So here’s a finance problem solved

Electronic dealing, which accounted for 66 percent of all currency transactions in 2013 and 20 percent in 2001, will increase to 76 percent within five years, according to Aite Group LLC, a Boston-based consulting firm that reviewed Bank for International Settlements data. About 81 percent of spot trading — the buying and selling of currency for immediate delivery — will be electronic by 2018, Aite said.

“Foreign-exchange traders are much like stock floor traders: a rapidly dying breed,” said Charles Geisst, author of “Wall Street: A History” and a finance professor at Manhattan College in Riverdale, New York. “Once the banks realize they are costing them money, the positions will dwindle quickly.”

So we don’t need to worry about curbing FX trades then. For as the problem was identified, it was those traders taking risks for their bonuses that were the problem. Given that computers won’t be taking risks in order to get bonuses we’ve solved the problem therefore.

ie, the Tobin Tax c’n fuckoff’n’all

38 comments on “So here’s a finance problem solved

  1. Oh the joys when some smart kid hacks the ForX system.
    One result of Big Bang & increasing computerisation has been traders getting into unsupportable positions & running up mega losses. Much less common when it was all face to face. Peeps are very much better at pattern recognition than computers. Many of them wouldn’t have happened because the WTF’s going on here alarm bells would have sounded. It’s all so much more efficient until…

  2. So, when it all becomes machines gambling with other machines, all running algorithmically… doesn’t that give us a situation in which anyone can buy a machine and do precisely the same gambling?

    And then, who gets the spoils of the fiat money system becomes entirely consequential on who is given a State gambling license, or a banking license as we might euphemistically call it.

    There is something very Philip K Dick about this.

  3. Ian B,

    Yes, but you need your machine to be identifying the trade and getting it to the exchange before the other guys. So you need an expensive box, clever software, and to rent space close to or in the exchange building to reduce latency caused by distance.

    In summary, yes, but no.

  4. I’m not sure the evidence points to the conclusion.

    “Electronic dealing, which accounted for 66 percent of all currency transactions in 2013 and 20 percent in 2001, will increase to 76 percent within five years.”

    This doesn’t say anything about a reduction in human-originated trades, simply that algorithmic trading is growing rapidly. Borrowing Tim’s argument about the service sector vs. industry: a percentage increase in one doesn’t mean an absolute reduction in the other.

  5. I can ping Google.com in 21ms. Not fast enough?

    It seems to me that the only barrier to entry is the right to trade. Other than that, you’re going to be down to commodity boxes and software. What would happen if anyone were allowed to trade? Think of it; billions of machines piling in. Would the system collapse? Or would the profits simply collapse to microscopic levels?

  6. No, not even close Ian. These people use taut cables to avoid the nanoseconds lost in coiled up loops of fibre. Some of the loonier ones are even talking about using free space optics to avoid the refractive index of glass slowing down the beam.

  7. Ian,

    21ms?

    This system could daisy chain 160 trades in the time you were getting your first in.

    http://www.londonstockexchange.com/products-and-services/connectivity/hosting/hosting.htm

    I’m not sure what you mean by “the right to trade”. Everyone can trade via a broker, you’re talking about removing the middleman? You need *some* sort of middleman to provide validation of the data that Rand Omstranger is squirting into the exchange. I suppose the exchange could trust your software to do this. It’s a trust issue in the end.

    There are two ways to look at algorithmic trading. You can run arbitrage strategies – looking to buy and sell equivalent (or near-equivalent) instruments simultaneously in different markets. This is mostly risk-free and so a guaranteed profit, but inevitably that makes it hard to get in first and the returns are likely to be small.

    Then there are speculative strategies, where you create an algorithm and trade based your belief: “trades that go up 4% tend to go up another 2%” or “trades that fall 15% tend to gain over the next week”. People running these games will sometimes get it right and sometimes get it wrong. strategies garnered from data-mining are likely to go out of date as more people get into this sort of trading and change the way the market moves. I don’t see these profits collapsing.

  8. Is it just me that thinks that this sounds insane? Can we meaningfully call this “trading” or even “capitalism”?

    Something I remember mentioning a while ago; Warren Buffet (I believe) pointing out that the supposed justification for the market- capital allocation- could be achieved with daily, or even weekly, clearing. Or even, apparently, “per minute” clearing…

    I think there is a relevant question here. Let’s get statist, and impose (as a thought experiment) daily clearing on the financial markets (and imagine in our thought experiment that this is not circumvented by some sort of unofficial dealing). Is there any identifiable harm that would be done, economically, by doing so?

