Comment by hackuser | Hacker News Reader

Comment by hackuser | Hacker News Reader

It's interesting, and troubling, that so many still trust these institutions:

* Banks that have been caught repeatedly both intentionally defrauding people and acting with extreme incompetence (and who knows who often they haven't been caught). Yet most customers, from individuals and to large corporations continue to trust the banks with their money and to take the banks' advice.

* They trust LIBOR and similar services as accurate and fair, when they've been tampered with repeatedly.

* They trust the financial markets as safe, fair places to invest, despite the problems above and others that pervert markets directly, such as high-frequency trading.

* They trust the 'Free Market', a good idea in concept but in execution appears to be a rigged marketplace, where the powerful win and if they don't, they get bailed out.

Do you still invest your savings in the financial markets? Do you have debts whose rates are tied to LIBOR? If Goldman Sachs offered to advise your company, would you trust them? Most people, knowing all of the above, still say yes. I think in part that's because there aren't many alternatives and in part it's due to lifetimes of of habit. These problems must be hurting trust and I imagine many people eventually will realize the disconnect at some point -- maybe in reaction to some big event -- and pull out.

The point of regulation is to make markets safe, which prevents fraud and attracts more investment. It's good for everyone. It seems like many in the financial industry, and the knee-jerk anti-regulation crowd, have lost sight of that.

What alternatives do you personally use?

(Not original poster, but some suggestions) :

- Use a local credit union as opposed to big national bank. Yes, there may be minor inconveniences in service, but in this day of online banking, they should be minimal.

- Invest with a financial advisor you know and trust, who will pick up the phone when you call and explain things to any level of detail you desire (or who will bring in experts to do so if you won't). Barring that, invest in index funds for broad asset class exposure with low fees.

- Don't believe / vote in / listen to anyone (economist, politician or otherwise) who touts "free markets" without further explanation of how that market's regulators & insiders will work.

Investing with a financial advisor you know and trust doesn't sound like a good idea to me. That's what Bernie Madoff's clients were doing. You want a financial advisor who is trustworthy, which is a very different thing and much harder to find.

I disagree - Madoff was extremely secretive about his "strategy" (because there was none) and financial statements. He wouldn't meet with individual investors. So the transparency & access that I recommend simply weren't there with him.

Because given the choice between being aligned with:

1) A powerful bad guy 2) A weak and ineffectual good guy

Most people will pick the powerful bad guy to protect their funds, advise their company and make decisions for them. We want the power, not the morality. These guys don't let their morality get in the way of winning.

> Most people will pick the powerful bad guy to protect their funds, advise their company and make decisions for them. We want the power, not the morality.

Considering only self-interest, how do you trust the bad guy with your money, when they've lost other people's funds? How do you trust their advice when you know they've deceived other clients? How do you know they will act in your interest, when they've acted against clients in the past?

How does High Frequency Trading pervert the market? They are acting as middle-men.

I think the complaint against is generally that they're acting more akin to front runners than middle men.

Either way, they're not doing market-making.

Don't get me wrong, there's lots of market perverting going on, but HFT isn't party to it.

They if nothing else threy distort the market by adding noise. As in 99.9% of the time no new information is used when they make a trade.

...middle-men that aren't providing any service or benefit to anyone except those that profit from those trades.

These "middle-men" are injecting themselves between buyer and seller to take their cut simply because they have the money, resources, and -- increasingly these days -- the geographic location to beat someone else to the punch.

isn't the typical benefit of a middle-man that they have the money, resources, and geographic location to help facilitate transactions?

HFT doesn't "facilitate transactions".

What is often happening is Seller A wants to sell something for $10. Buyers B, C and D submit an order to buy it for $10. The computer sees this, knows that it might be worth more than $10, and while Buyers B and C get their orders through, the computer buys it out from under Buyer D because their computers are faster. Buyer D now gets a notice that "oh, sorry, that thing you wanted is now $11."

It's the same thing as you overhearing your neighbor saying the Apple Store only has one iPhone left for sale at the Apple Store and, because you have a faster car than your neighbor, you get to the store and buy it and then offer it for resale at a higher price. That's not facilitating a transaction, and it certainly is perverting the market. When the people with the fastest computers and best geographical location get items cheapest, that's not a 'free market'.

Middle-men have classically existed to provide a _service_, adding value to a previously less valuable or more difficult transaction -- wholesalers or retailers. Wholesalers existed to pare down which goods are offered, and existed primarily because smaller retailers couldn't afford to purchase in bulk. Most 'middle men' of these classes have gone away due to the digital age and/or conglomeration. Grocery stores or websites that provide value by having multiple items in the same place that you can pay for all in one financial transaction.

If Buyer D is still willing to spend $11, how is that perverting the market? All HFT does arbitrage, which has been around forever and only serves to make a market more efficient.

"If Buyer D is still willing to spend $11, how is that perverting the market?"

What if Buyer D isn't willing to spend $11?

"only serves to make a market more efficient"

I would say it's exploiting inefficiencies. That doesn't make the market any more efficient. In fact, given the sizable number of 'computer errors' leading to significant volatility when they occur, HFT is in fact a destabilizing force in the market at times.

>What if Buyer D isn't willing to spend $11?

If Buyer D isn't willing to spend $11, then he simply doesn't buy the item. The HFT took on risk by buying the item and needs to either find someone else willing to buy it for >$10 or lose money.

>I would say it's exploiting inefficiencies.

Exploiting Market Inefficiencies == A More Efficient Market. The whole idea of "buy low, sell high" is exploiting inefficiencies in pricing, which is all HFT's are doing. As a result, they bring the buy/sell prices closer together, making it easier to trade. In return for making the market more efficient, they get a profit, and everyone wins except those who are acting in an inefficient manner. (Remember, buying something for less than it's worth is ALSO an inefficiency!)

The point about volatility is fair, but that has to do with market stability, not market efficiency. The HFTs are HIGHLY incentivized to not destabilize the market because they stand to lose a LOT of money if they make a mistake. Now, it _is_ possible someone could concoct a scheme where they profit from a destabilization caused by faulty HFT, but HFT is the means by which that actor perverted the market, not the reason the market is perverted.

> Exploiting Market Inefficiencies == A More Efficient Market. The whole idea of "buy low, sell high" is exploiting inefficiencies in pricing, which is all HFT's are doing.

There's a difference between pricing inefficiencies and technology inefficiencies. In theory there should be equal access to markets. This is why SEC laws on disclosure exist. When people with greater technological ability can, in effect, toll everyone else, you are eliminating this idea of equal access.

> The HFTs are HIGHLY incentivized to not destabilize the market because they stand to lose a LOT of money if they make a mistake.

So are all traders, but that doesn't stop things like Enron and Lehman Brothers from creating smoking holes in our economy. When you start creating legal fictions and technologies that are barely understood by those that create them, much less those that provide executive oversight, government oversight, or the general public, you are getting into very dangerous waters.

Software only works as long as the assumptions of the programmer stay valid. HFT quants are incentivized to make their companies money, not to protect the market at large. An application on a desktop computer crashing and exhibiting weird behavior isn't a big deal. A HFT process going rogue is going to cost a company millions or billions of dollars at best.

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