The answer is encoded in the problem
September 10, 2024 12:37 AM Subscribe
Every trade has a winner and a loser. Somebody makes money, and is therefore proved right; somebody loses money, and is therefore proved wrong. The binary nature of right or wrongness, repeated over thousands of transactions, confirms in many financially successful gamblers the feeling that they are right about everything. It’s not a question of being right more often than you’re wrong. It’s a question of being better than other people: right where others are wrong, clever where others are stupid, rational where others are emotional, insightful where they are blind, brave where they are timid, strong where they are weak. But awareness of superiority comes with a terrible sting, which is that the others don’t seem to see it that way. from For Every Winner A Loser by John Lanchester (LRB; ungated)
An essay built around The Fund by Rob Copeland and The Trading Game by Gary Stevenson
An essay built around The Fund by Rob Copeland and The Trading Game by Gary Stevenson
I uh, what?
Different people have different priorities and goals. A trade can be good for both parties if they value different things with different weight.
posted by constraint at 1:50 AM on September 10 [22 favorites]
Different people have different priorities and goals. A trade can be good for both parties if they value different things with different weight.
posted by constraint at 1:50 AM on September 10 [22 favorites]
John Lanchester also wrote a 2010 book on the 2007/08 financial crisis, Whoops! Why Everyone Owes Everyone and No One Can Pay, so he’s not new to this and the LRB is notoriously critical of organs of capitalism such as trading markets. You might disagree with what they say, but this is a very mild-mannered argument against the status quo.
posted by The River Ivel at 2:16 AM on September 10 [2 favorites]
posted by The River Ivel at 2:16 AM on September 10 [2 favorites]
It all sounds so very Calvinist.
posted by unearthed at 2:18 AM on September 10 [1 favorite]
posted by unearthed at 2:18 AM on September 10 [1 favorite]
I think the article kind of obscures the natural way that this bullshit becomes a reality. I grow mangoes and need to sell them for at least $1 a crate to send my kids to school, pay off my mortgage, and feed my family. So I find someone who pays me in advance for those mangoes at the $1 a crate. He, in order to continue to stay in business and buy mangoes, needs to sell them at some kind of profit in order to maintain his overhead. So he sells them in advance for $1.10. Ideally it'd be to a supermarket. But maybe the supermarket isn't able to at this time. Or they have had trouble selling them in the past and only need half the shipment. Either way, it goes around on trades, each person trying to insure that they do not go under by essentially performing some kind action to insure a profit. So far, so good, people trying to keep businesses going that keep the mangoes to the supermarket shelves.
Then some bright spark realizes that he (and yes, I am using masculine pronouns on purpose here, it seems that ever single one of these assholes is a cis man) can make money by just purchasing the insurance on the mangoes without the mangoes themselves. The insurance company fully expects to make money on this (as their models have mangoes not spiking in price) so they will happily take his premiums. He knows that in a month there is going to be a coup (or at least an attempt at a coup and the resulting chaos) that will disrupt mango production in one of the major growing countries. So he makes money on his bet, the insurance company loses, he goes on to continue to make bets like that.
You can't stop people from needing insurance (I'm using insurance not in the normal sense, but in the idea of hedging a bet) on stuff. And people will find a way to nominally own the goods they need the in order to get around any rules about not getting insurance on things they don't own. (For a practical example, see Walmart taking out life insurance on its employees, for a less practical version the trading on the expected price of futures contracts, not on the future of goods, but the price of contracts on those goods, and so one to however many levels you want.)
Anyway, I agree this is bullshit, but I fail to see a way to stop the finance juggernaut. Wealth taxes and rules about private foundations would slow it down, but now that people have discovered how to bet on bets about bets about market fluctuations, I don't see any way to completely stop it when it hits bullshit levels and isn't just hedging against the market being capricious.