  9. Potarto-

    Everyone can trade via a broker, you’re talking about removing the middleman?

    Well the point is, in our day after tomorrow sci-fi future, there aren’t any “men” at all, just the algorithms. So why go through a middle-computer-owner at all? Just leave the algorithms running and go to the beach. It seems at this point, profit simply boils down to the ownership of a software instance.

  10. Tim’s premise – “computers won’t be taking risks” – is flawed. The computers are merely tools of their human masters, therefore they will take as much risk as they are programmed to take.

  11. Ian,

    “Just leave the algorithms running and go to the beach.”

    That’s what happens now, pretty much. But you still need some proles to oil the hardware and notice when your awesome back-tested strategy comes off the rails.

    Can you flesh out the per-day market clearing idea? It sounds like it removes me from the decision making on my trades.

    If I want to buy Google before they go ex-dividend, how do I know the price? Do I set a limit and then curse when I’m too low?

    If there is bad economic news and I want to sell all my holdings, just when many others are doing so, do I sit by the Internet awaiting email news of how poorly I did at the end of the day? It all sounds a bit 19th Century.

  12. Potarto-

    I think that’s the idea. It stops you and the other lemmings all running of the cliff at once because you heard Bob over there is selling and he knows somebody at somewhere else, so follow him then, the market’s crashing, we’re all doomed, doomed, DON’T PANIC MR MAINWARING and so on.

    The actual point of what Buffett said was that if the markets really did what their apologists claim- allocation of capital- there is no need for instant or rapid trading. The instantaneousness is entirely to facilitate febrile gambling, not somebody after due consideration purchasing some shares in Amalgamated Wingnuts because they are a solid looking company who are likely to pay a healthy dividend.

  13. “The instantaneousness is entirely to facilitate febrile gambling…”

    But you just agreed that removing the instantaneousness makes it harder for me to make a better judgement on the allocation of my capital!

  14. The argument seems to be, “Traders are herd animals, so blindfold them to save them from themselves.”

    Sounds a bit Richard Murphy.

  15. But would it actually make it harder, or do you have to be so fast only because everyone else is?

    How short are your fibre optics? 😀

  16. Nobody would be blindfolded, just have time to stop and think.

    We know that the markets are irrational herd animals; that’s why we have crashes. It’s pretty much impossible to deny the assertion. You get spooked, you go running off a cliff screaming like girls, then the taxpayers have to give you more money for another game of craps.

    2008, and all that.

  17. I’m not seeing the gain.

    In its essence, every trade is based on a decision that I’d rather have the other than my current holding (whether I’m holding cash or an equity or whatever). This decision is based on the market price.

    I can’t imagine a system that doesn’t include these two factors. Given that traders look at the price and swap holdings based on that, what are you proposing?

    “the taxpayers have to give you more money”

    You really believe that? That tax-payers *had* to *give* money to banks?

  18. Potarto-

    You don’t seem to understand what’s being proposed in the thought experiment. You have identical information. You’re just slowed down by clocked clearing.

    You really believe that? That tax-payers *had* to *give* money to banks?

    You have no shame, and that is why so many people hate you and wouldn’t piss on the financial community if it was on fire. I cannot think of a politer way to put it than that.

  19. Well, that’s a little rude. Are you talking about me specifically, the whole financial sector, or just the bits that lost money? Or doesn’t your invective need a specific target just as long as your can spew it?

    You say, I’m slowed down, but are my trades conducted more slowly or is it just the time span for trading has been compressed? If it’s the latter, I don’t see any difference, other than traders get a lay in.

  20. Sorry, was in a bad mood having had a visit from the TV licensing nazi searching for an illegal wireless receiver hidden under the stairs, kind of thing.

    We’ve lost the point here, which was that the capital allocation role of the markets does not need instantaneous transfers (in which, as we have ascertained, “who gets in first” can be a matter of who has the shortest fibre) but could proceed equally well in an imaginary clocked system (clocked via clearing).

  21. I’m sorry to seem funcking dense, but I’m not getting it.

    We change to a clocked system. Who gets the first trade? The first person to get their trade in. How do you prevent that? A lottery system?

