You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your own, your house burns down. That risk exists, and you are not the optimal holder of it. Hence insurance. A Lincolnshire farmer — and yes, I like the non-abstract solidly of the example — is not the optimal holder of the ‘risk’ that the Australian and Kansas wheat harvests are super-bountiful. Markets allow that risk to be transferred to a non-farmer better able to hold the risk.

Of course, with markets come some ‘unproductive’ stuff. Likewise, democracy is good, but that is not necessarily praising the optimality of all parts of campaign finance legislation.

Let me also mention that I am the author of the definitive reference book on old Vintage Port: Port Vintages (and seemingly the board disallows a link).

That is just one of the purposes; others are:

- time-shifting of consumption: borrow when you study or build a house, then invest and save during work years, then live of retirement portfolio

- maturity transformation enabling investment: extra cash goes in the bank (and can be redeemed on demand), is bundled and lent (long-term) to fund construction or businesses [1]

- allocative function: send capital to its most productive use. For that, you need accurate prices, supported by equity research and markets.

So, in real financial markets, all the arbitrage games etc. [2] at least support actual productive purposes.

In crypto, it's just a pure cargo cult copy of financial markets without any underlying productive purpose.

[1] that whole banking business is somewhat precarious, but reasonably well understood (since Bagehot) and regulated/insured, though in recent times obviously hasn't worked great. Alternative models (narrow banks + private credit) are conceivable.

[2] and to be clear: the amount finance skims of the economy is way too large. Similarly, building a somewhat straighter fibre (and then microwave towers) from Chicago to NY has no societal benefit I can discern. (But the solution to that is fintech and regulation, not crypto.)

Why? Now we have a trustless, decentralized, tech solution, why do you still want the "guys with guns" solution?

It's clear why the current gatekeepers don't like permissionless alternatives, but why do you agree with them?

Much as you would like to personalise this debate, it's not about my level of agreement with straw gatekeepers. It's about the simple fact the "application layer" doesn't exist. You're not getting your mortgage or pension from a blockchain.

That's a strawman you've skewered twice already, well done.

What we're saying is: a lot of the low level infrastructure used now in finance (brokers! Dealers! Clearinghouses!) is easily replaced by some code, once you have trustless decentralized computers. Which we do now.

Then your oil barrel market is just some code nobody needs to trust, and yes, the "last mile" of it still needs "guys with guns" infra. So what? We made a part of that market freer and fairer.

Cool, isn't it?

So I don't think it's a "straw man" to point out the answer to your question is market participants want promises actually delivered upon which you now admit is entirely dependent on the "guys with guns" (and/or trust). By extension, blockchains don't actually provide a trustless or decentralized solution to the actual problems of finance. Actually knowing that your counterparty will send you oil isn't some unimportant detail of the oil barrel market which can be handwaved away, it's considerably more important than the implementation detail of the transaction record updates or whether brokers are involved.

You've moved more goalposts in this discussion than crypto has moved in the useful bits of finance.

> Similarly, building a somewhat straighter fibre (and then microwave towers) from Chicago to NY has no societal benefit I can discern. (But the solution to that is fintech and regulation, not crypto.)

I've always been talking about technical infrastructure, you're the one who brought up delivery of oil barrels.

If you think this bit is not important enough that's fine. Feel free not to get involved.

The GP's wider point was the purpose of the finance industry is to facilitate real world productive activity. If the "decentralised" bit is isolated from that, you haven't got a decentralised alternative to financial markets.

In short, BTC is not fungible.

So without all those games, what would be substantially different?

A “game” implies non-productive or zero sum.

By definition, an arbitrage is not that. Any arbitrage is the result of an inefficiency in prices or the economy.

When someone arbitrages prices back to where they should be, they are performing a service that everyone else benefits from, and are rightly compensated for this. Now, are finance people compensated too much for correcting price discrepancies? If yes, then that’s another arbitrage opportunity!

But the question of what would be substantially different is easy. No arbitrage = no markets = top-down command economy. Check out North Korea, Cuba, USSR, the former Yugoslavia, etc. for what would be different.

While I agree that finance serves a useful purpose, I don't understand this bit. Suppose hypothetically that arbitrage gives some social utility, but not in proportion to the amount of money it makes for arbitrageurs, and thus not in proportion to the effort put into it. Suppose that society is overproducing finance -- that most people would be better off if the world had slightly worse pricing information, fewer financial datacenters and low-latency microwave links, less human effort devoted to banking, and more of something else that could be built with those resources and that effort.

Maybe this creates another arbitrage opportunity -- maybe in an idealized free market (where there are no barriers to entry) more people would work in finance, and their competition would reduce profits. But it seems to me that this would only worsen the overproduction problem.

Or is there something I'm missing here? Why isn't this really an "opportunity" to (carefully) increase taxes on finance, so that it won't be overproduced by as much?

Rather, because the gain produced by financial instruments is proportional to the wealth someone has, the returns of finance disproportionately benefit those with large amounts of wealth. One man can only make so much plumbing or being a mechanic, but can make an arbitrary about by investing in ETFs.

In other words, if the financial sector was largely a collection of small businesses run by middle class people, no one would think it was a problem that they make money. That would be great! But in reality it's a smaller amount of companies and smaller amount of wealthy people that benefit from it.

That problem isn't unique to finance, it affects many parts of our society.

I don't think this follows for all financial services. Overproduction leads to a drop in value if the market is efficient, but real-life markets are not perfectly efficient. For arbitrage in particular, the whole point is that the market isn't efficient. Arbitrage makes it more efficient after the arbitrageurs have taken their cut, but the value of that service isn't necessarily determined efficiently. (At least as far as I know: I'm not an expert.)

> Rather, because the gain produced by financial instruments is proportional to the wealth someone has, the returns of finance disproportionately benefit those with large amounts of wealth. One man can only make so much plumbing or being a mechanic, but can make an arbitrary about by investing in ETFs.

> In other words, if the financial sector was largely a collection of small businesses run by middle class people, no one would think it was a problem that they make money. That would be great! But in reality it's a smaller amount of companies and smaller amount of wealthy people that benefit from it.

> That problem isn't unique to finance, it affects many parts of our society.

... but I do almost entirely agree with this.

At some point those that amass large amounts of wealth are disproportionately able to influence government regulation to ‘game’ the system itself in their favor.

It seems in the realm of finance, it’s much easier to obscure regulatory capture than in other domains, where anti-competitive practices are much easier to suss out.

The price discrepancy which was corrected by arbitrage is, itself, the compensation the arbitrageur receives. If it weren't, that inherently also means that there still exists a price discrepancy, and thus an arbitrage opportunity.

This is all separate from the question of public policy. Should taxes on income from arbitrage be increased? Perhaps they should. Though that doesn't affect the mechanics of how arbitrage works, it simply decreases the net profit of the firm doing the arbitrage.

Conceivably, you could increase the taxes/regulations/restrictions on such firms to such a degree that they are either no longer allowed to perform arbitrage at all and/or can no longer justify the cost of the high-speed equipment involved. The end result of this would be that the markets become less efficient (there would be greater price discrepancies and they would arise more frequently).

How much does that matter? Well, that's more of a philosophical question. How much does it matter to you that you're buying something for the best possible price (versus knowing it might be available cheaper elsewhere)? Depends on the person.

