It's not like a currency devaluation affects everyone equally, or even uniformly negatively.
If you were a British factory worker, it might have saved your job because British exports became more competitive.
If you were a middle class office worker, it probably made life more inconvenient because imported goods became more expensive, and that Spanish vacation you had been planning might now be out of reach.
If you were a member of the upper class, your wealth was probably already well hedged against GBP risk by using offshore currency accounts, foreign stock investments, etc.
You might even say forcing the prices of things to be accurate and exposing departures from reality is the purpose of financial markets and the thing an investor gets paid for.
(How well that works is questionable; my completely amateur impression is that this view would force us to legalize insider trading while declaring HFT completely useless, for example.)
Please do ! The amount of resources invested in making HFT possible and profitable is no where close to being justified by the benefits it brings to society as a whole.
Making financial information move in days instead of week ? Sure !. In hours instead of days ? Yep !. In minutes instead of hours ? Why Not !. In seconds instead of minutes ? Mmmh yeah, I guess. In milliseconds instead of seconds ? Stop it. Opening a road to put high quality cables and hiring some of the most clever folks on the planet to cut half a milisec on a buy/sell algo ? Fuck you.
Are they? Spreads have tightened massively since the advent of HFT which has knock-on effects for the small investor both in terms of cheaper personal trading and lower costs for those managing their retirement/mutual funds (see Vanguard's opinion on HFT[1]).
In terms of resources, Virtu is publicly traded and has a market cap of 6.3bn, Citadel was recently valued at 22bn, the total sector is maybe 100bn. Meanwhile our society ascribes about 260bn of value to Coca Cola alone.
Spreads may have tightened, but payments for order flow suggest to me there's a new flavor of front running involved via HFT and dark pools. But I'm no expert.
How? No offence but it just sounds like conspiratorial nonsense based on some scary sounding terms.
Payment for order flow is an example of the incentives of retail traders, retail brokers and HFT market makers aligning. The market makers are able (and obligated) to improve prices because they have paid to receive flow they are almost certain is not toxic. Meanwhile they charge the likes of hedge funds higher prices as they can't guarantee the reasoning behind their trades (i.e. they may be about to have their faces ripped off).
The HFT firm takes their (tightened) fee for making a market, kicks some back to the retail broker, and because the broker earns money that way, they offer commission-free trading to the retail trader.
Are you worried about getting front run for fractions of a cent? I’m not. I’d rather have penny wide spreads instead of 1/8 dollar (or larger) like the old minimum tick size.
Dark pools reduce volatility, it’s just liquidity outside of the normal order book. Regular people don’t need dark pools because they aren’t slinging $500M block trades. Furthermore, trades can happen off-exchange without dark pools.
It sounds like you aren’t even an amateur, let alone an expert, no offense.
It forces prices to be what people believe to be accurate, where that belief is strong enough for them to put down money on it. I think that may be the closest we're ever going to get.
The bit about belief above is why insider trading is illegal. If people can't trust the information they have, and at least importantly that they have fair access to accurate information, then they won't have faith in markets and won't put down their money. Belief implies trust.
I have bad news for you, insider trading isn't about fairness. People trade, legally, on inside information all the time. Adverse selection abounds in markets, so you have to be careful. Insider trading laws are rather about theft: did you illegally appropriate information owned by someone else to benefit yourself and/or a third party? That is insider trading. In the US, it can be even more relaxed than that, with the standard being you had intent.
It may be a contrived definition of ‘insider information’ in an attempt to concoct a controversy. Like a company buying it’s own shares based on its internal knowledge of its condition, or employees buying share options in a scheme for their company. If it was actually an issue I expect it would have been stated instead of coyly implied. Its true not all market participants have access to the same information all the time. The point I made is that this can’t be so skewed or biased that it’s an obstacle to investment.
Speculators play a vital role in stabilizing the price of a commodity over time. All other forms of arbitrage are meaningless besides the biggest one of them all: temporal arbitrage. Buy low sell high. And with it, sell high buy low.