  22. It’s a thought experiment, Potarto. It’s meant to illustrate a point, not be a fucking recipe. For chrissakes.

  23. Tim adds: IanB. I think you’re missing a bit here. Yes, faster trading really does just allow more speculation. But two things:

    1) Speculation is the liquidity that allows “investors” to move as they want to. Just an example, back when I did an internship the spread between buy and sell in the £/$ FX rate was 10 basis points, often higher. These days it is 1 basis point or below. That there is the huge froth of speculation is what makes those “investment” movements only 10% of the cost they were 25 years ago.

    2) The speculators are part and parcel of the pricing mechanism. Their views influence prices. And very importantly you want to have speculation on going short: this is what bursts or at least tempers asset bubbles. At least one recent Nobel Laurate (Shiller) has insisted that if there had been more speculation in US housing then the bubble wouldn’t have been so bad.

    3) Who are you to tell people what they may trade and how with their own money?

  24. Look, imagine a game. On each turn, you can do any combination of-

    1) Buy some shares that are on the market

    2) Put some shares on the market

    3) Run around in a circle screaming BUY PORK BELLIES!!!!111

    4) Borrow some money to buy some shares with

    5) Explain to somebody you previously borrowed money off why you can’t pay them back yet

    6) Start a boiler room scam

    7) Bank error in your favour. Collect £50.

    8) Jump off a roof

    Like that.

  25. Who are you to tell people what they may trade and how with their own money?

    Because most of it isn’t their money, as we found out in 2008.

  26. Ian B,

    > You don’t seem to understand what’s being proposed in the thought experiment.

    Actually, yes, he does. You explained it quite clearly. It is you who do not understand the implications of the thought experiment.

    > The instantaneousness is entirely to facilitate febrile gambling

    With respect, you have not the faintest clue what you are talking about.

    > You have no shame, and that is why so many people hate you and wouldn’t piss on the financial community if it was on fire. I cannot think of a politer way to put it than that.

    Actually, scrub the respect. You’re insulting us from a position of ignorance.

  27. Tim,

    > Given that computers won’t be taking risks in order to get bonuses we’ve solved the problem therefore.

    You do know that the computer programmers can get bonuses, yeah?

  28. > Because most of it isn’t their money, as we found out in 2008.

    Since the 2008 crash was caused by mortgages, you’re going to have to explain that one a bit better. A mortgage is quite clearly the bank’s money and not the houseowner’s. That is, by definition, what it is.

  29. Banks, like governments, haven’t got any money. They’ve got money on loan from depositors and have to pay back later.

    The point here is this; if we had a free market, complaints that “it’s our money and we can do what we like” would be entirely valid. But we don’t. We have a State market, at which point that defence falls apart, and the rest of us have a right to question the behaviour of the coke fiends playing a game called Stuff Money Up Each Others Arses Until The Music Stops.

    Honestly, this is the whole problem. You’re tone deaf. You have no idea why the left is so critical, because you cannot figure out that what is going on is deeply questionable.

    Stand on your own feet, or at least have the fucking decency to understand the reason for criticism from the rest of the people being robbed blind into penury to support the gambling habit.

  30. @Ian

    “Sorry, was in a bad mood having had a visit from the TV licensing nazi searching for an illegal wireless receiver hidden under the stairs, kind of thing”

    You just tell them “no thanks, not today”.

    They are just “salesmen” from Capita, on £20 commission if they get to talk to you “and take notes”, or even better if they can sell you a licence, nothing more.

    They have no “rights” whatsoever, you don’t have to talk to them, you certainly don’t have to let them in, you can treat them like charity beggars or double glazing numpties and just shut the door on them…

    They only get to talk to you if they get a warrant and turn up with the police. Which never happens unless they have “very good reason”.

  31. I’m going to start a new business with a great business model. We sell cables. And the shorter the cables are the more they cost.

    This time next year …

  32. PF-

    Yes, I know, but it was easier to just let him in, rather than raise suspicion and have them come back with the police and find the family of unrepentant smokers hiding in the attic.

  33. @ Ian

    That’s very decent, most people never bother (talking to them). He’ll be a very grateful chappy for that £20..:)

    Point taken about the attic..

  34. Ian B,

    > Banks, like governments, haven’t got any money. They’ve got money on loan from depositors and have to pay back later.

    Sorry, this is nonsense. Governments do have money; they just don’t generate wealth. They take money from taxpayers; after taking it, they have it. That is what “take” and “have” mean.

