of financial transactions across an expense account there are a list of expenses journaled as negative amounts and a list of re-imbursements journaled as positive amounts and when you add them all together the answer is zero. (And when it isn't zero then you either have unpaid expenses (negative) or have been over reimbursed (positive)). Another example might be in chemistry when you are balancing a chemical equation and all of the electrons and molar weights of different elements have to be the same before and after the reaction.
And that is the reasoning I use for my definition of a zero sum system. A system is zero-sum when all inputs and outputs across all transactions are balanced, resulting in no net change.
The GP comment was short, it asserted "Yes it [stock trading] is [zero sum] when you don't create wealth" and that was a follow up to an assertion that these funds were "taking wealth". Both of the original and the follow up used the concept 'wealth' to express as a proxy for 'value' in a series of transactions which are measured in 'currency'.
One could argue that on the basis of number of shares in existence, trading on the stock market is "zero sum." I would agree with that. I don't find that a particularly useful abstraction but recognize it would be one way to look at it. If on the other hand you are talking about wealth creation, the stock market is very much not a zero sum system. That is because the at one level the stock market is a reflection of the economic GDP of the companies that compose the market, and as economic GDP grows, so does the value of those companies. It is by that basis that an individual investor can buy stocks (equity) in a company, hold it for a long time, and "gain wealth" simply by having partial ownership of an asset which is growing in value. Nobody was made "less wealthy" by that growth and that person holding on to their stock. It was not a zero sum system.
To extend that analogy the trading company has a tap on the Reuters newsfeed and they sell the ball as soon as the steriod story reaches them, milliseconds before it reaches the newsrooms.