Though this is only true in a system where you don't face tons of hurdles to deploy these new systems, which is not the case in the current financial system.

(All assuming a properly working market without collusion, illegal usage of non-public information etc. – which is unfortunately not always the case.)

Let me offer a (partial) defense of crypto if I can:

Broadly, crypto is divided into crypto-currencies and applications.

Let's tackled currencies first, some of which some are reputable and some of which are grifts, but which viewed in their most favorable light attempt to be a form of currency or asset that is decentralized. This means that no single party may unilateraly devalue them, or restrict their trade in any way.

(No I understand if that doesn't excite a lot of people, but this is clearly valued by some people!)

As may be obvious, crypto-currencies are too volatile to serve as actual "currencies", so they are at best "assets". But it is possible to use these assets as collateral for the minting of stablecoins. I'm not sure this is quite risk transfer, but it essentially relies on the willingness of some to hold speculative assets to enable the creation of a stable assets.

In turn, these assets are not typically useless — they hold value because there is demand for them to pay for transaction costs on blockchain.

Blockchains themselves are not useless. We may not think much of the difficulties of transferring money, but it is a real challenge in LARGE swaths of the world, where people are unbanked or live under tyrannical governments. I would argue that even in the west, the need becomes is becoming more pressing (Trudeau freezing trucker supporter bank accounts, banks imposing tons of restriction on cash withdrawals and "large" bank transfers).

Beyond transfer, they also serve to run decentralized applications. People are quick to dismiss those, and true it doesn't enable to do anything dazzingly new. It simply enables you to do things you could already do, but in a way where no single party (or even colluding parties) can shut it down. This may seem silly, but I think the world would truly be better if we for instance had a YouTube where copyright trolls couldn't strike down / demonetize legimate content.

Applications then. In reality, we're still far from decentralized YouTube (but we will get there). Most applications today are financial. And I think they're quite useful. The financial infrastructure being built is genuinely novel and useful.

The problem is that it is navel-gazing at the moment: that infrastructure is mostly used to perform financial operations on crypto tokens themselves. But there is no reason that they couldn't be used for other assets.

In fact this is starting to happen: you can now invest in real estate and US treasuries on the blockchain. We're still a way from mainstream adoption, and that has mostly to do with legal uncertainties that prevents established players from diving in (though many of them are experimenting). There are also entrenched interests there, it must be said.

So if anything else, crypto helps build a better financial infrastructure.

It's somewhat ridiculous that when you buy some stock, the trade is routed through three intermediaries and is only really settled 7 days later. The abstraction on top of this is actually leaky, with each intermediary coming with some risk and some agency to throw a wrench in the works. As in fact happened between Robinhood and its clearinghouse (or some such intermediary) during the GameStop frenzy.

Heat pumps will take a long time to reach every application that needs heating. EG: drying grain. Sometime heat pumps are not the answer (-21F for instance). Bitcoins resistive heating properties are almost 100% efficient.

With bitcoin mining: Money In = Heat + Air Flow = Money Out.

Electrical energy now has an opportunity to not be waisted where it normally would be. Think renewables where line loss / demand doesn't make a perfect system. Bitcoin can act as a storage device with near free movement allowing flexibility in these systems.

This monetary recovery can also be used to move money/energy to other places without the line loss.

The closest I’ve heard is that I could use the bitcoins to buy electricity from someone else, but I could have just paid that guy in the first first place and cut out the guy in Iceland. Also, it feels like we now have two power plants involved in charging my laptop, which feels like a lot of overhead.

I’ve heard this explanation enough that there must be something obvious that I’m missing.

For instance, apparently the EU is currently considering a regulation that houses must be energy efficient. Getting a current house into compliance would cost on average $50k. That kinda stuff adds up.

  if, for example, your liquid net worth is 100x the replacement cost of your
  home.

  for the vast majority of people, rebuilding their home is not feasible with 
  their current net worth.

The same is not true for auto insurance in most states, though most also have an option to self-insure by putting up collateral.

Without such insurance, specifically the "injury liability type" with its limits; then if someone gets injured on your property there may be no limit to your liability.

So even people who could afford the loss buy insurance because it is the best method of limiting intangible risks.

You can put the house into a limited liability company, which theory should limit the liability to the value of the house.

Depending on whether director negligence was involved etcetera.

It definitely shows, thank you for publishing it freely

>The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them.

This makes a sense to me, thanks for explaining. I can definitely understand how insurance collectivizes and smooths individual risks, and from this and other examples I can see why a lending institution might seek something similar to enable them to keep cash moving. It does seem a little epicyclic to me that a farmer faces a glut as a result of organizing food production through a market economy, and then we resort to like a second-order market trick to resolve that problem. Presumably it would be simpler to just dump all the food in the middle of the table and then hand it out evenly, but I've heard this runs into its own set of difficulties.

>Let me also mention that I am the author of the definitive reference book on old Vintage Port: Port Vintages

Very welcomed, I may not buy the book but I will definitely go buy some port. TGIF!

Are you familiar with the arguments of (more popularly) Aaron Brown and (transitively) Jeffrey Williams?

Essentially, the idea that a farmer would be an active participant in a futures market is quaint, but the vast majority of activity is speculation. This is not a contradiction of your point, but an elaboration of a counter-intuitive part of it.

One might look at a futures market and see that well over 98 % of the activity is buying and selling by people who never have any reason to care about wheat other than for the possibility of its price going up or down. But this large-scale speculation is precisely the thing that makes it possible for a farmer to hedge (by providing liquidity and a motive for the counterpart of the hedge) or, as Williams' points out, perhaps more commonly "take out loans in commodities" for their convenience yield.

Essentially, the Lincolnshire farmer can lock in a price with a plain forward contract. However, that does take a double coincidence of demands (or whatever the phrase is) and the standardised nature of futures contracts help avoid that problem.

But! The most common use of futures contracts (aside from speculation) is not (or at least was not, when Williams wrote his book) hedging, but effectively borrowing and lending in commodities.

Where do you draw the line between (useful) arbitrage and "pure speculation"?

Much of what is commonly known as speculation is actually an important mechanism for price quality or liquidity.

Obviously there are limits, and there are ample opportunities for making a one-sided profit without regulations, but people often seem to miss the value that arbitrageurs tangibly provide to them: Being able to exchange foreign currency at very tight spreads almost 24/7; being able to buy and sell even not commonly traded stocks etc. are often a function of that.

Having some experience with both trading derivatives and gambling though, I’m fairly confident saying that it’s a distinction without a difference. In both cases a little guy with an understanding of risk and bankroll management and some aptitude for the game, which for trading is a Keynesian beauty pageant, can scrape up a few bucks. But most people are going to be fish for the house. The derivative markets are providing exactly the same service as casinos, albeit with considerably higher limits and opportunities for crafting complex bets.

So I could decide that I think your house is likely to burn down, so I buy insurance on it.

That's what enables the gambling. If the only people who could buy puts or calls were people who had insurable risks in the underlying; it would be a lot smaller market and less gambling.

which makes the insurance premium grow higher, reflecting the information that such a house has a high risk of burning down.

It doesn't matter that the buyer of the insurance has no material connection to the house. I can't see why such "gambling" shouldn't be allowed to happen, provided that there's enough regulation and monitoring so that you cannot then go and burn down someone's house to collect the insurance!

financial markets are based on stochastic events which do matter very much, such that paying a broker is worth it. If it's not worth it to somebody, they should not participate, but in that sense they shouldn't participate in casinos either.