Admittedly, I only know as much as a couple of finance classes (the most useless class in my data science masters was on finance, especially as it was all undergraduate level, at best, which has also lowered my view of anyone who isn't doing this the quant way) and some reading here or there, so if anyone knows how to really stop this, I'm all ears.
posted by Hactar at 2:25 AM on September 10 [5 favorites]
Then some bright spark realizes that he (and yes, I am using masculine pronouns on purpose here, it seems that ever single one of these assholes is a cis man) can make money by just purchasing the insurance on the mangoes without the mangoes themselves. The insurance company fully expects to make money on this (as their models have mangoes not spiking in price) so they will happily take his premiums. He knows that in a month there is going to be a coup (or at least an attempt at a coup and the resulting chaos) that will disrupt mango production in one of the major growing countries. So he makes money on his bet, the insurance company loses, he goes on to continue to make bets like that.
You can't stop people from needing insurance (I'm using insurance not in the normal sense, but in the idea of hedging a bet) on stuff. And people will find a way to nominally own the goods they need the in order to get around any rules about not getting insurance on things they don't own. (For a practical example, see Walmart taking out life insurance on its employees, for a less practical version the trading on the expected price of futures contracts, not on the future of goods, but the price of contracts on those goods, and so one to however many levels you want.)
Anyway, I agree this is bullshit, but I fail to see a way to stop the finance juggernaut. Wealth taxes and rules about private foundations would slow it down, but now that people have discovered how to bet on bets about bets about market fluctuations, I don't see any way to completely stop it when it hits bullshit levels and isn't just hedging against the market being capricious.
Admittedly, I only know as much as a couple of finance classes (the most useless class in my data science masters was on finance, especially as it was all undergraduate level, at best, which has also lowered my view of anyone who isn't doing this the quant way) and some reading here or there, so if anyone knows how to really stop this, I'm all ears.
posted by Hactar at 2:25 AM on September 10 [5 favorites]
"$667 trillion. That makes it the biggest business in the world"
That's arrived at by adding up the notional value of all the derivatives in the world, but that's a deliberately misleading number.
Say in the mango example, where my cost to produce mangoes is $100, current price of mangoes is $115, and I would like to protect myself against fluctuation in prices, so I write a contract to sell mangoes in a year's time for $115. A contract like this might be valued at $3 on the market.
The notional value of the contract is $115, while the market value of the contract is $3.
The 667 trillion is the notional value of the derivatives, while the actual market value of those derivatives is probably around 20 trillion...
posted by xdvesper at 2:31 AM on September 10 [8 favorites]
That's arrived at by adding up the notional value of all the derivatives in the world, but that's a deliberately misleading number.
Say in the mango example, where my cost to produce mangoes is $100, current price of mangoes is $115, and I would like to protect myself against fluctuation in prices, so I write a contract to sell mangoes in a year's time for $115. A contract like this might be valued at $3 on the market.
The notional value of the contract is $115, while the market value of the contract is $3.
The 667 trillion is the notional value of the derivatives, while the actual market value of those derivatives is probably around 20 trillion...
posted by xdvesper at 2:31 AM on September 10 [8 favorites]
Some people made money and some lost it, and all of that cancelled out. No value was created in the process.
The value is the friends we made along the way! Or, as Lanark points out above, the value of the process is the discovery of the price. "The activity produces nothing and creates no benefit for society in aggregate," the author continues, and this is also nonsense.
What's produced is not the mango, but its price, and the societal benefit is that over time, this pricing mechanism works to relentlessly drive down the cost of producing mangoes. The problem is that this happens at the expense of things that can't or shouldn't be priced, like natural beauty or human connection.
Greed will kill us all, but not from lack of productivity.
posted by dmh at 3:11 AM on September 10 [7 favorites]
The value is the friends we made along the way! Or, as Lanark points out above, the value of the process is the discovery of the price. "The activity produces nothing and creates no benefit for society in aggregate," the author continues, and this is also nonsense.
What's produced is not the mango, but its price, and the societal benefit is that over time, this pricing mechanism works to relentlessly drive down the cost of producing mangoes. The problem is that this happens at the expense of things that can't or shouldn't be priced, like natural beauty or human connection.
