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If you carefully read the article, it is very much not about the "What if 100% of assets were indexed" argument you often see. It's about what happens as more and more assets are robotically allocated via algorithms. Matt Levine is not a clickbait writer, and he deals seriously with the arbitrage-seeking nature of capital markets including robots which will seek to dominate by predicting what the winners will be.

I think the article deserves a fuller and fairer reading than your comment indicates you've given it.

Levine is great, but the headline (both the ones in the article, and the one here especially — which differ) suggest that there is no middle ground between status quo five years ago and 100% index funds, no active investors at all. (Often journalists don't get to write their own headlines.)

I.e., grandparent commenter is responding reasonably to the headline, if not the article itself.

It's fine to comment on a headline but it's generally considered bad form here on HN to comment based just on reading the headline.

Not really, 2/3rds of the entire article, plus the title and subtitle are about index funds:

> Are Index Funds Communist?

> But when those thoughtful active analysts are replaced with passive index funds, the market stops serving that function.

> Indexing is cheaper, yes, but that's because active management has positive externalities, and if no one will pay for it, those benefits will disappear.

> But more fundamentally, there is an alternative view that the rise of passive investing will improve capital allocation

> The passive investors can't influence relative prices

> Their worry is that the growth in passive and quasi-passive products

> Or I guess pure indexing -- everyone passively throws money at everything that there is, with no judgment at all -- is an imaginable fourth answer, and is strictly worse than the others.

As I explained elsewhere to you, not all passive or quasi-passive money is in indexed products. And furthermore, reading the article as I encouraged you originally to do, reveals it is not about index funds.

> Not really, 2/3rds of the entire article, plus the title and subtitle are about index funds

This is not responsive to my comment?

> It's about what happens as more and more assets are robotically allocated via algorithms.

Algorithms don't have anything to do with index funds.

And again, as more and more funds move to index funds, the returns on active managed funds will increase due to information asymmetry, and the market will move towards an equilibrium.

The allocation between index and active is a continuum, not a step function.

Yes but this article is really not about index funds which is why it’s fine that algorithms play a prominent role in the article.

I'm sorry but I don't understand what you are getting at. Besides index funds not being impacted by algorithm trading that much, the author of that article also notes that trading stock doesn't to much to allocate capital anymore, like it used to. They get some money at ipo, but after that most companies aren't selling stock to get more capital for expansion. I think we would be better off without the financial industry taking a pointless large cut of the economy, and reducing their stake at least seems sensible.

No?

> Are Index Funds Communist?

> But when those thoughtful active analysts are replaced with passive index funds, the market stops serving that function.

> Indexing is cheaper, yes, but that's because active management has positive externalities, and if no one will pay for it, those benefits will disappear.

> But more fundamentally, there is an alternative view that the rise of passive investing will improve capital allocation

> The passive investors can't influence relative prices

> Their worry is that the growth in passive and quasi-passive products

> Or I guess pure indexing -- everyone passively throws money at everything that there is, with no judgment at all -- is an imaginable fourth answer, and is strictly worse than the others.

This is a very poor way to think about what the central thesis of an article is.

Yeah, I guess that when the title, subtitle, and half of the entire article are about index funds, the article isn't about index funds.

It's definitely possible, as evidenced by this case where the article is actually not about index funds! Also passive and quasi-passive is in no way necessarily "index funds"

> Matt Levine is not a clickbait writer

Come on. Enough of this. For some odd reason, every week there is a levine article here and every time someone goes out of their way to praise levine. The guy works for bloomberg. Clickbait is part of nature of the beast whether you think levine is great or not. Is levine a writer or a cult leader. What's with all the worship?

Maybe he is praised because he is a good and thoughtful finance writer. And if there’s any financial news site which would have an incentive to avoid clickbait it would be Bloomberg because it’s subsidized by the rents it extracts from its terminal and data business, and this is one service they provide to those customers so they have an incentive to provide value.

> Maybe he is praised because he is a good and thoughtful finance writer.

Could be. But there are a lot of good and thoughtful finance writers. I don't see their articles spammed here on the weekly like clockwork along with the fawning worship. It's almost like the article is just posted to talk about how great levine is and not the actual article. Just seems odd to me that's all.

> And if there’s any financial news site which would have an incentive to avoid clickbait it would be Bloomberg because it’s subsidized by the rents it extracts from its terminal and data business, and this is one service they provide to those customers so they have an incentive to provide value.

I'm well aware of what bloomberg is.

You responded to the only phrase of my original comment that had to do with Levine the person. If this is your concern, perhaps you could have chosen to substantively engage with the article?

>It is a self-balancing situation. A scenario of "oh my god, everyone is just putting their money on index funds" would never happen.

Such a situation is not stable if the speed of information is not fast enough. If the market is unable to produce information quickly enough, or market actors don't act fast enough, basic differential equations dictate that you will get oscillations. See e.g., the business cycle.

Of course you'll get oscillations (but the business cycle doesn't have anything to do with it), and you don't even need differential equations.

But the point of equilibrium is a Nash Equilibrium, meaning that any deviation from it will create forces that push back to it (you can think of it as a valley). So while there will be oscillations, you won't expect large deviations.

It seems to me obvious, yet implicitly overlooked, that people who hold stocks and don't trade aren't affecting the price one way or another. It's only the traders that set prices.

Anyone who holds stocks bought them, and if they are still generating net wage income will buy more, and presumably will eventually sell them when hey retire.

All that time, however many years they own the stock, they are putting in neither bids nor offers, so they are completely uninvolved with the price. You put in an order, and it influences the price slightly for a matter of seconds. But if nobody traded, there would be no market price.

> This is fearmongering.

Spoiler, the article is actually a playful response to a fear-mongering article titled "The Silent Road To Serfdom," with a bit of inspiration from Asimov at the end.

The title is bait for misinterpretation, because the title is the original article's thesis that Matt is riffing on.

Matt Levine is a really fun writer, and I recommend the click to anyone who skipped it because they thought the title was the main and uninteresting point of this piece.

Yeah - it took like the first paragraph to realise he was taking the piss... people should really read beyond the title.

It isn't just the title, 2/3rds of the article are about index funds:

> Are Index Funds Communist?

> But when those thoughtful active analysts are replaced with passive index funds, the market stops serving that function.

> Indexing is cheaper, yes, but that's because active management has positive externalities, and if no one will pay for it, those benefits will disappear.

> But more fundamentally, there is an alternative view that the rise of passive investing will improve capital allocation

> The passive investors can't influence relative prices

> Their worry is that the growth in passive and quasi-passive products

> Or I guess pure indexing -- everyone passively throws money at everything that there is, with no judgment at all -- is an imaginable fourth answer, and is strictly worse than the others.

To initiate a transaction an arbitrageur, though, needs a counter-party that's also engaged in arbitraging, but has an opposite opinion.

Thought experiment - let's say there's an imaginary country that has 100 companies listed publicly, each floating 1,000 shares. Most citizens prefer indexing so 99,000 shares are owned by a bunch of Country 100 index funds. Those index funds will only trade on inflow/outflow into their own fund, never on corporate earnings, board changes, product announcements or other external event.

What opportunities are there for arbitrageurs?

Someone has to sell to them when they get inflow and buy from them when they get outflow. Who do you think that will be?

That would be wage savers buying from retirees who are cashing out, both with market orders, not limit orders.