Also, welcome!

- [0]: https://www.portvintages.com/

they _produced_ more risk (by holding long maturity bonds that lose value as interest rate grows). This risk was not something that is inherent - they could've chosen not to do that with the large deposits from the pandemic money growth.

There's noone who can be the optimal holder of the risk that is produced this way, because there's no value on the other end - SVB is taking the full value already (the interest payments on said long bonds).

If someone were to hold that risk, SVB would have to pay out premiums that would surpass the interest income they receive.

The alternative is for society (aka, the central bank) to hold that risk. But this just means socializing the losses but privatizing the gains - something i'm very much against.

In the end, SVB was the optimal holder of the risk (that they produced for themselves). And they can't actually hold that risk - thus their failure.

While this may have prevented FRB, that's a very dangerous game to play should the bluff get called.

I'm strongly opposed to the idea that those given the power and authority to control or markets, as best they can, should world that power by lying to us. Lying because they think it's the best thing for us or because they don't think we can handle the truth is a slap in the face to the very trust that empowered them to begin with. Our leaders do this often and it's such a slippery slope - it either works and you feel emboldened to lie again or it backfires and we're all worse off.

By merely suggesting that a bank can fail, and that the FDIC is not going to bail out high depositors, they paradoxically _cause_ the run. After all, the people who took the money out just merely redeposited it back elsewhere (that they trusted more).

The white lie is better than a loss of trust which lead to an actual problem. And the FDIC could actually lie without lying by putting in vague words and misdirect people - such as saying things like "if necessary". In fact, people in society today believe plenty of white lies already - what's one more?

If we have such a fragile banking system that those in charge are expected to lie to us to keep people from seeing the fragility, we have to rethink the system.

> In fact, people in society today believe plenty of white lies already - what's one more?

That feels like a bit of a slippery slope, selling people on one lie shouldn't justify telling another. It also means first defining what a white lie is, and who gets to know the truth to decide whether it's acceptable or not.

... or especially to somebody who happens to bear the reverse risk.

For example, a wheat farmer doesn't want the risk that wheat prices might collapse by harvest time due to windfall harvests somewhere else in the world; and the spaghetti maker doesn't want the risk that wheat prices might be soaring due to crop failures somewhere else-else. They make a deal now so they don't need to worry about the future, but they don't need to make the deal directly, they can each buy or sell wheat futures.

Visit a part of the world where most people do not have access to home loans, health insurance etc. and you will not have to ask how mere redistribution of risk and capital adds to productivity ever again. (I happen to have been born one such part of the world.)

Which is true, but there's another angle that needs discussing - that of a high-trust society vs low-trust society.

In all places where there are well functioning financial markets, there exists a high trust society. This trust is the foundation on which the financial markets exist.

So in poorer countries where such financial markets don't exist (or don't serve the people), it's not because they've chose not to have it, but that individual actors cannot trust that the system is fair and is rules based. So the problem isn't the lack of financial markets (which is a symptom), but that of a lack of good governance (bad or non-existant laws, corruption etc).

Urban India is a very low trust environment, but people still have access to things like home loans, insurance and capital markets (equity and loans).

> lack of good governance (bad or non-existant laws, corruption etc)

I agree that good governance is a necessity for development of financial markets, but not sure what it has to do with being a high trust or low trust society.

i would imagine that high trust but only within the village is not really high trust. Anyone outside the village who would've otherwise had the capital to lend to this village would not trust them to repay the loans, and perhaps would also not trust that the authorities would come in to enforce the collection of collateral (and in any case, if you forcibly evicted the original owners of a property for debts, the other villagers are probably not going to let you live there peacefully).

> but not sure what [good governance] has to do with being a high trust or low trust society.

Good governance allows high trust to exist, which allows many other things to exist as a precondition.

Care to elaborate for those of us who never made it out of middle-america?

(Likewise with credit allowing people to finance ventures that they would otherwise be unable to)

So, effectively [1], with insurance everyone can build a house nearly twice as big as without. That strikes me as productive.

[1] if the probability of a fire is sufficiently small

For example, having fire sprinklers greatly reduces the risks from fire. However even the reduced risks are still too great for your typical homeowner, so therefore those risks are distributed (and the reduced risks are reflected in lower premiums for the homeowner).

The governments, on the other hand, don’t go bankrupt, so when they price the risks too low, the public will be forced to bail it out anyway, either through taxes or through inflation.

This very much is real and serious problem: consider, for example, National Flood Insurance Program, which is exactly the kind of publicly controlled insurance you asked for. It was $25B in the red by August 2017, and would have gone bankrupt if it was private. However, you (and other taxpayers) bailed it out in October 2017 to the tune of $16B. It continues to accumulate debt, and is more than $20B in debt right now. You will bail it out again, and keep subsidizing people who build their houses on flood prone areas, knowing that you will pay for their losses.

It's no different from the GFC, where the risk (of those mortgages) are mis-priced, and in the end, someone is left holding the bag.

A functioning market to redistribute risk needs transparent pricing, and proper bankruptcy (so in other words, the risk taker must not be bailed out, even if it hurts in the short term).

There are people advocating for “public banking”: https://publicbankinginstitute.org/

and credit unions also exist, which are nonprofits

Right, but taking this in the opposite direction then, why for public interest things should the default of 'people who just want to buy the next yacht' run them good?

Those are two different things. Bankruptcy isn't fun, but it clears your debt.

The view presented here assumes that the market prices risk (premium) arbitrarily correctly, and then argues the benefits of that.

What is optimal depends on the premium and a subjective assessment of the risk. There is no guarantee that what market offers is optimal.

I started with blockchain development, but noticed a huge gap in knowledge when it came to economics.

Hopefully, this book can give me some insights on tokens that resemble "money".

However, while the simple discounting formulas described (likely, haven't read other than the list of contents) in the book were at the time actually used more or less as-is to value instruments in the derivative markets, nowadays they are seldomly used on their own. Two major developments there are multi curve discounting taking collateralization into account and different valuation adjustments, collectively known as XVAs.

That is not to say you do not need to understand the beginner basics, vice versa, iys just that nowadays there is much more nuance in actual valuation.

Edit: to add, I'm not sure if its useful to study these nuances in detail, unless you are going to actually work on the markets. In the big picture their details are likely not worth it, but of course it is good to try to understand why these developments have been needed/wanted by market participants.

This is also behind the theory of why certain forms of financial transactions are legal and others are illegal. Arbitrage = legal, because it converges prices in two separate markets in a way that gives producers in both those markets better information about true demand. Futures markets = legal, because they smooth out temporal fluctuations in demand so that producers only have to worry about producing, while also incentivizing the construction of just enough storage & buffering to hold that product. Pump & dump schemes = illegal, because they distort price information in the market in an unsustainable way and then leave later participants to bear the cost of this. Same with Ponzi schemes. Equities markets = legal, because they transmit information about the overall cost of capital within the economy to firms, which can then use it to decide the profitability or unprofitability of various investments.

Certainly one function of financial markets and prices is to convey information, but that's not "solely" their purpose. They also provide a mechanism for resource allocation, risk management, wealth generation and collective action, among other things.

