Comment by albertsun | Hacker News Reader

Comment by albertsun | Hacker News Reader

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The intelligent don't have an obligation to create maximal value. But if you're making money without creating value for society, then what you're doing is rent seeking and "cheating" people who do create value. http://en.wikipedia.org/wiki/Rent_seeking

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.

You're wrong about liquidity. By providing liquidity to a market you are providing immediacy to someone else. Market participants seeking immediacy place a specific value on it and are willing to pay someone for the privilege. As a market participant, if you want to buy or sell at the market, you're directly benefiting from the liquidity being provided by other participants.

Yes, but still no. By providing liquidity you can be directly benefiting someone else but you're still not directly creating value.

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.

Farm equipment doesn't have any intrinsic value. The only reason farm equipment exists at all is to facilitate the allocation of natural resources towards the production of things that have real value.

Yep.

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.

Please define "things that have real value".

Things people want that aren't a means to get something else.

Burrito? Yes. Clothes? Yes. Art? Yes. Money? No. Liquidity? No.

Liquidity provides mobility - there's been a couple times in my life that I'd have converted to any religion on the planet if their chief deity promised me a buyer at even half the market value of the asset I wanted to sell.

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.

This is patently absurd.

"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 overwhelming majority of jobs probably wouldn't classify as they're all creating intermediate products.

Good question, sounds like value is being defined way too narrowly here. The value of farm equipment isn't the intrinsic or salvage value of the metal and other raw materials it is made out of, the value is equal to (value of crops yielded with the use of equipment) - (value of crops yielded without use of equipment). Just like the value of liquidity is clearly evident by the liquidity preference in debt markets. An upward sloping yield curve means investors demand higher rates of interest for longer tenor debt http://www.bloomberg.com/markets/rates/index.html Same situation applies to equity markets and is one of the reasons VC investments require higher discount rates than equity investments in public companies.

You're talking about money value, not "real value." (I guess that might not be the clearest term for what I mean)

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.

I understand how you are defining value. I am just rejecting that definition because it is both different from how people typically define the term and not particularly useful. For instance you are claiming that software has no value, only the consumer end-products you create with it. Most people would say software has value equal to the increased efficiency it gives you. In that same vein I am claiming liquidity has value equal to the increased optionality it gives you. How does your definition help me better understand the world?

Sorry, the meaning I've been trying to get across is intrinsic value and I think we agree. I'm not trying to say that liquidity has no value. It clearly does have value.

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's important to have this awareness because increasing liquidity might not always be the best way to increase the efficiency of allocation.

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.

How about anything that contributes to the continued survival of the human race?

Yeah liquidity is great, but only up to a point. If it takes me six months to sell my house at "market price" that really sucks. I'd welcome a little real estate speculation, and the liquidity it brings. But if bond traders shave 600 milliseconds off the time it takes to sell my bond holdings, so what? People may be willing to pay for that, but society doesn't benefit.

Because while they shaved 600ms of your execution time they also lowered your spread by 50 basis points, making it cheaper for you to unload your bond holdings on the market.

Making it cheaper for WHO to unload their bond holdings?

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?

Please define flipping a security when you're holding a futures contract for the near month. You need to step back and understand the totality of the complex financial markets before you presume to understand peoples motivations by dictating to them how long they should hold a financial instrument. People use the markets for varying motivations and their holding periods are one, of many things, that vary.

Why are you holding the contract? You're an airline hedging against rising oil prices? You're a multinational corporation locking in a reasonable exchange rate when dealing with overseas manufacturers? You're a speculator who thinks the market isn't properly anticipating the impact of a weather pattern? All these seem fairly reasonable to me.

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.

What you call "flipper" is normally called a "speculator".

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.

Also, speculators add value to the market because they push prices toward the true values.

Like what the people flipping houses did to housing prices?

> 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.

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.

Best of luck in your attempts to radically alter basic human nature and the foundations underlying the theory of evolution.

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.

So? That's that's a tiny benefit, even to me, let alone society at large. Our society already has very efficient allocation of resources. Devoting significant resources to increasing that efficiency by tiny amounts is just a waste. I'd prefer Carter devoted his intellect to making it cheaper to put cargo into low-earth orbit, than to making it cheaper to sell bonds.

A tiny benefit multiplied by a billion people and several trillion dollars per day suddenly isn't so tiny anymore.

The difference in benefit I'm talking about is qualitative, not quantitative. I'd rather have a cure for cancer than a thousand years of narrower bond spreads. And when I'm on my death bed, I hope I can look back on my life and say that I contributed to something more meaningful than the bond market.

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