Greed will kill us all, but not from lack of productivity.
posted by dmh at 3:11 AM on September 10 [7 favorites]
Also on the statement that Finance creates no value - I have to challenge that! Firstly, someone is paying good money to those financial intermediaries - but why, and what for? I'm not going to morally justify it, but just illustrate the actual service being rendered.
What they do is unblock transactions to unlock value, mostly through solving information asymmetry and adverse selection problems. (Ok that is a mouthful).
To begin with a simple analogy, say at the population level, the chance of a person needing hospital care is 1/10 a year. A hospital visit costs $2000, so on average each person needs $200 worth of hospital care per year. An insurance company could use that as the benchmark, then advertise an insurance policy they sell at $250 per year. If they did that, however, it is likely they would lose money.
Information asymmetry exists in this situation because each individual knows the state of their health better than the insurer. This leads to adverse selection, where only sick people who anticipate needing high levels of hospitalization will be encouraged to take on health insurance - given the hospital cover is advertised at $250 per year, only people who anticipate needing significant care (say $400 per year) will be incentivised to apply.
The insurer can't even solve this by charging more to cover the adverse selection effect, because each time they raise the cost higher, say to $500 per year, then only people who anticipate needing $700 per year of hospitalization costs will want to apply.
... I'm in Australia, so I'm assuming that the free public health option exists and private healthcare is only for electives.
Anyway the core idea is that because of information asymmetry, every offer you make will attract counterparties who are likely to be a bad deal for you.
Successful transactions increase value in society. For example, say you purchase a can of Coke for $1. This is because you were thirsty and valued the Coke at $2. On the other hand, the vendor bought the can for $0.50. When you transact at $1, you "gained" $1 of value because you paid $1 for something you valued at $2, and the vendor gained $0.50 because he sold it at $0.50 more than he bought it for. In total $1.50 of value was unlocked.
Transactions can become blocked because of information asymmetry. Let's say you were thirsty and wanted to buy some Coke for $2. But the vendor has some strange drink you've never heard of so you have no idea if it's any good. So you're only willing to pay $0.25 for it. The vendor, of course, knows it's as good as Coke, but he can't convince you of it, because you would suspect him of having an ulterior motive.
What if someone (a neutral intermediary) could convince you that the strange drink was as good as Coke and therefore should be valued at $2.00? Unlocking the transaction creates $1.50 of value - the intermediary could structure the deal in such way that the buyer gains $0.8 of value, the seller gains $0.50 of value, and the intermediary takes $0.2 of value. Everyone profits in this situation compared to having no deal.
This is basically what financial intermediaries (investment banks) do, except on the scale of large companies and transactions. A merger of a billion dollar company, or the raising of a billion dollars of debt, or a large share IPO, they are all complex transactions which involve a lot of risk and huge information asymmetries between parties. Many transactions are "blocked". Unlocking those transactions would create hundreds of millions worth of additional value to both the buyer and the seller. Any intermediary who unlocks those transactions stands to gain tens of millions in commissions and fees.
On a smaller scale, you put money in the bank to earn interest (no risk) instead of investing in random small businesses in your town, which have a chance of going bankrupt and wiping out your savings. You have no idea which businesses are safe and which are risky, but the bank solves this problem for you by being the intermediary.
Financial intermediaries use rating schemes and reputation to reduce information asymmetry, and they can use risk pooling to spread the risk, they can sell sophisticated hedges and contracts to reduce risk exposure to allow certain businesses to be viable (like in the mango example), and of course they will lend their significant experience and expertise to the deal.
posted by xdvesper at 3:28 AM on September 10 [15 favorites]
What they do is unblock transactions to unlock value, mostly through solving information asymmetry and adverse selection problems. (Ok that is a mouthful).
To begin with a simple analogy, say at the population level, the chance of a person needing hospital care is 1/10 a year. A hospital visit costs $2000, so on average each person needs $200 worth of hospital care per year. An insurance company could use that as the benchmark, then advertise an insurance policy they sell at $250 per year. If they did that, however, it is likely they would lose money.