Your point about centrally planned economies, while historically corroborated in cases like the Soviet Union, might be an overgeneralization. The effectiveness of an economic system depends on numerous factors, including its degree of flexibility, the effectiveness of its institutions, and its ability to adapt to changing circumstances.

Not all centrally planned economies are doomed to failure; some have been quite successful, notably in East Asia where countries like China and Vietnam have managed a mixed economy with elements of central planning and market mechanisms.

Many capitalist corporations are centrally planned economies larger than many nation states. While everything fails eventually, these centrally planned organizations can last multiple human generations, and can be more durable than many markets and market-oriented economies.

The assertion about the feudal Middle Ages also needs some nuance. The Middle Ages, and the feudal system in particular, had complexities beyond simple information and incentive problems. Numerous sociopolitical factors were at play, including a rigid class structure, the influence of the Church, and the lack of certain technological innovations. Ascribing the issues of a historical period mainly to its economic structure oversimplifies the multitude of factors that influenced societal development.

Moreover, while financial markets do help in transmitting information from consumers to producers, they are not infallible. They can, and often do, suffer from issues like information asymmetry, where one party in a transaction has more or better information than the other. This can lead to problems like adverse selection and moral hazard. Financial markets can also be subject to speculation, which can distort the "signal" provided by prices.

The focus on profit as the sole incentive in the market might be somewhat limited. People's decisions to buy, sell, and produce are influenced by a host of factors beyond profit, including societal and environmental concerns, personal values, and ethical considerations. Financial systems, to be truly effective, need to take into account this wide range of motivations.

China isn't really centrally planned. They call themselves that so that the government and previous communist ideology can avoid losing face, but anyone who's visited there or done business with Chinese companies will say that it's intensely capitalistic, just with the potential for random state interference at a whim. I suspect the same is true for Vietnam, but know less about the country.

Information asymmetry issues are exactly why certain types of financial transactions are illegal - that's why we have things like SEC disclosure and insider trading laws.

[0] https://www.ers.usda.gov/webdocs/publications/99518/eib-219....

[1] https://emp.lbl.gov/publications/primer-electricity-futures-...

What percentage of futures trading is on farmers crops?

What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death?

How well will it work if we create unsustainable land that the farmers can no longer grow crops on?

They are far from the only example. Airlines use futures to hedge against fluctuations in fuel prices. Manufacturers use futures to hedge against fluctuations in the price of input materials. International businesses use FX swaps to hedge against currency fluctuations. Borrowers use interest rate swaps to hedge against interest rate rises. Investment funds (including pension funds and sovereign wealth funds) use options to hedge against drastic movements in asset prices.

I don't really understand your other questions. The use of derivatives in agriculture does not, on balance, result in fewer crops being produced. On the contrary, by allowing farmers to protect themselves against various risk, derivatives markets allow farmers to safely invest more money in production, and reduces the risk of farmers going bankrupt (bankrupt farmers don't produce many crops). Food would almost certainly be more scarce and more expensive if farmers did not have access to the financial markets.

And technically, futures are a more standardized tool than forwards are, hence the talk about futures all the time. [1] For reference, forwards have been used forever, and used for all sorts of commerce. [2]

We take for granted that you can pull out an iPhone and buy your favorite stock in seconds, but for most of history, nobody could even imagine that. That the modern world even exists is because of forwards and futures. The ancient world was able to grow and expand because of forwards.

[0] - https://www.cftc.gov/About/HistoryoftheCFTC/history_precftc....

[1] - https://www.investopedia.com/ask/answers/06/forwardsandfutur...

[2] - https://www.encyclopedia.com/social-sciences/applied-and-soc...

https://en.wikipedia.org/wiki/D%C5%8Djima_Rice_Exchange

On top of those primary deals, a lot of people pile up making bets on secondary deals. Those are the people going for "hey, a lot more farms are growing rice this year, I bet its price will fall". They are very welcome because they not only stabilize the prices on those markets, but they also provide short-term money to make the deals flow more homogeneously. Without them, making deals on those markets would be a profession by itself (as it was).

Now, there exist people making bets on the results of the bets of the secondary market. That is a different market. At some point it's clear that this becomes toxic, but nobody seems to agree on what point exactly.

> What about the crops they destroy because they would be less profitable?

You mean farmers getting bankrupt? You seem to be misunderstand, because the main reason farmers love the futures market is because it lowers their risks.

> How well will it work if we create unsustainable land that the farmers can no longer grow crops on?

Well, surely if you go and kill everybody, there will be nobody losing money on those markets.

To clarify this point specifically, food self sufficiency is considered a national security issue.

Consider the situation where a hostile country floods your market with cheap food products (below cost) until your country's farms go bankrupt due to an inability to compete. Once you stop producing food of your own, you give significant power to whoever controls your food supply.

This is a large part of why agricultural subsidies exist. And yes, sometimes it means paying farmers to let crops rot on the vine in order to not cause market gluts. That is an entirely different situation from futures and hedging, which in any sane market match supply and demand (with the result of minimizing waste).

The hostile country will eventually go bankrupt because they are producing products below cost.

Additionally, hostile countries do not need to flood markets sustainably if the goal is simply to hollow out food production in the target country before taking more overtly hostile (i.e. military) actions.

I get where you're coming from, and there's a lot which is not great in farming, but hedging values isn't one of those areas.

Because it was created by them, for that very purpose? Futures Contracts. Chicago Mercantile Exchange. Up until 1971 future contracts were ONLY for agricultural goods.

https://en.wikipedia.org/wiki/Onion_Futures_Act

The Dutch (and after the idea had crossed the Channel, the English) were trading debt from the invention of exchanges.

The CME might have started with FX futures in 1971, but they're hardly the first non-agricultural use.

A mining company would sell gold futures under the expectation that they will mine a known quantity of gold. They trade the risk of price fluctuations to match against their known liabilities (e.g. labor or depreciation of equipment costs).

Now replace “gold” with lithium (for electric car batteries) and you can create the greenwashed story that you want to hear.

They didn't just mentioned, they had an outsider negative take on it.

The best way is to respond with simple examples.

> What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that the farmers can no longer grow crops on?

How does futures trading cause these negatives? If anything, trading reduces these risks. Countries with markets have large bounties as opposed to those that don't.

It is not a zero sum game.

>what about the crops they destroy

This has nothing to do with the discussion

Oil, gas, lithium, corn....

Other examples are _all_ commodities markets like mining, logging, etc.

Of course public company share futures are inherently abstract, but they serve similar purposes, just not to a particularly similar party, depending on your perspective (of ownership, operation).

Edit: Now get why it is downvoted, but it's fair to note that farmers represent a small (10% from what I gather here) portion of futures, so I don't know how reprensentative they are.

It is nice as a purchaser of such securities that you can build things more quickly than usual and transfer worry to someone who is willing to be worried for you. However I don't believe the SEC financial highway patrol has enough cruisers or sophistication to pull over enough abusers to deter the disproportionate fraud that increasingly arcane financial instruments create.

The costs of a few bad actors building piles of money illegitimately do not show themselves immediately. They pop up slowly, in dark money investments in destabilizing elections, funding of war criminals, market manipulation, etc. The societal cost of a charlatan having several lifetimes worth of an honest person's influence are grave and not to be laughed off.

We're already there, brother.

At a basic level, obviously thee needs to be someone assuming the price risk from the farmers, and those people will obviously need to be compensated.

