My point regarding pings was that tiny advantages in speed, if leveraged across enough people, become large advantages in speed, and if a single person provides a tiny bit of value to many people, then that adds up to a lot of total value produced by one person and therefore a big paycheck for that one person.
The telescope information is valuable to fruit sellers and fruit consumers alike. If Bill is very hungry today, but Joe is not, then Bill is rightly willing to pay a higher price for fruit.
Let's say that the loss of one ship raises the fruit price from $1 to $10. Bill wants to eat today and so he is saving his last $10 for when the fruit arrives.
As the ship crosses the ocean, the closer it gets to shore, the less risk there is in Bill spending his other $9. He wants to buy beer but is unwilling due to the risk of not being able to afford fruit.
To Bill, there is clear value in knowing how far along the ship has gone. The sooner he knows the better. Since knowing the ship is coming frees up his $9, this information also provides value to the brewer who will be able to sell his beer sooner. If the brewer sells his beer sooner, the brewer will be able to buy himself new shoes sooner, and so on. The 5 minutes of foreknowledge results more economic activity, and higher wealth in general. Bill gets his beer sooner, making him happier sooner. This has value. Mr. Guinness the Brewmaster gets his shoes sooner, easing his ankles sooner, and this is worth something. Every little bit of foreknowledge helps.
All arbitrage follows this same model. Whether the arbitrage profits are collected by one person or many is not relevant. There is utility in prices that accurately reflect supply and demand. The sooner prices reflect reality, the better.
If there are going to be fewer oranges available, the price should be higher to ensure an efficient distribution - a distribution to those who most value the oranges.
Galileo made prices 5 minutes more accurate, and while that is unsexy, it saved 5 minutes of inefficient trading. In aggregate, those 5 minutes end up being worth a lot.
Those minutes provide some level of utility equal to or greater than Galileo's profit. If Bill did not get at least $10 worth of utility from his oranges, he would not buy them, and Galileo would not receive Bill's money. These are voluntary transactions after all. Bill can always starve until tomorrow, or boil his shoes, or go forage for berries.
First you were arguing that the profit equaled the utility exactly. Now you are saying something different. Taking your new example, since the trading profits are roughly the same whether the advantage is 5 minutes or 20 seconds so long as the ship is seen first by telescope man, yet the probability of Bill mistakenly wasting his money on beer when he should have saved for bananas does depend on that length of time, then the utility and the profit aren't equal; and as the time advantage approaches 0, (and thus the utility you are talking about here approaches 0) the profit remains the same.
You are saying there is always some utility. Ok fine, but it gets arbitrarily close to 0. In the case of HFT there is also some cost (brain-drain for proprietary R&D, power drain for datacenters, etc.). Which outweighs which? What timescale do we have to get to? We are already well below it.
I was wrong saying profit equaled the utility exactly.
There is clearly an opportunity cost with HFTs, and I would hypothesize that at a certain point there is a better ROI in other fields for those people. There should be diminishing returns to investments in HFT, right?
This is such a theoretical argument and my conclusions are based mainly on the idea that if there is no utility people would not pay for it. It does seem ridiculous that moving 3ms faster wins you so much, but I'm just not convinced that there is definitely no utility there. Often economic utility is very hard to intuitively recognize -- often it is not recognized until people start intervening in the market and bad things start happening. If you ask computer scientists which jobs are useless, provide no utility, and should be eliminated, they would eliminate huge sections of the economy.
The telescope information is valuable to fruit sellers and fruit consumers alike. If Bill is very hungry today, but Joe is not, then Bill is rightly willing to pay a higher price for fruit.
Let's say that the loss of one ship raises the fruit price from $1 to $10. Bill wants to eat today and so he is saving his last $10 for when the fruit arrives.
As the ship crosses the ocean, the closer it gets to shore, the less risk there is in Bill spending his other $9. He wants to buy beer but is unwilling due to the risk of not being able to afford fruit.
To Bill, there is clear value in knowing how far along the ship has gone. The sooner he knows the better. Since knowing the ship is coming frees up his $9, this information also provides value to the brewer who will be able to sell his beer sooner. If the brewer sells his beer sooner, the brewer will be able to buy himself new shoes sooner, and so on. The 5 minutes of foreknowledge results more economic activity, and higher wealth in general. Bill gets his beer sooner, making him happier sooner. This has value. Mr. Guinness the Brewmaster gets his shoes sooner, easing his ankles sooner, and this is worth something. Every little bit of foreknowledge helps.
All arbitrage follows this same model. Whether the arbitrage profits are collected by one person or many is not relevant. There is utility in prices that accurately reflect supply and demand. The sooner prices reflect reality, the better.
If there are going to be fewer oranges available, the price should be higher to ensure an efficient distribution - a distribution to those who most value the oranges.
Galileo made prices 5 minutes more accurate, and while that is unsexy, it saved 5 minutes of inefficient trading. In aggregate, those 5 minutes end up being worth a lot.
Those minutes provide some level of utility equal to or greater than Galileo's profit. If Bill did not get at least $10 worth of utility from his oranges, he would not buy them, and Galileo would not receive Bill's money. These are voluntary transactions after all. Bill can always starve until tomorrow, or boil his shoes, or go forage for berries.
Fast information is worth something in itself.