Information asymmetry exists in this situation because each individual knows the state of their health better than the insurer. This leads to adverse selection, where only sick people who anticipate needing high levels of hospitalization will be encouraged to take on health insurance - given the hospital cover is advertised at $250 per year, only people who anticipate needing significant care (say $400 per year) will be incentivised to apply.
The insurer can't even solve this by charging more to cover the adverse selection effect, because each time they raise the cost higher, say to $500 per year, then only people who anticipate needing $700 per year of hospitalization costs will want to apply.
... I'm in Australia, so I'm assuming that the free public health option exists and private healthcare is only for electives.
Anyway the core idea is that because of information asymmetry, every offer you make will attract counterparties who are likely to be a bad deal for you.
Successful transactions increase value in society. For example, say you purchase a can of Coke for $1. This is because you were thirsty and valued the Coke at $2. On the other hand, the vendor bought the can for $0.50. When you transact at $1, you "gained" $1 of value because you paid $1 for something you valued at $2, and the vendor gained $0.50 because he sold it at $0.50 more than he bought it for. In total $1.50 of value was unlocked.
Transactions can become blocked because of information asymmetry. Let's say you were thirsty and wanted to buy some Coke for $2. But the vendor has some strange drink you've never heard of so you have no idea if it's any good. So you're only willing to pay $0.25 for it. The vendor, of course, knows it's as good as Coke, but he can't convince you of it, because you would suspect him of having an ulterior motive.
What if someone (a neutral intermediary) could convince you that the strange drink was as good as Coke and therefore should be valued at $2.00? Unlocking the transaction creates $1.50 of value - the intermediary could structure the deal in such way that the buyer gains $0.8 of value, the seller gains $0.50 of value, and the intermediary takes $0.2 of value. Everyone profits in this situation compared to having no deal.
This is basically what financial intermediaries (investment banks) do, except on the scale of large companies and transactions. A merger of a billion dollar company, or the raising of a billion dollars of debt, or a large share IPO, they are all complex transactions which involve a lot of risk and huge information asymmetries between parties. Many transactions are "blocked". Unlocking those transactions would create hundreds of millions worth of additional value to both the buyer and the seller. Any intermediary who unlocks those transactions stands to gain tens of millions in commissions and fees.
On a smaller scale, you put money in the bank to earn interest (no risk) instead of investing in random small businesses in your town, which have a chance of going bankrupt and wiping out your savings. You have no idea which businesses are safe and which are risky, but the bank solves this problem for you by being the intermediary.
Financial intermediaries use rating schemes and reputation to reduce information asymmetry, and they can use risk pooling to spread the risk, they can sell sophisticated hedges and contracts to reduce risk exposure to allow certain businesses to be viable (like in the mango example), and of course they will lend their significant experience and expertise to the deal.
posted by xdvesper at 3:28 AM on September 10 [15 favorites]
Cryptocurrency is, and has always been, complete bullshit. It is, as the saying goes, leaving your car engine idling to solve sudoku puzzles you can exchange for heroin. It's only use was the ability to buy drugs on the internet (admittedly, very useful) but I'm not even sure how well it does that anymore.
As with all pyramid scams, there are endless proponents who claim that the detractors just don't get it, man. These are sophisticated encryption algorithms! We are building a new method of finance! You're going to be left behind the technological future. Look at these positive write ups in mainstream media publications! If you're so smart, why aren't you rich like these crypto bajillionaires? How can you say nothing of value is produced? You just don't understand.
I sold my tenth of a bitcoin at the end of 2017 just before the first major crash because I correctly saw an obvious bubble. Then I walked away from crypto because it's a Ponzi scheme for gambling addicts. And yet, what I "should" have done according to capitalism is get right back in. Bitcoin is now trading for 3x what it was in 2017.
All of this is funded by the losers. And crypto isn't a zero-sum game; it's a definitive net negative. The electricity alone is millions per day. The mining hardware, the entire corporate infrastructure, the tax breaks, the (heh) compliance and regulation... it is a monumental waste of human potential (in every sense, but especially literally: I've seen the crypto subreddits post the suicide prevention hotline when the "market" tanks.)
And yet I see crypto advertisements when I walk through the airport terminal because crypto is bigger than ever.