The more something trades, the more likely we will have the right price. When things don't trade as much, we don't actually know what that thing is worth.

This concept is a benefit to society as many things are interconnected and correlated, so the more accurate we can quickly find the current price (and expected future price) the more we can evaluate value.

(Also, they aren't "siphoning money" really it's "value" because the contract isn't actually money)

Is the idea that society gets a net benefit from price distortions like minimum wage, subsidies, taxes, etc. also "weird"? These also make it hard to discover the "right price" for goods, therefore it's... weird to have them?

> but then a bunch of unrelated parties come in and siphoning money from the existing parties.

I think you are trying to argue that markets mean that the value of a purchased contract changes, and that's only if you want to sell the contract again. If you buy the contract you'll get delivery of what you bought at that price? the market moving only affects you if you want to sell again. If I buy a 2009 used dodge charger with 100k miles for 10k, and then the next day someone sells another 2009 dodge charger with 100k miles for 9k, are those unrelated parties siphoning money away from me?

You could go straight to your local wheat farmer and cut a deal directly with them, but they are gonna say "what's the going rate for wheat" and call some friends and look at market data to determine if they want to accept your deal or not.

----

If you believe that futures markets are harming society, then what is your proposed solution as to how a buyer and seller should agree on a fair price for wheat?

So who is on the buy-side? Exclusively supermarkets/distributors, while exclusively farmers sell? I suppose that could work, but I assume it would quickly regress into tight relationships like we have (probably regionally variable) for smaller market's, like most vegetables (vs grain) where as I understand it it's largely a direct relationship with the buyer - you probably still sell a future contract, but it's not via a central market and it is 'farm x will deliver to buyer y', i.e. a pre-order if you will, not really a commodity.

And as others say, price discovery, liquidity. What harm does completely open (no obligation) do? And maybe you eat a lot of potatoes and want to lock in the price today. (Or more seriously maybe you're a big baker, but not big enough to be buying direct from farm, your miller is. So grain price affects you, but ypu can't directly control/choose when to take it. Secondary grain futures allow you to hedge risk of it moving against you. In turn this means lower prices or lower risk of shock price increase to your consumers.)

The farmer did want the price certainty that allows the risk of being more leveraged (tractor mortgage). But the farmer was not the optimal person to hold the credit risk of the grocer.

And the farmer might have sold without the intent to deliver. It might be that the delivery specification, or location, or whatever, isn’t perfect for the farmer. But if the farmer is confident that the prices will move together, then it still works.

Problems always appear when market participants try to affect reality to increase their odds, like shorting a position and then releasing some ugly news.

Loans are useful and necessary because businesses need to buy things before they get paid. It can't all be done using Kickstarter! Farming works this way.

Insurance is useful because you get paid when something bad happens to you. On a day when you're glad that you had insurance, it means someone else lost a bet.

Buying insurance you don't actually need is kind of dumb because you'll lose on average, but people do sometimes win in casinos, too. Selling insurance when you can't afford to lose is risking disaster, but sometimes people get away with that too.

But "like insurance" I think was meant as a broader term. Traditional insurance contracts look a bit like options. But forward purchases or sales are also often used as "insurance". The big gain is that purely cash settled contracts (or contracts where cash settlement is possible as a result of sufficient market liquidity existing to allow closing a position before physical settlement) can be used for risk mitigation in other ways which offer much better liquidity and better cost-efficiency in the right markets.

A good real world example is oil price hedging. An airline might want to mitigate the risk that their future cost of jet A-1 goes up. On the other hand, an oil producer might want to mitigate the risk that their future sale price of a particular blend of their crude goes down. Instead of using insurance or entering into bilateral forward contracts, both can trade futures or options on a standardised crude (which neither of them is ever planning to physically deliver or take delivery of[0]). The contract they are trading will not be a perfect hedge for either of them, but it will mitigate their risk significantly. In fact if they are both large enough, bilaterally the liquidity available to them would likely be insufficient to mitigate the same amount of risk.

Having a "single", transparent price also brings some other benefits beyond simple liquidity. For example, it enables several ways to manage counterparty credit risk which would otherwise be unavailable (daily margining, use of central counterparties or clearing, etc).

[0] although the contract might enable an oil producer to make physical delivery of their own blend with a price adjustment

But they also do different things:

You need insurance companies for one-off risks. Someone has to go see the house and say, "yep, it burned down." Also, we don't let people bet on other people's houses burning down for good reason.

Other risks are more impersonal, like "what if this company I bought a bond from goes bankrupt" or "what if the price of corn drops in half" or "what if the price of oil doubles." There are lots of people and companies who might want to hedge against those, not just the owner of the property.

Because this is more efficient and useful.

And what would you rather happen? That you were prohibited?

As others have said, your counterparty won’t know who you are: hedge fund; commercial hedger; rando — unknown.

Do farmers prefer that? Yes, the larger the futures market, the price of selling futures will be closer to optimal. If the market is illiquid, farmers often have to sell futures at a lower prices to market makers.

The vast majority of financial transactions aren't this - they're speculative. They bank on the idea that money now is worth more than money in the future, and the future value of an asset (using the definition of an asset that it's a sequence of cashflows) is both variable and uncertain. So therefore the promise of future money is inherently tied to the concept of risk. The majority of financial markets trading is based around this concept of risk, and the management of it.

There's vastly more complexity under the hood, but that's roughly speaking, accurate.

Third world countries want to issue debt in American dollars, because no one wants to buy their bonds in their home currencies.

Think about it this way, actors in financial markets all have various beliefs about the future, and all of these beliefs are on a scale of accurate to inaccurate. Speculation allows these beliefs to be aggregated into a single market price (which btw implies no arbitrage) for various types of contingencies and risks, and the price will rapidly update to reflect updates to reality and thus updates to everyone’s beliefs.

Let's imagine that a commercial farmer, whom we'll call Jeremy plants 100 acres of wheat on a farm. Market values for wheat (and everything else you can farm, from livestock to grains and so on) vary and move constantly, as a function of supply and demand. We saw this in an extreme form with the invasion of the Ukraine, and the droughts in Italy last year.

Now the problem with farming is your timescales are long compared to the movements of values for your product in the market, so you've no real idea as to what what you're planting will be worth by the time the bloody thing has actually grown and you've got it harvested and into barns to be sold. And once the seed is in the ground, you can't exactly just plough it all over and plant something else (not strictly accurate, but you don't want to go down that route).

So now let's fast forward. Jeremy now harvests his wheat, and let's say the price has moved up a lot between planting and harvest. Jeremy is a happy man, who's going to have a bumper time, even if his crop doesn't produce as much per acre as he might like at the minute, because it's not raining enough. Or conditions are perfect, and the price has gone up, and he makes a huge amount and can reinvest. Jeremy is a happy camper.

However, if the price falls, Jeremy is not going to be quite so chipper. As such, Jeremy can move his risk, through the use of a hedge. Let's say Jeremy hunts around to find someone to buy his wheat at the start of the season. He might sign a contract with a flour producer, stating that they will promise to buy x tonnes of his grain at £y per tonne. Jeremy now has a fixed price, which has hedged his risk profile. Now his risk has moved from financial to productive - he has to be able to provide the x tonnes. If he can't produce it all on the farm, he needs to source the difference. On the other hand, if he's a good farmer, and the farm produces well, and he doesn't over-extend his risk on what he's committing to, he now has a fixed price contract for his goods, which isn't going to fluctuate based on time (assuming the contract is honoured - if he's worried about that, Jeremy could then buy insurance on the risk of a default on the contract, but that then gets complex). This is a very good thing, but means if the market prices his wheat vastly higher than he expected, he'll miss out on that upside.

