[bequanna]

Remember, not everyone participating in the financial markets is simply speculating.

Indeed, many market participants are hedging their business operations, future production/consumption of physical commodities, etc.

So, when a speculator takes the opposite position of someone looking to hedge risk value is created for the hedger. Sure, it's not necessarily tangible, but it isn't nothing.

[mrchicity]

I would agree with you 99% of the time, but not for these products.

Professional fund managers who want to insure against volatility can easily trade VIX futures or index options. They wouldn't use an ETP that can only replicate daily returns which erodes longer holding period returns, with high internal fees, daily roll costs, etc.

Same goes for other products like 3x inverse leveraged oil ETPs. The Southwests and Exxon Mobils of the world would never hedge with those. They'd go to ICE/CME or have a bank/energy producer write a bespoke forward contract.

The people trading these exotic products are the /r/wallstreetbets crowd. They're basically gambling instruments because of the amped up returns. They aren't suitable for the retail investor because they can't understand the mechanics, and professionals have better choices. Really no reason for these to exist, and I wouldn't be surprised to see more scrutiny after retail traders lost everything in inverse VIX this week.

[branchless]

Agree with everything except the "I wouldn't be surprised to see more scrutiny". That would surprise me!

[mrchicity]

I think it's a case of bad optics. Most leveraged ETFs or ETFs that hold futures and constantly pay roll costs just slowly decay. They're not suitable for the average mom & pop, but holders have ample time to see their investment going poorly and get out. It's hard to feel super bad for them and they're less likely to complain loudly.

Meanwhile XIV did the complete opposite. Because of the VIX futures term structure it was actually earning roll premium most days. That plus declining volatility caused its price to march steadily upward for almost two years. It looked safe and some people put lots of money in, even bought on margin. Then one day they lost 80-90% with much of the losses in after hours trading.

It's like the difference between a company having kinda crappy management that spends too much on executive perks vs. outright fraud like Enron. Sharp moves that wipe people out completely without warning will get outsized attention.

[branchless]

Agreed, but there is a huge, huge amount of people doing very little of value. All the games with low latency and the rules for order placement could be changed to greatly simplify and stop the race to ever-lower latency.

I work in it, it's a total waste of resources.

Our banking sectors are insanely large. Aren't they supposed to be efficient? Why such a large % of the economy?

[mrchicity]

Why's it a waste? Low latency traders facilitate risk transfer in thousands of instruments at razor thin margins using automation. They keep prices efficient through arbitrage or predictive modeling. Even during extreme market stress I can trade SPY in my brokerage account within a penny of its true value. If the S&P 500 index futures or the S&P 500 stocks move, someone will update the price of SPY instantaneously.

You want them competing with each other. To win they have to make the tightest price before a competitor, which either lowers their margins or requires them to bring new information to the market sooner.

If you accept that markets require intermediaries to bridge liquidity gaps in time, place, and product, then high speed traders are far less wasteful than the firms they replaced. Consider this: In 2000 Goldman Sachs bought Spear, Leeds & Kellogg (SLK), a large NYSE dealer. SLK employed 2500 people and earned over a billion dollars annually. That's one firm on one exchange. Each market had thousands of men in jackets yelling at each other, making a much bigger spread on transactions, and giving less accurate pricing.

Today there are a couple thousand people involved in low latency trading across all markets/firms and the entire industry makes a few billion dollars a year. Teams with a handful of quant researchers make markets in every listed stock globally.

[prklmn]

How much of that is simply splitting pennies and front running slower traders? Is that truely creating value? Seems like they’re siphoning value to me.

[mrchicity]

Not sure what you mean by splitting pennies, earning the bid/offer spread? That's common but the person who paid the spread to them got to trade instantly instead of waiting for another natural buyer or seller. The spread is payment for providing a service, just like an insurance company earns the spread between what you pay in premiums and their expected losses on claims. High speed market makers compete with each other so the spreads they end up earning are tiny.

The majority of high speed traders are trading their own account and don't have customer orders to front run. If you prefer a loose definition of front running to mean something like "reacting to changes in the market faster than others" then yes, but I don't see anything problematic with using public data to make your prices more accurate faster.

If you believe markets operate well without intermediaries, there are block crossing services where institutional investors can try to match up with one another. I'm sure institutions would prefer trading that way, but it turns out finding someone trying to do the exact opposite trade at exactly the same time is very difficult--volume transacted on these systems is small.

[bequanna]

> Our banking sectors are insanely large. Aren't they supposed to be efficient? Why such a large % of the economy?

Are they? What is the appropriate size of a nation's banking sector as a % of GDP (or whatever)? Who decides this?

This is still a free(ish) market. Anyone who can provide the same services/capture the same opportunities with fewer resources is rewarded.

[branchless]

Nope, we have a series of too big to fail banks which have exclusive issuance of debt as $, unconstrained by any limits other than demand now we are off the gold standard:

https://bankunderground.co.uk/2015/06/30/banks-are-not-inter...

They use this privilege to capture all benefits of wealth creation via usury against land.

Just go outside. Why are banks like the new churches in the middle of the most expensive real-estate in the world? They are supposed to be the oil of real industry. The tail is wagging the dog.