I don't know if you have been on the other side of what market makers do, but its not exactly a day at the beach. Once you gain enough insight to see whats going on the charts you just see it as a graveyard of traders positions, stop losses and their capital. This happens every minute the market is open at every timeframe.
Have you ever wonder why the markets appear so irrational? Great economic data and the worse drop in months or vice versa. These are the expectations, emotions and psychology of the masses that are liquidated by market makers. Have you also just had a gut instinct to buy or sell and market moves completely opposite beyond your psychological limit. Only for it to start moving into profit once you have closed at a huge loss. This is all market makers do all day.
In principle there is nothing immoral here. Participants are all taking risks voluntarily, no one is forcing you risk trading the stock market. But in practice market makers take positions at the stop losses 90% of market participants giving them significantly overwhelming supply of assets at the best prices, while everyone else sees consistent intractable losses.
This is a Darwinian environment where only the biggest, fiercest and most aggressive players will win by killing weaker, smaller and less knowledgeable players. The only way for a small fish to win is to understand the rules the market makers play by. Their strengths, desires, weaknesses, limitations and once you do you realize that this was someone's capital, but it's also capital not going to the market makers.
I think you intended to reply to me (GP), not the parent.
You're ignoring my objection to this stuff, which has nothing to do with immorality and everything to do with with the waste and misdirection of resources. Why do people participate in this stuff? Because someone might get rich. From my POV, that's a waste and misdirection of resources. People getting rich is not the right motivation for pareto or utilitarian optimal allocations.
Capitalism and people getting rich is for better or worse exactly the stabilizing factor that has lead to the success of the modern world we take for granted. Capitalism is the worst except for all the others.
I empathize that it appears the case it's not an optimal allocation, but to say you know it's a misallocation leans overly simplistic.
What you see as misdirection of resources is the product of competitive market forces that drive innovation and efficiency. And the market often finds value in ways not immediately apparent.
Is less efficient resource arbitration (futures, forex) worth the trade-off? Producers can make their own market and set their own prices. But do that in an information vacuum and there will be increased deadweight loss in the form of higher bid-ask spreads, increasing costs, reducing economic activity.
There are more benefits in the form of reducing volatility and increasing liquidity.
It is not at all as obvious as you make it that society would be better off had HFTs and similarly received sorts of "financialization" not exist.
> I empathize that it appears the case it's not an optimal allocation, but to say you know it's a misallocation leans overly simplistic.
I empathize that it appears the case that the market has some emergent properties that allow it to optimize allocation, but to say you know its an optimal allocation leans overly simplistic.
"I think investing in a venture that will do <X> seems like a good idea" may, indeed, have some connection to an at least pareto optimal resource allocation.
"I will offer your $X in N months for <X>" might also play a useful role in resource allocation.
"I will buy this 3rd derivative instrument that reflects guesswork about guesswork about preferences and hold it for 3 hours" is just the financial service industry fucking us over.
I'm pointing out The Economy/Market and its mechanisms is a complex system. I urged caution making conclusions from facile knee jerk first order observables when it's the unknown nth order effects we should probably try to identify and characterize first.
> just the financial service industry fucking us over.
Maybe. But why think you know this? I haven't even tried to quantify the pros/cons, and I'm unwilling to stake a position until I do.
I don't know it in the way that I know about gravity or garbage collection. But I know it in the sense that the end results of this complex system are at best subject to debate as a net win given metrics that include the environment and equitability. A system with the set of pros and cons that the current one demonstrates on a daily basis seems incredibly unlikely to me to be remotely close to optimal.
Now, what does seem true is that it is easy to tell stories about this system that focus on its pros, of which there are many, and thus to construct the overall impression that we should be cautious about changing or discarding it.
In and of itself, that's not a problem. However, combined with the fact stories about the cons are routinely marginalized, discarded as not serious, simply ignored and forth, this is a problem. It leads to a strong bias in favor of the status quo - look at the all the good things we get! we must careful not to lose them! - and an equally strong bias against change attempting to target the much, much less culturally visible cons.
When I see a system that combines externalities, wild inequality of outcome and this sort of builtin restistance to tackling the cons, my facile knee jerk reaction is to assume that it is rigged. More pertinently, even if the alternatives do present various risks, we should be exploring "the neighborhood" with an awareness that we may not even be in a local optimum, let alone a global one.
> When I see a system that combines externalities, wild inequality of outcome and this sort of builtin restistance to tackling the cons, my facile knee jerk reaction is to assume that it is rigged.
But that's just the brain's bias towards simple explanations and well-defined actors - the Ockham's Razor heuristic you could call it. Truth is we're still in the early stages of capitalism where most (all?) nations aren't stably resourced and as such geopolitical strategy and internal unrest can and will undo capital expansion with a stroke of the pen or a bullet from a gun. The need for monopolisable extractative resources such as fossil fuels ensures that capital will trend towards monopolistic behemoths with deep connections to their governments, and that permeates down into capital as a whole.
Moving to a more decentralised model of resourcing means less need for national security to favour and support massive quasi-governmental corporations that are "too vital to fail" and which leads to an environment where the inevitable endpoint of every market sector is consolidation into their own behemoth conglomerates. The more dispersed your resource acquisition is, the less dependent on massive corporations governments will be.
Have you ever wonder why the markets appear so irrational? Great economic data and the worse drop in months or vice versa. These are the expectations, emotions and psychology of the masses that are liquidated by market makers. Have you also just had a gut instinct to buy or sell and market moves completely opposite beyond your psychological limit. Only for it to start moving into profit once you have closed at a huge loss. This is all market makers do all day.
In principle there is nothing immoral here. Participants are all taking risks voluntarily, no one is forcing you risk trading the stock market. But in practice market makers take positions at the stop losses 90% of market participants giving them significantly overwhelming supply of assets at the best prices, while everyone else sees consistent intractable losses.
This is a Darwinian environment where only the biggest, fiercest and most aggressive players will win by killing weaker, smaller and less knowledgeable players. The only way for a small fish to win is to understand the rules the market makers play by. Their strengths, desires, weaknesses, limitations and once you do you realize that this was someone's capital, but it's also capital not going to the market makers.