This is called a forward contract. There's other types of contract which can be used to do similar things (futures, derivatives...) but that gets a bit more complex.

So basically a third party would step in to assure him that he'd be paid the fixed price for a small fee? Are there no repercussions if the contract isnt honored?

Simple example - let's say the contract is for 100 tonnes of wheat at £175 a tonne. So Jeremy should get £17,500 for the wheat he's contracted to deliver. Now let's say that Jeremy has the 100 tonnes ready to go, but the flour merchant can't/won't pay up. Maybe he's in financial troubles, maybe Jeremy ran off with his wife, who knows. But for whatever reason, he refuses to pay.

Now let's also imagine two scenarios - one in which the price of wheat has gone up, and one where it's gone down. In the former, Jeremy is actually happy with this, as he can now sell his grain on the open market for more than the contract, and claim the insurance payout on the contract. On the other hand, if the price went down, Jeremy still has to sell his grain, but he might only get £100 a tonne, which is going to result in a loss of £7,500. At this point Jeremy is very glad of the insurance.

Now the interesting bit is the insurer has the estimate the risk of default, and the likely movement on the market, to be able to offer a sensible insurance product to Jeremy. So Jeremy might pay £1,000 for an insurance product which pays out £10,000 on the default of the purchaser, for example. Obviously the numbers involved here are fictional (apart from the price of wheat per tonne, which is probably around the mark given at the moment), but the principle is accurate.

Basically the entire point of futures markets is to standardize the contracts and process by which these contracts are fulfilled to the point where all of that is just part of the pricing mechanism.

Ancient civilizations invented the jubilee (loans should be repaid in 7 years) to prevent speculation on them. But unfortunately, preventing extreme concentration of wealth has fallen out of favour

If shares of companies are valued at fair prices it means that the finance departments for that companies can raise more capital. So companies that bring value to society should be able to expand their business.

At the same time, regular people can invest in such companies at somewhat fair prices without doing much analysis. Basically, because the profits above the market average have been taken by smarter investors already. But it’s still good to always be able to put money somewhere and receive avg. market returns.

One famous example with a completely extinguished price discovery is the Soviet Union. I think this is what killed it more than any internal or international political problems.

This only true of companies that were underpriced. Overpriced companies, either because of hype (Pets.com), fraud (Enron) or other reasons (maybe Jim Cramer issued a buy) do not benefit from a fairer price.

You mean over-priced?

because if a company is underpriced, they cannot raise capital as easily, since each share they raise would be underpriced, and thus the existing shareholders actually _lose_ value.

An overpriced company is one where raising capital (via equity offering) is worth doing. If a company was under-priced, it would actually make more sense to do buybacks instead.

For the reasons you listed, it was hard for the underpriced company to raise capital and too easy for the overpriced company. But those distortions go away once it is fairly priced.

I know that some people knew that something was wrong with Wirecard and they short sold the stock.

McDonald’s is known to have almost invented and streamlined cooking to industrial level. But McNuggets were made possible only through financial engineering:

https://tackletrading.com/tackle-today-the-rise-of-chicken-m...

I just finished some McNuggets so it’s even more funny to me right now.

youtube.com/watch?v=uG3uea-Hvy4

So, markets work pretty hard to make sure that information from one area of the global economy can flow to all of the rest of the system with relative efficiency. This works a lot like a game of telephone where changes in one market venue propagate through related instruments to other venues crossing space, species, and even time. Much like telephone, each pair of neighbors wants to do a good job sharing information without loss and, also, over long distances minor errors add up.

Arbitrage is the glue which prevents this from happening. Arbitrage says that any time anyone discovers some level of disconnection occurring, they can make money at very low risk by voting to shift markets to better align with one another.

Arbitrageurs are getting paid to provide a service to the market and subsequently the entire world. Their actions ensure that information flows throughout the global financial system quickly and without relying on centralized planning. Without them, markets could become disconnected and wander out of agreement.

>This works a lot like a game of telephone where changes in one market venue propagate through related instruments to other venues crossing space, species, and even time.

Hell yeah I'm not sure where I fall on accepting this way of thinking about things, but the line of poetics/skeuomorphics/analogy is very cool to me.

>Economic wreckage is the result, at least, but also imagine what would happen if corn farmers produced only half the crop that their buyers would have liked to purchase.

This is kind of my sticking point because on direction of that risk is like an actual hazard to my biology and the other is the consequence of allocating food by market. Not saying it's 'wrong' per se, but it does stand out that we're resolving market problems with like market^2

Most of the financial wizardry you read about in the linked article is related to that aim. It's not always obvious, because a lot of it is higher-order stuff: transactions between financial market participants where payouts are linked to other transactions (or aggregations of transactions) between financial market participants, etc. It can be hard to see the link to the participants I mentioned above. But a lot of it is a means to understanding, and spreading, the risks associated with financing those participants. It is a lot easier to lend people money to finance their wants and needs if you can (a) differentiate between people who will pay you back and people you won't; and (b) share the risk of not being paid back with others.

What they might be waiting on - imagine you have a business wanting to invest in something - new equipment maybe, or opening a new office. That requires capital expenditure. You might not have the free capital to be able to do that. However, if you can improve your cash position, that might be something which becomes available sooner, allowing you to grow more rapidly.

That requires that you're able to secure finance, which means you need someone to either buy something from you now, or to buy the promise of something for the future. In either case, you now have increased cash at bank, which lets you invest to generate returns (hopefully).

This is deeply rooted in the idea that money you have now is worth more than money you may have in the future.

- Commodities like wheat, barley, cows, coal, electricity and so on

- Money itself, in which case we call this lending and borrowing

- Money for other money, commonly called currency transaction

- Ownership stakes in companies, aka shares

- Contingent claims like options and futures on the above

Say you want to build a factory to make cars. That's going to cost something, and you want to share the risk with the public.

- When you IPO this company, you get a bunch of money from the buyers of your shares. The owners of the shares, why do they bother? They don't just get all the profits of the company like if they owned a restaurant. They don't control the car factory, they leave that to the management, including how much of the profits are paid out. What if they need the money, despite everyone thinking the company has good prospects? Enter the secondary market, what we normally call the stock market. Here you can find other people who want the shares you don't want, and will give you money today for your shares, even if the company hasn't made a dime yet.

- You have plans with the 10B from the IPO, but not right this day. If there were a money market you could gather some interest until the bill for the factory comes. Some other business needs to make payroll with their receivables a couple of weeks later. You just need to match with them somehow.

- When you start selling cars, you find that a lot of people don't have 50K in cash. Not to worry, you hand these people their cars anyway, and you make a financing plan where they pay for the car with money that they owe you. Now you have a bunch of loans from people, but you can't use the IOUs to expand your factory. What do you do? You find someone to forward you some actual cash on the expectation that the car buyer will eventually give you the money for the car. You just need a market to find this person with the opposite need to you.

