[allo37]

I'm curious what the answer was. I've read plenty about how the boutique finance sector is basically a parasite that only benefits a small cohort of already wealthy individuals, would like to hear what the other side has to say.

[jerkstate]

The answer I get from people working at market makers I’ve talked to is that they provide liquidity (so you can buy or sell a security immediately rather than waiting minutes or hours?) and decrease volatility.

An example is onions futures; see https://en.m.wikipedia.org/wiki/Onion_Futures_Act and check the onions price history: https://fred.stlouisfed.org/series/WPU01130216/ compared to a commodity where futures trading in common, like corn: https://fred.stlouisfed.org/series/PMAIZMTUSDM where there are price swings but the volatility and frequency of the swings is lower.

I’m a layperson, not involved in finance, but this is the value add I most commonly hear about.

[abdullahkhalids]

One set of markers of a "good" industry or organization is whether they pay for all the harm they create in society and whether their profits are equal to or below the value they create for society.

For instance, the oil/car industry pays for basically none of the large negative externalities they create. In this case, I hazard that futures industry captures more value than they create. And that value is extracted from other players in the vertical chain, particularly farmers.

[wdg3]

The relationship between futures traders and farmers is pretty much identical to that between any kind of insurance company and its customers - it's a risk arbitrage transaction where the client (farmers in this case) are sacrificing profit in expectation for a flatter outcome curve which in a properly priced market yields higher utility in expectation, since utility as a function of profit is concave for an individual farmer and much closer to linear for a well-capitalized market maker.

[abdullahkhalids]

I understand the mathematics. The problem is that there is a practical asymmetry of information. Large future traders can invest a lot of resources into getting a much better prediction of future prices, while individual farmers cannot. In such scenarios, it is inevitable that farmers will be exploited by future traders into making bad deals.

[malloryerik]

You might try examining -- with an open mindset -- a few CFTC Commitments of Traders reports and then see if you feel the same way.

[scarby2]

futures contracts work somewhat well for farmers. There's a level of certainty provided and they are reducing their risk so that a low price at the end of the season doesn't ruin them (however they also don't profit from a higher price). As a farmer i would likely prefer to sell a certain percentage of my goods with a futures contract so that i can have less risk of financial ruin.

[boring_twenties]

This reasoning seems suspicious. Why would farmers choose to use futures markets if it doesn't benefit them?

[md_]

In contrast to the parent post:

When I was an undergrad, I interviewed at a then-very small, now-very-prestigious quant firm. In the last interview or so, I asked the quant head something like, “but what value do you provide to society?”

He said, “we provide liquidity.”

I turned down the job they later offered and went to work at a software company that sells a thing people buy.

[Turskarama]

That's the benefit they give to their _customer_, which is not the same as a benefit to _society_.

[tangjurine]

I took a look at the two graphs.

I would prefer the price of onions - seems like the price is a lot more stable other than a few points out of the year where it is very high. For those times, I could choose to have a small store of onions or go without.

For the price of corn, if the price is high, chances are it will be high for a while, so I'll have to go without for a while...

What do other people think?

[scubbo]

Likewise, this is the answer I generally hear from those folks. IME it's still begging the question - the increased liquidity is still overwhelmingly only meaningful to those already-ultra-rich, unless you subscribe to trickle-down Economics.

[mihaaly]

This does not sound as value for the society but advantage for the tradesman.

[nameless912]

Right? Like, I tried really hard to prepare a very neutral answer focusing on taking advantage of arbitrage and fixing over- or under-priced securities, which I think is the closest thing to a benefit you could come up with. And that apparently wasn't good enough for this guy.

[nvm0n2]

He was checking if you understand what the actual benefits of trading firms are to the wider market participants. I've never worked in trading and even I know the answer to that: he was looking for a discussion of the value of liquidity and price discovery.

Sounds like you gave an answer that didn't mention that at all, and may have presented the firm as merely taking advantage of other people's mistakes to make profit. Clearly that's not how he saw it, and the VP correctly guessed from your social media that you may not actually have understood the part of the finance industry that you were applying to work for. The question was to check whether you'd actually be enthusiastic about the work you were doing and you did indeed fail it.

This would be like if you turned up at Google and an interviewer said, "What do we do here" and you said "exploit data to profit from people's ignorance" and when they gave you a second chance you couldn't answer.

Frankly you can't get a job at most firms if you can't explain why you think the company should exist.

[gsuuon]

I think the value add of the speculative markets is (in theory) that people make predictions of what will be valuable -- if they're right they earn and if not they lose out. In effect, it's market research expressed as bets. That information can have utility but my opinion is that our current setup probably over rewards this sort of work.

[m463]

I wonder too. Some things are really non-intuitive.

I really enjoyed "The Rational Optimist" where it explains things like trade, which tends to make everyone wealthy, while generally the people trading think they are both getting the better end of the deal.