But I digress. We were talking about finance?
posted by AlSweigart at 3:43 AM on September 10 [8 favorites]
As with all pyramid scams, there are endless proponents who claim that the detractors just don't get it, man. These are sophisticated encryption algorithms! We are building a new method of finance! You're going to be left behind the technological future. Look at these positive write ups in mainstream media publications! If you're so smart, why aren't you rich like these crypto bajillionaires? How can you say nothing of value is produced? You just don't understand.
I sold my tenth of a bitcoin at the end of 2017 just before the first major crash because I correctly saw an obvious bubble. Then I walked away from crypto because it's a Ponzi scheme for gambling addicts. And yet, what I "should" have done according to capitalism is get right back in. Bitcoin is now trading for 3x what it was in 2017.
All of this is funded by the losers. And crypto isn't a zero-sum game; it's a definitive net negative. The electricity alone is millions per day. The mining hardware, the entire corporate infrastructure, the tax breaks, the (heh) compliance and regulation... it is a monumental waste of human potential (in every sense, but especially literally: I've seen the crypto subreddits post the suicide prevention hotline when the "market" tanks.)
And yet I see crypto advertisements when I walk through the airport terminal because crypto is bigger than ever.
But I digress. We were talking about finance?
posted by AlSweigart at 3:43 AM on September 10 [8 favorites]
> the purpose of trading is price discovery
Sure, some trading, all this *waves hands* shit?
posted by lucidium at 4:15 AM on September 10 [1 favorite]
Sure, some trading, all this *waves hands* shit?
posted by lucidium at 4:15 AM on September 10 [1 favorite]
Oh, for the love of Pete. I don't know a lot about finance, but I am in fact a wholesale produce buyer for a midsize, independent (ie. not Kroger, etc) wholesaler. I buy directly from farmers and from brokers. Our company sells to retailers, restaurants, cruise ships, and institutions such as hospitals or schools.
I don't know a lot about finance, but I do know something about produce, and this is very much not how things work for mangoes or other very perishable crops. There are some contracts, yes, but they don't cover the whole market and don't reflect the real price of a mango, like, the I want to buy a pallet of mangoes or 10 cases of mangoes price. A lot of that price finding is done by people like me, with one foot inside those contracts and one foot outside of them, and it doesn't have shit to do with derivatives.
Anyway, mangoes are a terrible example. WHEAT. This whole conversation should be about wheat, or soy, or pork belly (bacon). That is all. Please carry on as you were.
posted by Smedly, Butlerian jihadi at 4:24 AM on September 10 [29 favorites]
I don't know a lot about finance, but I do know something about produce, and this is very much not how things work for mangoes or other very perishable crops. There are some contracts, yes, but they don't cover the whole market and don't reflect the real price of a mango, like, the I want to buy a pallet of mangoes or 10 cases of mangoes price. A lot of that price finding is done by people like me, with one foot inside those contracts and one foot outside of them, and it doesn't have shit to do with derivatives.
Anyway, mangoes are a terrible example. WHEAT. This whole conversation should be about wheat, or soy, or pork belly (bacon). That is all. Please carry on as you were.
posted by Smedly, Butlerian jihadi at 4:24 AM on September 10 [29 favorites]
We were talking about finance?
“The total value of all the economic activity in the world is estimated at $105 trillion. That’s the mangoes. The value of the financial derivatives which arise from this activity - that’s the subsequent trading - is $667 trillion.”
xkcd visualizes this differently
tfa:
posted by HearHere at 4:26 AM on September 10 [2 favorites]
“The total value of all the economic activity in the world is estimated at $105 trillion. That’s the mangoes. The value of the financial derivatives which arise from this activity - that’s the subsequent trading - is $667 trillion.”
xkcd visualizes this differently
tfa:
Dalio had visited China and liked what he saw, so he incorporated into Bridgewater a system in which Principles Captains, Auditors and Overseers vied in supervising their application and reported to a body called the Politburo. … a newly pregnant senior colleague was publicly humiliated and reduced to tears… The project took more than a decade, cost $100 million and never produced anything useful, mainly because the Principles… all this in pursuit of no end except money making more money.a paper cited [mit/pdf] refs pontryagin [(duality) wiki]
…
You finish The Trading Game unsure whether it is a story of victory or defeat. It is the ideal book to give to a young person contemplating a career in finance, because the way they answer that question will determine their view of what it’s like to be in that world.