Government employees, for instance for Codelco, Chile's state-owned mining corporation, value speculators because those speculations are the best predictions of the future. Suddenly you can make guarantees to your stakeholders, and sell futures, and plan, feed the prediction into your other math.
Also I'm not sure HFT is totally useless. If you set a minimum latency in the market and forbade anybody go around that you would get cheaters, and less integrity, and roll back trades. Instead, with HFT, the only challenge of the fastest is to really be the fastest. They gotta win. Further, at a societal level, I divine there are harmful macro artifacts that happen at large multiples of HFT's granularity. So when the latency was milliseconds, artifacts happened in years, in microseconds, they happened in days.
If there were zero external costs to having a minimum-latency market, no big deal.
But we're still short of that. So there's a lot of money and brainpower being thrown into marginal decreases in market latency. Do we want so many of our best engineers chasing HFT performance?
It also creates a new ecosystem of arbitrage-- the guy with 20ms ping can take advantage of price differences the guy with 40ms can't-- which isn't necessarily producing real value.
This also assumes that the goal of absolute price discovery is itself meritorious. Maybe we're better off not being able to correctly value assets with infinite precision, because it tends to encourage the mindset of chopping up businesses for parts.
I'm a fan of the old-line conglomerate model. By bundling so many diverse assets, they inherently block price discovery, which creates openings where risk hedges and long term plays can survive and pay out. But investors hate being unable to pull those components out of the stock price.
I don't know that they actually are that competitive about marginal decreases in market latency. I think they're competitive for some stuff, but for others, it's easier to split the atom than split their eyelids. Literally.
Like I came up with a sorting algorithm I thought HFT--just some single monopolistic HFT company--would love, like die for. And I kept it so secret, did so much so nobody could hack it under any circumstances, never put it in an email, nothing, and? and? I sent it to over 40 FAANG and HFT equivalents and never heard back.
They really don't care about time, like really in real life. After the fact, yeah. Like when you're explaining to them why they lost money I guess. Not beforehand, when they could make money.
You're projecting about how competitive it actually is. Maybe if I actually split the eyelids first, then it would be competitive, but without that it is it is about as competitive as auctions for the best uranium mineral rights in the 1920's. Nobody gives a shit!
The Bank of England did what it was told - the Conservative Government's were intent on maintaining Sterling within the European Exchange Rate Mechanism currency band (a precursor step to harmonizing currencies into what would become the Euro). This was what allowed Soros to endlessly short the pound.
Is that what actually happened in this case, though? (Not a rhetorical question, I honestly don't know).
I ask because the decision to short the pound was a coordinated attack among many powerful financial institutions. There is a reason collusion in other economic areas is illegal, precisely because it allows a "mispricing" to occur compared to what would happen if their were arms-length, fair competition.
Again, I have no idea if this is a valid criticism of Soros' trade, but the part of the article about him convincing other investors to go along with trade reminded me in a way of the agreement of SV companies not to poach each other's talent, which HN loves to decry as illegal collusion to depress wages.
They (UK govt at large) tried to keep the value of the Pound up, so that the UK could join the Eurozone, which was being constructed at that time. Large inflation started building up in the UK and there was not enough buy-in to do what's right (jack up the rates, cause a recession, clean the economy; like Volcker did in the US), so they eventually had to admit to their failure and let the Pound trade down.
The "insight" that Soros and others like him had was when would this happen. It's been known to be unstable for years, it was known to break eventually (unless rates go up, by a lot), the only question was when.
Also, this outcome was what "the people wanted". As I wrote above, there was not enough buy-in to jack up the rates and save the currency at the expense of jobs, so the opposite happened, jobs were saved at the expense of the currency. Low currency isn't necessarily bad - it's good for some people and bad for other people. In fact these days countries routinely accuse other countries of suppressing the value of their currency, to facilitate a desirable trade balance (China vs US, as an example; remember Trump's tariffs?).
* The mid-2000s British housing bubble, and its collapse in 2007, would have been even bigger.
* Britain would have had to ask the IMF, ECB, and EU for loans.