    Banks have money too. The fact that they have contracts stating that they may have to give some of that money to other people at some point doesn’t mean they don’t have the money. On the contrary: the contracts wouldn’t be necessary or make sense if the banks didn’t have the money. And, deposits aside, I’m guessing you have at least heard the phrase “bank charges”.

    > if we had a free market, complaints that “it’s our money and we can do what we like” would be entirely valid. But we don’t. We have a State market, at which point that defence falls apart

    I agree, which is why I opposed the bailouts at the time and haven’t stopped doing so since.

    http://blog.squandertwo.net/2008/10/who-should-suffer.html
    http://blog.squandertwo.net/2008/10/pros-and-cons.html
    http://blog.squandertwo.net/2008/10/representation.html

    Since I blog my opinions and they’re there for all to see, why don’t you have the fucking decency to hurl your invective at someone who actually supports what you’re so keen to blame me for?

    > the rest of us have a right to question the behaviour

    So fucking what? Just because you’ve got a right to question the current system (which no-one here has disputed), it doesn’t follow that every suggestion you make for its replacement will be a good one. There are plenty of good suggestions around for ways to improve the banking system, and the British banking system is currently busy restructuring itself in a very big way based on some of those suggestions (I’m a small cog in that machine myself). But your suggestion, above, is shite. For reasons that Mr Potarto has explained quite satisfactorily, albeit that you’re too tone deaf to understand the explanations.

    > the coke fiends playing a game called Stuff Money Up Each Others Arses Until The Music Stops. … the gambling habit

    In my experience, traders like to project the image of reckless gamblers because it’s cool and gets you more casual sex. The reality of their jobs is far more mundane, and (having spent years working in risk) I can honestly say I have rarely met a more risk-averse bunch of people in my life. The existence of crashes actually confirms this: if it were just roulette, a crash would occur when everyone in the casino put their money on 4 for some reason — which would never happen. Crashes happen precisely because the choices aren’t random, meaning that bad information causes lots of people to make the same mistake. If it were roulette, bad information wouldn’t have any effect.

    > Honestly, this is the whole problem. You’re tone deaf. You have no idea why the left is so critical, because you cannot figure out that what is going on is deeply questionable.

    Which bit of “what is going on”? Algorithmic trading? The bail-outs? The whole of banking? What?

    I certainly understand why people are angry, but being angry doesn’t make them right. You, for instance, have already demonstrated that you don’t understand algorithmic trading, but, what, I’m supposed to take your advice on the matter on board anyway, because you’re angry? I’m quite happy to engage with people on the subject of banking and spend a lot of my spare time explaining some of the concepts to people and things like what’s wrong with transaction taxes, why bonus capping doesn’t hit the people it’s intended to hit, what a credit default swap is and how you can tell they didn’t cause the crash, why the media are insane to have got all hysterical about short selling, etc. If they’re polite to me. People who just hurl abuse the moment they hear the word “banker” can go and fuck themselves. (They’re usually teachers.)

    > Sorry, was in a bad mood having had a visit from the TV licensing nazi searching for an illegal wireless receiver hidden under the stairs, kind of thing.

    Funnily enough, I had a rather annoying and stressful phonecall with a builder earlier, so apparently it’s OK to take that out on you, you tongue-dragging moron. Oh, sorry.

  35. IanB – I think the point is it can be done, so it has to be done. It’s like writing computer viruses – if you don’t indulge in the game of writing viruses and producing fixes, then the whole system ends up exposed to the person who does.

    If you tried to slow down trading on the official channels then unofficial channels would spring up (narcotics?).

    As long as reasonably smart people with massive amounts of money can make more by doing it, there’s little to be gained by trying to stop them. The important thing (like narcotics) is to ensure that whatever policy steps are taken are done so to reduce the potential harm to third parties, rather than to grandstand to particular political constitutuencies, mind you could say that about anything the damn government sticks its nose into.

    Cuffleyburgers

  36. “Sorry, this is nonsense. Governments do have money; they just don’t generate wealth. They take money from taxpayers; after taking it, they have it. That is what “take” and “have” mean.”

    it’s not nonsense, though. Governments, or at least the UK Government, do not “have” money. Its role is to administer the nation’s finances. It has control. That it regrettably behaves as if it was its money & talks about “We are spending…” in the personal rather than general sense, is beside the point.
    As ever, they lie.

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