[ExI] Efficiency of algorithmic trading

[Rafal Smigrodzki]

On Fri, Apr 29, 2011 at 5:38 AM, Eugen Leitl <eugen at leitl.org> wrote:
> On Fri, Apr 29, 2011 at 05:23:29AM -0400, Rafal Smigrodzki wrote:

> I thought it is well known that it's the predictability of
> collective actions of small investors that allows big players
> to make money off them.

### Well, why should the clueless expect to gain? Inefficient actions
(i.e. the short-sighted greed of the small investor) lead to incorrect
pricing (i.e. prices that do not accurately reflect the underlying
values of assets) and better investors (i.e. investors who understand
the future over larger time scales) correct the inefficiencies,
reaping a reward. There is nothing wrong with it, and it's the reason
why I do not individually trade on the stock market.

It bears repeating that the social purpose of the stock market is not
the money that investors make there but rather the pricing signals
generated by it, and the accompanying flows of resources to productive
uses. Accurate prices are, well, priceless for the functioning of an
economy, and the gains that investors make on the stock market are a
small price the rest of us pay for the knowledge that is encoded in a
price. Any feature of a trading system that produces more accurate
prices is socially beneficial, no matter how many little greedy people
get burned by it.

---------------
>
>> Seriously, railing against short-sellers is for me a bad diagnostic
>> factor, somehow didn't expect it from you.
>
> I'm not singling out particular culprits, merely the fraud cluster
> in finance. The potential for damage is immense, and is not well
> understood by the general public.
>
> That core functions of finance are vital for advanced societies
> to operate is pretty obvious. What we need to do is move these
> functions into tamper-proof decentralized protocols and infrastructure,
> to protect them from human meddling.

### Trade *is* human (even if done with algorithmic intermediaries). I
am all with you in the decentralization camp but I haven't heard any
interesting specifics from you yet. The fraud is mostly related to
government involvement in banking, otherwise it tends to be a
self-sanitizing business (just like other branches of the economy
where reputation is key, and performance is easily measurable by
outsiders).

Rafal