* The Tories would in 2010 have promised a referendum to leave the Euro and won a majority. Labour would have won fewer than 100 seats, and UKIP would have "made spectacular gains".
* The anti-Euro side would have won the referendum, and the currency would have collapsed.
* "after a deep and painful recession economic recovery began".
* "Britain would have destroyed the euro on departure, and would now be on the point of leaving the EU altogether. The idea that Farage might be the next prime minister would be quite credible."
And the UK not being part of the ERM or Eurozone in no way disadvantaged London from becoming the continent's financial capital during the 1990s and later.
This is the kind of question that will still be debatable 100 years from now :)
It's similar to the hard currency question that sprung up as we (all countries really) detached from gold. It's still not really settled, cryptocurrency being the latest reincarnation.
It's basic game theory, understanding adversarial finance, and applying risk management practices at the sovereign state (central bank) level.
It does seem strange today to bet somewhere in the neighborhood of $7 ~ $8 billions, to only realize a capital gain of ~$1 billion, but it's actually a really impressive ~14% return.
The issue I suppose is where taking that adversarial position, and then being outspoken about the topic, in essence a variation of pump'n'dump for short sellers... proclaim the doom of the British sterling, and the doom becomes real via market awareness.... or, is "market awareness" really just market manipulation?
Soros did not "break" something that was fine if left untouched. He realized that exchange rate was overvalued and acted on it. Resulted devaluation of GBP made British labour more competitive overnight and fixed the imbalance. Other European countries (like Finland) had similar problems at the same and were forced eventually to devalue without any coordinated attack.
When economies do not form an optimal currency area, tying currencies together with fixed rate creates all kinds of problems. Having floating exchange rate where central bank only "leans" to reduce volatility is usually the best course of action.
Eurozone is constantly battling against internal imbalances. Moving towards common fiscal policy is one way to fix them.
As much as I disagree with Soros on a lot of things, betting on a government being unable to manipulate it's currency forever, and succeeding on that bet is the government's fault, not Soros'.
It's 100% Soros's fault and he probably should have been jailed for it.
A nation was pursuing an economic policy towards harmonising their economy with that of another - a very nuanced process. Like two ships lining up so that one could supply the other.
That it makes an economy possibly more vulnerable to external issues (like a giant wave) is true, but it's a necessary condition that ostensibly has future benefits of economic alignment (i.e. ships being resupplied worth some risk).
Soros is a thief, a pirate, like any other - he came a long and created enormous risk, extracted billions into his fat pocket which would otherwise be in public coffers, and didn't create a dime in value for anyone, it's a zero sum game in which he ran off with riches learning everyone else poorer. It's cockroach capitalism of the worst kind.
I've heard the same kind of blame leveled at the characters of the Big Short. But just as they didn't make banks give out bad loans, Soros didn't make the Bank of England put an unsustainable currency peg in place.
It was your fault for not putting on a helmet and allowing me to hit you with a steel pipe and take your money.
See the problem? There's a reason it's illegal to exploit vulnerabilities in software. It's even illegal to exploit them in humans (mostly). It's called fraud.
In a world where there are people that will hit you with a steel pipe and will not be stopped by the legality of the matter then it is your fault for not putting on the helmet.
But that isn't a good comparison for this case as what he did was not illegal. Unlike hitting people with steel pipes.
I appreciate the honesty and consistency at least of doubling down on blaming the victim.
Our pipe-wielding example will just find another victim without a helmet. You can always find something a victim could have done differently, the only common thread is the perpetrator.
Also legality isn't a proxy for morality. Slavery was illegal. Some societies allowed cannibalism. What Soros did had a human cost and the fact someone else might have done the same financial alchemy had he not doesn't excuse it.
The UK central bank was actively harming their economy with this nonsensical peg. Comparing trading an obviously overvalued currency to hitting someone with a pipe is similarly nonsensical. The government was not the victim here, but the perpetrator of the crime. Soros forced them to stop before the central bank could cause even more damage.
I never made a case for legality == morality. Also beware that morality isn't equally defined, what you find moral others will find amoral.
