| | Dean:
I think he is talking about a form of risk arbitrage, as opposed to true arbitrage.
Some people regard true arbitrage as whacky. But true arbitrage serves a function; it is a force that maintains parity of prices for the same(or similar)things across markets. It still sounds crazy to some.
True arbitrage, as I understand it, is when a trader notices a slight difference in the price of the same commodity or instrument in two different marketplaces; by acting quickly and buying in the lower price market and immediately selling in the higher price market, a trader can make an almost 'risk free' trade. Because these differences are usually tiny, he must look for and make many of these 'risk free' trades, as well as leveraging, to make a little money on a lot of transactions. So not only high frequency but high speed.
Of course, these trades are not actually 'risk free' because each play is subject to his speed of transaction and there are other arbitrageurs looking for the same plays. So success comes down to speed of detection and transaction. But in theory, such true arbitrage plays based on actual observed differences for the 'same thing' (which might be some complex financial instrument)selling for slightly different prices in two different markets are 'risk free' or nearly risk free.
As well, the action of arbitrage eliminates or minimizes those small differences. If not their intent, that ends up their accepted function. (Gradients drive everything.)
So clearly, there is competition to detect and make these transactions as fast as possible, with no human involved to slow up the decision and transaction. This ends up as silicon battling silicon, but the result is a pressure that eats up small price differences in multiple markets.
With increasing competition comes the desire to actually not only observe and act, but predict in near real time these market price differences slightly in the future. Again, not based on direct human observation, but on silicon and code analyzing and modeling the differences in reaction of multiple markets to real time news and events. This kind of modeling is not really crystal ball gazing but it is not science, either. It is clearly risky, and so, is 'risk' arbitrage. But it is a different kind of 'analysis' then what I think you were describing. And, it still ends up, in practice, as silicon and code battling other silicon and code, in sometimes bizarre and unpredictable ways.
This is not what 'day traders' are doing when they are staring at their graphs and such and making day trades(at a much slower speed of transaction than either true or risk arbitrage.) In a way, 'day traders' are part of the required daily energy in different markets that supply the reactive element to this type of analysis. For example, a silicon model might attempt to model/predict 'how will the day traders in this market respond to this news relative to the day traders in this other market, given this news...' If analysis of past reactions uncovers a correlated predictable difference, then detecting the combination of real time news events that will trigger the market difference slightly in the future will trigger the play.
It's like the difference is, in true arbitrage, the silicon waits for markets to react to news and observes differences which trigger a play, while in risk arbitrage, the silicon detects news and events which it predicts will result in a difference in those market reactions. It still ends up silicon and code battling silicon and code, and the really weird thing is, in some ways, risk arbitrage silicon and code might need to model the reaction of true arbitrage silicon and code.
Does the SEC have a handle on the system dynamics of that? Of course not, so instead, they have safety valves and automatic stops when this whacky constellation of silicon and code(constantly getting tweaked, growing, and changing, like an AI amoeba)goes nuts.
Does this begin to sound like a room full of mouse traps?
And the draw of easy money and 'nearly' risk free trades, or at least, a trading model that can draw tsunamis of OPM at risk, is currently drawing a significant fraction not only of the nation's capital but the nation's intellectual capital.
This is building beast? This is building broad economic opportunities?
No. It is a game focused on ... a game. We have meandered ourselves into a value-proxy generating cul de sac that not only does nothing net to actually finance beast building, but actually siphons off capital and human intellectual capital from that activity.
The analysis you describe, I think, is what Wall Street was once about. It was necessary to actually research real folks playing the game out on the field, under a model where performance on the field would lead to a reaction in the market which would define a play. This new game is like focusing only on the scoreboards in a stadium with multiple scoreboards, and noticing that there is slight variation in when the score shows up on one scoreboard vs the other, and then connecting up a computer to detect these differences and ... place bets on the score.
Or something; but it no longer has anything at all to do with the game once played on the field. These types of 'financial scoreboard betting services' are serving only themselves, not the game on the field.
The teams are leaving the field, and the fans are getting bored. But the high fives in a handful of the skyboxes are going full speed ahead.
And the guy in this article finally looked out on the empty field and the emptying stands, looked around the skybox and asked himself "What the hell are we doing?"
|
|