…
In 1995 Edward Witten, a physicist who is considered by some as the closest contemporary equivalent to Einstein, gave a conference paper in which he showed that five different competing versions of string theory were different forms of the same underlying mathematical structure
posted by HearHere at 4:26 AM on September 10 [2 favorites]
Before the end of the first paragraph, the writer establishes a tone that is somehow both smug and twee. I feel like this is something expensive British schools must teach kids early on, and it maybe hits different for UK readers. For me, I instinctively make a fist when I encounter that tone; I know nothing good is going to come of something that sounds like that.
posted by kittens for breakfast at 4:39 AM on September 10 [5 favorites]
posted by kittens for breakfast at 4:39 AM on September 10 [5 favorites]
the purpose of trading is price discovery
The purpose of no-limit Texas Hold'em is to find out who has the better cards.
It'd be much more efficient if everyone just showed their cards immediately after dealing, but information asymmetry is how people privately profit from an otherwise simple task.
posted by AlSweigart at 4:57 AM on September 10 [20 favorites]
The purpose of no-limit Texas Hold'em is to find out who has the better cards.
It'd be much more efficient if everyone just showed their cards immediately after dealing, but information asymmetry is how people privately profit from an otherwise simple task.
posted by AlSweigart at 4:57 AM on September 10 [20 favorites]
would be better served using source material written by successful traders rather than people who burned out and left the industry.
Have you read The Trading Game? I have. Stevenson was a successful trader, and what motivated him to find a way out of the investment banking industry was his unwillingness to embrace the required deranged drug-fucked vampire lifestyle. The actual burnout happened in the course of trying to find an exit strategy that didn't result in the bank having him literally murdered or financially destroyed with spurious litigation.
posted by flabdablet at 5:27 AM on September 10 [10 favorites]
Have you read The Trading Game? I have. Stevenson was a successful trader, and what motivated him to find a way out of the investment banking industry was his unwillingness to embrace the required deranged drug-fucked vampire lifestyle. The actual burnout happened in the course of trying to find an exit strategy that didn't result in the bank having him literally murdered or financially destroyed with spurious litigation.
posted by flabdablet at 5:27 AM on September 10 [10 favorites]
The idea was to create a culture of radical candour. All of Bridgewater’s employees were supposed to give one another constant feedback. Especially negative feedback. One Principle was that ‘No one has the right to hold a critical opinion without speaking up.’ It was forbidden to criticise anybody in their absence: you had to say everything straight to the subject’s face. Everyone at Bridgewater was given a tablet computer that they were supposed to fill with ‘dots’, positive or negative, giving constant ratings on every aspect of the company and their colleagues. The offices were full of cameras and sound equipment recording interactions between staff, all of it added to a Transparency Library, where it could be viewed by other members of staff, who would then provide feedback. Employees handed over their personal phones on arriving at work, and were allowed to use only monitored company phones; computer keystrokes were tracked.
The surveillance and feedback were put to use. Failings resulted in ‘probings’ or public interrogations, often led by Dalio, in which the employee would be grilled on what they had done wrong, in search of the higher truth – the deeper, underlying weakness – that had caused it to happen.
I worked at a place like this. Not quite to this degree, but every small mistake would be pored over and, in an attempt to get to the root of the problem, some sort of structural scaffolding would be put in place to ensure that the mistake was never made again. As a result, work became a dizzying task of navigating these guard rails, which took far more work than simply addressing the occasional human mistake. It sucked! It was extremely a "drink the Kool-aid" environment, in which any time somebody gained a bit of power they'd seize it by turning scrutiny on people below them, and I'm unreasonably proud to have been fired for not fitting in.
posted by entropone at 5:53 AM on September 10 [7 favorites]
The surveillance and feedback were put to use. Failings resulted in ‘probings’ or public interrogations, often led by Dalio, in which the employee would be grilled on what they had done wrong, in search of the higher truth – the deeper, underlying weakness – that had caused it to happen.