As for the pipe and helmet example. The laws and ways of upholding them are the metaphorical helmet that we put on to protect ourselves against pipe wielders.
The perpetrator will do what it wants to do, we can protect ourselves with laws, law enforcement, education or physical armour. Or do you expect the pipe wielder to stop because they were told what they are doing is bad or amoral?
I can only be exploited by people with massive resources. There's not that many people or companies in existence. It's not the same as a software bug that can be exploited by any random hacker
Lots of society still relies on people behaing well overall with the few outliers being ostracized or outlawed when they don't.
> can only be exploited by people with massive resources
Not true. Unrealistic pegs paired with reams of floating-rate debt always break. See the Asian and Russian Financial Crises [1][2].
We discuss those as financial crises, not a man breaking a central bank, because they (a) don’t have a narratively-convenient antagonist and (b) aren’t Western central banks.
> I’ve only ever heard this line of reasoning used to justify something unethical.
That doesn't mean it's not true. Soros's actions ending the peg helped the british people, whose government was throwing away billions of pounds trying to sustain the unsustainable peg.
Perhaps the outcome was better for Britain in the end, but I object to glorifying Soros on the grounds that his intentions were clearly to take money out of the system, and breaking the pound with a coordinated attack just doesn’t seem very ethical.
I also think that when people characterize moves like this as ‘brilliant’ it does a disservice to the word. I think many folks, if they tuned their attention to opportunities like this, had the big name firms in their Rolodex, and had questionable ethics, could have made this move. Maybe I’m missing it, but this seems like a pretty straightforward way to take advantage of the system.
I really don't think intentions matter when contemplating moral questions, outcomes matter. Every economist was saying the peg would be broken, yet the bank of england was committed to throwing away money trying to save it. Every day they continued the british people were worse off. Soros was a hero in this story for being the person who convinced the bank of england to end their fools errand.
That's begging the question. Clearly someone thought that Britain would be better off in the ERM at that rate, and clearly some economists thought the rate could be maintained
Even if I leave my front door unlocked it's not your prerogative to empty my house. The locked door is there to suggest that it's a immensely stupid idea. I cannot begin to imagine the self entitled bull, someone peddles to themselves, to justify corruption and greed at this level.
It's not an unlocked door situation and it wasn't illegal. It's more akin to you betting on the wrong horse and being mad at the other guy who bet on the right one for losing your money when it's your fault for gambling instead of doing something else.
It wasn’t just a horse bet by my reading of the article. It was more like they noticed that there was an opportunity to hobble a horse if you and your buddies rush the field and that the odds makers were not anticipating this so you bet otherwise.
You can marvel at the technical ingenuity of a heist like this but the ethics are dubious. The strongest counter is that the Bank of England wasn’t paying attention but that’s mildly victim claiming just like it would be if a company fell prey to a novel 0-day software exploit.
They already knew, by my reading. Bankers knew there was a bubble which is why it wasn't just Soros. He convinced quite a few banks and investors to help him in this scheme (and make quite a bit of cash as well) in order to pull it off. From the article:
- George Soros and all the funds and banks that participated in this large-scale attack were then able to repay the loans they had taken out in sterling, but with a devalued pound against the US dollar -
He was just the "ring leader", as it were. To date, no one had been able to coalesce all the necessary players into a single room and get them on the same page before in order to pull off such a thing. He was a proverbial shepherd corralling a bag of cats in order to make this scheme work.
Callous and greedy, sure. Intelligent and legal all the same. Blame the law makers for this one if you don't like the outcome. Their shortsightedness and allowances of quick, speculative, money-making bubbles to prop up fraudulent banking systems had a lot to do with this.
If you were a British factory worker, it might have saved your job because British exports became more competitive.
If you were a middle class office worker, it probably made life more inconvenient because imported goods became more expensive, and that Spanish vacation you had been planning might now be out of reach.
If you were a member of the upper class, your wealth was probably already well hedged against GBP risk by using offshore currency accounts, foreign stock investments, etc.