- You might sell cars in other countries. If your factory is not in that country, your expenses will be mismatched. If only there was someone out there willing to swap all the Euros you got from selling cars in Europe for your Dollars that you use to pay your workers. It happens that there are other companies in America expanding to Europe needing Euros for their local offices, and having only dollar income. How to find them?

So what happens then? Who is going to match all these different interests? The answer is market makers. Basically people who know that there are clients whose interests match. Your basic middle man who stands there when the farmer comes in, buys the grain, and then waits for the restaurant guy to come in, and sells them. That way they don't need to meet at the same time and place, and they don't need to match exactly.

Not matching exactly brings us to contingent claims. If everyone just transacted everything in the exact right quantities, that would be nice for the market maker. He'd just take a spread on everything and sleep comfortably. But that's not what happens and supply and demand change, and prices change. In fact prices can change a lot, and you might need some sort of deal where you can buy or sell something, but only if the price is at some particular level. Or you might want to buy or sell something definitely, but not right now, only at some time in the future. This whole derivative game allows people to move risks around in order to match their changing balance of buyers and sellers.

I haven't even added speculators yet, but that's the start of a "who/why markets" answer.

EDIT. I know people will ask next. What does any of this very nice sounding imaginary world of completely explicable financial needs have to do with arbitrage?

The answer is liquidity aggregation on similar products, and liquidity spreading by interaction of participants.

Let's say there's a market to borrow money for each year in the future, eg 2024, 2025, 2026, and so on. Some guy decides he needs to borrow money for 2025 to build a factory. As a market maker, that's fine, but hey wait a minute. There's nobody I know who wants to lend in 2025. What do I do? I have this guy who wants to lend in 2024 and a guy who wants to lend in 2026. Hey, maybe I can just do all these deals, paying me a spread? My books will be slightly off balance, but don't interest rates basically move up and down together? Let's do it and deal with the mismatch later. So now these related markets are connected. They are sort of one large pool of liquidity, but still their own separate pools since there is still some difference.

This is a loose arbitrage. You're not guaranteed to make money on it, since rates can move the wrong way for you. But this is also the most common arbitrage, the one where you sort-of hedge your book against similar things and hope the imbalance falls out eventually.

Why has the global economy put such a high benefit from investment bankers compared to, for example, family doctors?

they can only scale at most linearly, with the number of hours they work.

A financier can scale multiplicatively, because the amount of the monies they deal with can increase without "extra work". The multiplicative nature means the more capital you have access to, the more money you get to make, which approaches exponential at some point.

And in the end, the financier speculating on the markets can affect many more people than the doctor ever can in their life.

It allows corn farmers to grow wheat instead, because he is selling it right now and wheat is more profitable right now.

The main reason why it doesn't go astray and make people hungry is because people that isn't involved in any way can go, study the factors that make wheat more profitable to corn, do their predictions of what will be the case at the point of delivery, and if they predict correctly that the price is wrong they can go and adjust it making a lot of money on the process.

I'm not sure why I'm being downvoted, as I didn't think this is all that controversial. Historically, finance was a much more boring and less lucrative field than it is now, and consequently much smaller. "I'm a super smart 18 year old and I want to get rich, so obviously I should go into banking" is a relatively recent phenomenon. I agree with everyone else here that the industry has value, so presumably its recent explosion in size has brought some additional value, but it's very hard to believe that value is large enough to offset the opportunity cost of a generation of ambitious geniuses not going in to science or industry or becoming entrepreneurs.

More housing is being built, but housing is not fungible, nor is it used as an input for manufacturing. I’m not sure what you’re trying to imply by saying if you were making a completely different argument about housing speculation being bad, the reaction would be different. Of course it would, it’s a totally separate argument from the one we are having about commodity futures.

I’m not sure why you care so much about financial speculation, it provides more accurate pricing and lowers transaction costs for the actual users of the futures contracts who take delivery of the commodity.

In my opinion, your arguments are coming from an emotional place. Try and examine futures markets from a place where you aren’t thinking about greedy rich Wall Street guys, the amount of money they make is irrelevant to futures markets being useful tools for producers and consumers of commodities.

I understand and agree, as I've said pretty explicitly in both of the comments you responded to. I'm arguing that the finance sector should ideally be smaller than it is, but you're responding as if I said it should disappear entirely.

> In my opinion, your arguments are coming from an emotional place. Try and examine futures markets from a place where you aren’t thinking about greedy rich Wall Street guys, the amount of money they make is irrelevant to futures markets being useful tools for producers and consumers of commodities.

I don't have any an animus against speculators; please try to read more charitably. The rapid growth of the finance industry over the last two generations is a result of the policies we've enacted, and the position that it should be smaller is an argument for different policies. Similarly, "it seems like we are pouring [too much] of our resources and brainpower in to designing exotic new ways to bet on the corn harvest" is a complaint about the system that incentivizes that outcome and the policies that produced it, not about the individuals acting within that system.

> I’m not sure what you’re trying to imply...

I wasn't suggesting that commodities are similar to housing in any way; I was saying that, since a lot of people seem to recognize the societal cost of speculation on housing specifically, that I was surprised to be downvoted for complaining about the cost of speculation more generally (which, I remind you again, is not the same as saying it shouldn't exist, only that our economy ought ideally to produce less of it).

For complex instruments in money markets, the main effects are bridging mis-priced treasuries on different time frames and hedging against various outcomes for pensions, banks, and dealers in physical commodities.

Most of the complex stuff either serves one of those purposes or becomes a zero sum game that doesn't affect non-participants. It's important to judge each instrument by its purpose and mechanism rather than bunch everything as a way to make bankers richer (e.g. a future vs. a CDO).

Venezuela has never had Soviet-style central planning. It's a market economy with a public sector only slightly larger than the OECD average. Their current situation is largely the result of excess social spending: first at the expense of investment and diversification away from oil prices were high, then at the expense of currency stability when oil prices crashed.

Venezuela's level of interventionism is unremarkable by the historical standards of the developed world. The problem is their poor choice of interventions.

why would this be surprising? Don't believe for a second that the USA has a generally more liberal financial market than Scandinavia. Employment laws, trade, regulations, etc. are often wayyy less strict in Scandinavia.

Where in Scandinavia would that be?!?

Suppose you produce oranges. It'll take a few months for the harvest, and while costs are generally well understood and stable, at what price will you sell those oranges? What if by then the price of oranges tanks and you find out you're not turning a profit? This is where futures come in. The producer can sell a number of futures contract to lock in a future selling price, making cash flows much clearer and predictable.

Conversely, there's the case of a factory that needs to buy oranges for its products. They have the opposite problem and would like to make costs more predictable. Then they'd buy futures to lock in a future buying price.

Interesting observation given that your own wealth is managed this way.

Whether its the simple bank deposit in a checking account, if you've ever chased an interest rate for a savings account, or had your earnings managed in a retirement account from your employer, or if you attempted to make money faster because a debt was coming due.

Its all tied together and a product of this system.

The goal is to keep money moving within the economy, as people also race to hoard it.

