[cims]

You do realize that the bonuses are paid to practically all staff, right? That includes IT, HR, Legal, Personal Assistants, and so on. So by your logic it's only OK for banks to pay bonuses to staff who do something that benefits society? Or banks shouldn't pay bonuses at all? What about consultancy firms or other large companies that pay bonuses?

[MarkPNeyer]

my point is that electronic trading provides very little, if any benefit to society.

the usual argument they make is that they are 'adding liquidity' to the markets - which means that they make it easier for buyers to find sellers. electronic trading is an arms race - the guy who gets there first gets most (if not all) of the profit. so a ton of money is spent trying to be the first guy to get there.

for something like a house, adding liquidity is awesome, by saving time for both buyer and seller. for something like a spread contract, though, you could argue the reverse - a spread is complicated financial instrument, and nobody can really be certain how much it's worth. by adding liquidity, you're making it much easier for people to exchange items of dubious value.

in other words, market makers (which is what we were doing) provide the 'service' of reducing the bid-ask spread of given contracts. that spread is really a measure of uncertainty - the larger the spread, the more disagreement there is about how much the contract is worth. by reducing spreads, the market makers are saying 'we are more certain about the value of this option than the rest of the market is.'

if you believe that someone can know the value of an option that expires in three months, accurate to three decimal places, then yes, it does make sense that the market makers are adding value to society. but if you believe that the market makers are possibly overstating their level of certainty, then what they're doing is adding a false sense of certainty to the market.

when you then take into account that the extra liquidity means that people can trade these wildly complicated financial instruments in microseconds, the 'we are helping the world by adding liquidity' argument gets even more absurd. does the world really benefit as a result of people who want to buy pork belly futures being able to find a seller within microseconds of deciding to buy, instead of minutes or even hours later? is that benefit really enough to justify the enormous amount of compensation given to the people who make such a thing possible?

so the question you have to ask yourself is this: is it better to underestimate how much you know, and take longer to make decisions, or is it better to overestimate how much you know, and make your decisions much faster?

[MrMan]

So by the content of this post I will guess that you only worked at a trading firm for a year or two?

Narrower spreads by definition make the coordinates of that forward price known with more certainty. By definition and by construction. It is not hubris for the market to think it knows that price -- that's the price.

I wish people would stop selectively questioning some post-modern economic constructs, like buying and selling derivatives, then conveniently ignore how the company that wrote Go buys and sells.... search terms! And eyeballs! How else are we all going to eat when farms and factories are all automated? Luddite.