I worked at a place like this. Not quite to this degree, but every small mistake would be pored over and, in an attempt to get to the root of the problem, some sort of structural scaffolding would be put in place to ensure that the mistake was never made again. As a result, work became a dizzying task of navigating these guard rails, which took far more work than simply addressing the occasional human mistake. It sucked! It was extremely a "drink the Kool-aid" environment, in which any time somebody gained a bit of power they'd seize it by turning scrutiny on people below them, and I'm unreasonably proud to have been fired for not fitting in.
posted by entropone at 5:53 AM on September 10 [7 favorites]
To confess an interest, I have made quite a good living in the financial markets for over 20 years and quite doubt that the combination of intelligence, bonhomie, and ruthlessness that made it possible could have yielded the same quality of result - at least for me - in any other trade.
That said:
(1) anyone who thinks that transactions, as a general matter, must be, or are even likely to be, a zero sum game is an idiot deserving of no further attention, or a willful deceiver grinding some malignant ax. Every one of us transacts expressly or implicitly constantly for our very survival.
(2) I would hope that almost no one (aside from idiots) questions the value of primary financial market transactions - people borrowing money and issuing equity in order to acquire assets and grow businesses.
(3) I fully understand how one can question the utility of secondary and derivative financial transactions. I don't think anybody whose ever worked on - nay, even visited - a trading desk can help but think "what would happen if all this deployed capital, IQ points and cortisone floods were put to work curing cancer or perfecting robotics?" The answer there is (a) without a secondary and derivative market you can't have a primary market because no one will buy what they cannot confidently expect to be able to sell or hedge and (b) anything that would reduce the profitability (and hence usage of IQ and cortisone) of secondary and derivative markets is a cure worse than the disease in terms of its impact upon primary markets. (That said, I do like to think about all the trading floors in New York as available for a draft in some existential crisis - every head of high yield and distressed a reserve company commander in our war against whenever...)
posted by MattD at 6:21 AM on September 10 [6 favorites]
That said:
(1) anyone who thinks that transactions, as a general matter, must be, or are even likely to be, a zero sum game is an idiot deserving of no further attention, or a willful deceiver grinding some malignant ax. Every one of us transacts expressly or implicitly constantly for our very survival.
(2) I would hope that almost no one (aside from idiots) questions the value of primary financial market transactions - people borrowing money and issuing equity in order to acquire assets and grow businesses.
(3) I fully understand how one can question the utility of secondary and derivative financial transactions. I don't think anybody whose ever worked on - nay, even visited - a trading desk can help but think "what would happen if all this deployed capital, IQ points and cortisone floods were put to work curing cancer or perfecting robotics?" The answer there is (a) without a secondary and derivative market you can't have a primary market because no one will buy what they cannot confidently expect to be able to sell or hedge and (b) anything that would reduce the profitability (and hence usage of IQ and cortisone) of secondary and derivative markets is a cure worse than the disease in terms of its impact upon primary markets. (That said, I do like to think about all the trading floors in New York as available for a draft in some existential crisis - every head of high yield and distressed a reserve company commander in our war against whenever...)
posted by MattD at 6:21 AM on September 10 [6 favorites]
Maybe it's not cool to come into a Metafilter thread and say that people who don't share the beliefs that underpin your living are idiots?
posted by entropone at 6:34 AM on September 10 [9 favorites]
posted by entropone at 6:34 AM on September 10 [9 favorites]
(That said, I do like to think about all the trading floors in New York as available for a draft in some existential crisis - every head of high yield and distressed a reserve company commander in our war against whenever...)