Not that I want to defend some of these institutions, though some are better than others, but it’s important to keep in mind that they do take on risk in order to provide us liquidity, and most of them specialize in managing the risk, some of them are even good at it. Their infrastructure and connectivity and the price they charge you to provide liquidity allows them to make profits, but they do lose money sometimes. Also, compared to 20 years ago, there’s fierce competition now in pretty much every aaset class - if you work in one of the buy/sell side firms, you’ll very often hear terms such as spread compression etc (except the Covid years of course - people just wanted to trade, nobody cared about the price of liquidity (e.g. spreads or sales credit etc.) they had to pay)

Either way it’s hardly a waste of time or money, and banks make money not from “arbitrage shell games” but by matching buyers with sellers. Some people have money to lend and sone people have enterprises they need to fund.

Ok the farmer example is a trope apparently. Any business where you need to hedge financial risk. Lending too many mortgages to self employed people? Sell that risk / revenue stream on to someone else and buy something different to diversify.

At the same time, it’s worth asking the question of why the financial sector just keeps growing and whether that’s desirable. Shouldn’t improved efficiency with digital systems make this intermediation layer thinner, less labor-intensive, more competitive? Instead it seems to be capturing an ever larger share of the economy’s output to itself.

In my opinion regulators should try deploying some blunt tools like transaction taxes and hard salary caps, and see if we’d be any worse off with a smaller and poorer financial sector.

Businesses and people need to loan or borrow money, offering a wide variety of products that suit different needs supports economic growth.

A good example of this are all the foreign companies that decide to go public on the NASDAQ. They aren't doing it in their home country because of a weak (or non-existant) equities market, or burdensome regulation.

> if you follow the “force is only justified in response to force” principle

Ooh, ooh, do the Paradox of Intolerance next!

You need mommy just as much.

E.g. Chad Ungabunga sees alphanumeric living on fertile soil with an attractive woman so he's going to bonk him over the head with a club and take his stuff because he's bigger and stronger.

I believe that principle should be enforced by the government, that’s the only thing I need mommy for. Given that you also believe in police, military and courts, on top of a bunch of other shit (like stopping consenting individuals from trading their own money), no I don’t need mommy “just as much”.

Except an apologetic nonsense-logic-it-is-obvious-it-works trope.

Only product is the profit.

Once HFT firms started becoming more widespread, the spread lowered significantly. SPY bid/ask spreads are 1 cent on a share that costs ~$450. Some assets even have sub-penny bid/ask spreads.

The traders that create units of SPY get better spreads on the underlying stocks too, which benefits you as well by reducing asset fees and more accurately representing the NAV by lowering transaction costs. The S&P 500 is made up of 500 stocks, it is much more cost effective to assemble a basket of stocks with 1 cent spreads than 6.25 or 12.5 cent spreads.

Liquidity does the same thing for every market, it increases the speed and accuracy of price discovery and lowers transaction costs.

Right, yes - I as a relatively-wealthy individual certainly benefit from an effective market. But does _society_ benefit from the existence of a stock market in the first place? Does the increase in wealth for those at the top outweigh the comparative-loss (stagnation relative to inflation) to those who can't afford to buy-in? I find it hard to morally support a system whose justification boils down to "it redistributes wealth to the wealthier without providing any net-increase in quality of life".

It benefits people who have cash that they want to invest, because they have more opportunities to do it and more visibility over which investments are safe and which ones are risky.

Therefore it benefits society by transferring cash from people who have it now but need it later, to people who will have it later but need it now. Enabling and facilitating actual socially good activity, like manufacturing goods, providing services, etc.

So there are definitely benefits to people outside the finance industry. However, in order to accept any of that you do ultimately need to believe, to some extent, in the market as a means of allocating resources. You don't need to think it's perfect, or that it shouldn't be regulated, or even that it is the fairest system, but you need to accept that it is the system we use. In a totally state-planned economy, finance wouldn't work or even make sense.

I wonder if there's a way to derive those same benefits (people doing useful work have access to funds) without the exploitable loopholes (sufficiently clever and evil people can shuffle numbers around and fabricate wealth without _actually_ affecting loan-availability)? I suspect that's probably a provable invariant - you can't have one without the other. Shame.

And at these times of high rates and inflation, the only safe move seems to be money market accounts and take the delta inflation hit. Try to focus your time in more valuable things like your friends and family. And keeping your sources of income.

> Pricing Money is a beginner’s guide: it says so in big letters on the front cover. I believe it to be an excellent beginner’s guide — presumably many authors believe their own books to be excellent — but, being a beginner’s guide, it will not immediately make you a world-renowned expert.

> It was written around the turn of the pedant’s millennium. In some parts it shows its age. It has been slightly freshened by the addition of green-boxed updates, but these have been written very concisely, more to point to developments than to explain them fully.

> Please do learn from and be informed by Pricing Money. But also be cautious: it is not enough to make you a world-renowned expert; it does not list the many details that are both dull and necessary; some things have changed since it was written; it cannot be your risk manager.

Call me jaded but I’ve worked with both systematic and discretionary traders. The algos I’ve seen tend to be heavily overfit, and stop working as soon as they hit production. The discretionary traders usually have a tonne of gambler’s tics and have a bad habit of assigning narratives to market noise.

Most institutional traders aren’t the best in the universe. They just do dumb things faster and at bigger scale than day traders.

The real sharks are on the sell side, using low-latency arbitrage and massive leverage, and have the ability to unwind risky positions over months. Fleecing buy side and retail is highly profitable for them.

In their defense of course they'll say they're "providing liquidity", and given how much buy side tends to pile up on one side of the trade, you can see their point: somebody's going to take the other side of these big moves.

Even if you invested in 2007 at the peak and lost 50% of a 100% S&P500 portfolio by 2009, by now you'd be extremely wealthy, adjusting for inflation.

A $10k investment in 2007 is now worth $27k and that assumes you didn't contribute another penny for 16 years.

This is the same reasoning as Banks avoiding mark-to-market.

I meant to put money in index funds right now. Not ongoing investment over a long time.

And going back further to my original point, if I had money in funds now I'd move it to Money Market accounts because the risk of a stock market downturn is big (1987/2001/2008 style). You are not Soros/Buffett/Munger or a multi-billion dollar hedge fund.

- Recession now undeniably starting (several friends in Tech are losing their jobs in companies doing well)

- Ballooning deficits and debt at every level

- High rates making debt ballooning faster

- USD dominance decreasing

That's known and now not matter of opinion but hard facts. Now, where to invest? I have no idea (and I'm pretty sure traditional investment knowledge doesn't work anymore), so I do money markets and take the hit until I figure something out. Maybe there's a non-hype AI application opportunity somewhere, who knows. Worrying too much makes you do dumb life-altering things. In uncertain times, I chose to invest the time in enjoying life a bit. Wait and see.

I'm just indexing and staying happy, worry free, it worked for the last 100 years and I'm sure it'll work for my lifetime.

My (limited, retail only) experience tells my gut that most retail investors do it to get rich, and not to learn the markets, learn the risks, and build a business. They are different goals, granted both do seek to make long term gains.

I like to believe that retail investors can make it if they put in the effort and learn to manage risk appropriately. At least I need to tell myself that as I work towards making money in the markets myself.

I am definitely dumb money right now, and I could also be delusional, but saying there is no hope so give up and just do something else completely is just defeatist.

That said I feel like it’s skipping some explanation for what’s supposed to be a beginner’s guide. One thing that sticks out to me is that it jumps straight into talking about interest rates without explaining the time value of money and why interest exists.

I wanted a book I could recommend and to others who knew even less than me, but I don’t think this could be it.

(And maybe interest is covered later on, but the ordering is important)