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Comment by jamesseda | Hacker News Reader

My understanding is GS is company that wants to "beat the market" meaning someone else in the market is loosing. And Google's goal is to make the worlds information available to everyone and show them ads. Google seems more like a everyone wins company.

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The following is from a talk at the New York Public Library.

ERIC SCHMIDT: But in fairness to those people[finance people], had they come to Silicon Valley in 1999 they would have received a far greater payoff during our little bubble. So who are we to criticize the Wall Street folks for having their bubble? It was just a bigger bubble.

WALTER ISAACSON: Do you think though that Google creates something that’s more real than somebody on Wall Street creating a financial instrument?

ERIC SCHMIDT: To be honest, not really. When I walked into the company, I said, “People pay you for this thing, these little ads?”

http://www.nypl.org/sites/default/files/events/live_2009_11_...

Eh, I don't see how candidness and an eagerness to question his own model by Schmidt changes the value proposition at all. Almost all of the time, an ad click is creating value (or a fractional expected value) where there wasn't some before, unless you have a 0% conversion rate.

Meanwhile, a huge chunk of Goldman's activity as I understand it is simply taking the "dumb money" on Wall St. Nibbling the edges, taking pieces of trades by less sophisticated investors. That's not necessarily value creation, and much of the time it can be straight extraction from the rest of the economy.

Not that ads won't get there of course - they're well on their way already with various exchanges. But presently, they have to actually be creating other economic value via conversions in order to exist.

Everyone wants to "beat the market." For every dollar McDonalds gets, Burger King is not. For every dollar Microsoft gets, Apple is not. There are no group hugs unless you work for a non-profit (and even then, for every dollar your non-profit gets, some other, equally deserving non-profit is not).

This sounds like a very zero-sum model. Do you know, that dollars don't get destroyed by spending them? (And that this doesn't even matter, because it's wealth creation that matters (supply) and not demand?)

I think the point of his comment is to see that viewing trade as zero-sum leads to absurdity.

Certainly, but assuming it can't be zero-sum leads to absurdity as well.

What about high frequency trading? Most of it is zero sum, first one to arb the difference wins. The economy doesn't derive any higher value from it if the difference would've been corrected within a couple seconds (or a few minutes) anyways. It's not the same as buying a burger.

The value investor gets an abstraction over the ocean of algos and traders trying to out-game each other. The abstraction is that there's a market price and a book depth. The deeper the book, the more stock the value investor can move around without being gimped by increasingly undesirable prices. The more traders, the deeper the book.

Finance pundits worry about the implications of traders gaming each other. Let them game each other. The value investor sees a market price backed by millions of dollars of offers within pennies of each other. Should his trades move the market, much more liquidity will spring to life. The value investor feels fine.

Oh, if you by a burger and sum the benefit over, say, Burger King and McDonald's it's probably constant.

If you sum the benefits of arbitrage over the high frequency traders, it's possible (close to) constant, too.

But the rest of the world can still benefit (or perhaps suffer in the case of a burger).

Hm, I think we're talking past each other although I'd like to hear more exposition on your comment because it doesn't really make sense to me.

I was talking more from the perspective of someone who's generating cash. Burger King pays suppliers for meat and whatever (or raises cows in their own operation) and you pay them for a burger. You get a burger, they get cash, pay people, value creation all around.

In Wall St, on the other hand, theoretically we should see value creation through efficient routing of capital to the right places and the people who make that happen are rewarded for their effort. In practice, I feel, it's often a video game where they manage to nibble a billion little pieces away from the value-based investors who are actually performing an economic function. So in some scenarios, they're a net drain, rather than part of a robust economy. That's where my zero-sum analogy came in. YMMV.

Yes, the difference between theory and practice can be startling in finance. But I am more wary about fleecing the customer than about counter parties in a high frequency trade. [1] And of course there's also always making money by rent-seeking behaviour. E.g. the implicit subsidy banks get in lower borrowing costs on the market once they are to big to fail.

[1] Mutual fund managers or hedge funds who take a lot of fees are probably quite a drain on your their clients returns.

> For every dollar McDonalds gets, Burger King is not. For every dollar Microsoft gets, Apple is not.

I'm pretty sure that's not the case. Apple and Burger King would probably never be what they are today without MSFT or Mac. And perhaps vise versa also.

for every dollar of ads google sells, that's a dollar their competitors don't get. they are as cut throat as anybody else, they just do a better job of making computer people feel good about it. ask their sales department if they're an "everyone wins" company.

If G-mail didn't exist I would use yahoo. G-mail is much better for me though. I win and Google wins. Yahoo looses. If GS gets in front of Citi on a trade by 2 seconds GS wins and Citi looses, no one else is involved. Unless those two seconds of "efficiency" help someone?

You are assuming all trades are determined by priority, which is false.

If GS got there first, but Citi cuts in line by offering a better price, the customer also wins.

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