| | Mike E:
I agree that there is something screwed up with Silicon based trading, especially when true arbitrage is extended to risk arbitrage via Silicon based trading systems. But that is still tempered by views of the consequences of freedom.
I understand the service provided by true arbitrage; pressure to equalize market prices in different markets for equivalent instruments. What Silicon based true arbitrage effectively does is keeps these differences as low as technology permits, by allowing Silicon based bottom feeders to trim the random deviations. But wouldn't this same adjustment occur with wetbits only trading? I don't think most other non-Silicon traders even assess on the level of differences fed upon by true arbitrage driven at the speed of Silicon.
But risk based arbitrage is something else, and is disturbing. Under the general concept 'do all players in the game understand the rules of the game they are playing?' I think there is an ethical problem with encouraging day traders to swim in an ocean in which Silicon sharks are feeding at some fraction of the speed of light. In that game, day traders are willingly? knowingly? providing the analyzable energy/turbulence needed to twitch in predictable ways to the news of the day, and no matter how fast day traders think they are responding to their assessment of that news using their wetbits, an entire tier of Silicon based sharks are way ahead of them, and analyzing not the news and its effect on company performance and the long term value of stocks or financial instruments, etc., but the reaction of day traders in different markets to that news, and getting to the market just slightly ahead of the wave. The impact of the news on companies long term success and value is not of primary importance; the reaction of day traders (and even other arbitrageurs) to the news is.
So unlike true arbitrage, which responds to already occurred differences in market price in two or more markets, risk arbitrage is analyzing real time news feeds and based on models of market response, anticipating actual market differences in the future. Risk arbitrage is the competitive pressure of true arbitrageurs trying to beat their fellow silicon based traders to the school of fish. They aren't competing with the slow as molassess wetbit constrained day traders, they are competing only with each other.
Do the wetbit constrained day traders fully understand the rules of the game they are playing? If so, and they volunteer willingly to be the required energy/turbulence, then there is no ethical problem.
But do they? And when they use those free consoles provided by E-Trade, etc., do they fully understand what is being done with the signals they are providing, required in order to do exactly what is being asked of them?
Day trader reads the news, applies wetbits analysis, makes his trades, which maybe even E-Trade guarantees at 2 seconds. But how much time has passed since the news came out on the RT news feeds? Day traders are competing, they think, with other day traders.
Does the SEC(or anyone)understand the total system dynamics when this type of trading exceeds a certain level of total activity? Because with Silicon battling Silicon, it begins to seem like a room full of mousetraps waiting for that ping-pong ball to set them all off, like digital lemmings. We tune PID loops, but what tunes this? And indeed, whacky excursions of prices sometimes occur. The markets have some kind of crude shutdown/safety valve when it is obvious the Silicon has gone whack battling each other, but that is about it.
Sounds more than a little whack. A consortium of traders just built a shortened fiber cable between NYCity and London for $350 million dollars, in order to shave a few milliseconds off of their transaction speed.
Seriously? Sounds very efficient. Is it? At doing what? Because what it appears to be efficient at doing is concentrating capital and human capital in activities that employ very few; a cul de sac where capital is in service only of pursuing more capital.
At its peak, Beth Steel employed over 300,000 Americans. The biggest IPO news of the last year was Facebook, who employs maybe 3000. Capitalism has meandered into a going nowhere and doing nothing cul de sac.
But we will so rock Twitter while we're circling the drain.
regards, Fred
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