Leaving aside the discussion of "IQ points" (a not-so-gentle reminder: IQ is BS), I've seen this idea, that people with deep skills in one highly specialized area can thus solve any problem, before. With science fiction authors it led to bonkers and racist "solutions" to national problems. I have zero doubt that unleashing traders from a trading desk on our "war against whenever" would result in the same, only they'd charge unreasonable amounts for the terrible advice.
posted by sgranade at 6:39 AM on September 10 [14 favorites]
Leaving aside the discussion of "IQ points" (a not-so-gentle reminder: IQ is BS), I've seen this idea, that people with deep skills in one highly specialized area can thus solve any problem, before. With science fiction authors it led to bonkers and racist "solutions" to national problems. I have zero doubt that unleashing traders from a trading desk on our "war against whenever" would result in the same, only they'd charge unreasonable amounts for the terrible advice.
posted by sgranade at 6:39 AM on September 10 [14 favorites]
It's always fun when some commenters inadvertently confirm the veracity of the quoted text.
posted by Stoof at 6:41 AM on September 10 [8 favorites]
posted by Stoof at 6:41 AM on September 10 [8 favorites]
anyone who thinks that transactions, as a general matter, must be, or are even likely to be, a zero sum game is an idiot deserving of no further attention, or a willful deceiver grinding some malignant ax
Closest TFA gets to making any such claim is in the context of speculative transactions, which absolutely are a zero sum game.
posted by flabdablet at 6:42 AM on September 10 [5 favorites]
Closest TFA gets to making any such claim is in the context of speculative transactions, which absolutely are a zero sum game.
posted by flabdablet at 6:42 AM on September 10 [5 favorites]
MattD: The answer there is (a) without a secondary and derivative market you can't have a primary market because no one will buy what they cannot confidently expect to be able to sell or hedge
Not true. I buy stuff I can't sell or hedge all the time.
posted by signal at 6:45 AM on September 10 [14 favorites]
Not true. I buy stuff I can't sell or hedge all the time.
posted by signal at 6:45 AM on September 10 [14 favorites]
I thought a central insight of economics is that trading is not a zero sum game. Like, sure, there can be winners and losers, and bubbles and crashes, gold fever, unfair advantage, people getting ripped off... but the general rule is "everyone wins", and this rule is more true the closer to pure trading you get. To claim otherwise is to make an extraordinary claim, and the whole article could be about why finance is, unexpectedly, zero sum. That economics Nobel is just sitting there, waiting to be won.
posted by surlyben at 6:45 AM on September 10 [2 favorites]
posted by surlyben at 6:45 AM on September 10 [2 favorites]
> I do like to think about all the trading floors in New York as available for a draft in some existential crisis
Interesting idea.
posted by lucidium at 6:48 AM on September 10 [2 favorites]
Interesting idea.
posted by lucidium at 6:48 AM on September 10 [2 favorites]
Man, there are a lot more people here defending the pointless gambling that's bringing our society to the brink than I would have expected on MetaFilter.
posted by biogeo at 7:08 AM on September 10 [16 favorites]
posted by biogeo at 7:08 AM on September 10 [16 favorites]
Guys is it feeling like we're doing "Roaring Twenties II" to anyone else? It's actually giving me heartburn how recklessly small investors are speculating with the stock market
posted by potrzebie at 7:22 AM on September 10 [5 favorites]
posted by potrzebie at 7:22 AM on September 10 [5 favorites]
The only “smug finance apologists” I see is the one who called people morons. Everyone else disagreeing with the piece seems pretty reasonable in that disagreement. You might disagree with what they say, but this is a very mild-mannered argument against the article.
posted by Captaintripps at 7:27 AM on September 10 [4 favorites]
posted by Captaintripps at 7:27 AM on September 10 [4 favorites]
A large part of the piece is about how people who think they have trading all figured out do seem to think that means they have the world all figured out, and how they are often extremely wrong in this belief. I note that most of the traders who've revealed themselves quibbled about the opening sections of the piece, confident that this probably means they don't have to worry about what the rest of the piece is saying about people like them. Humility? Doubt? Probably not important.
posted by Merus at 7:32 AM on September 10 [5 favorites]
posted by Merus at 7:32 AM on September 10 [5 favorites]
Back in the 90s, I worked at Enron. I was on the IT side side, and started out supporting natural gas trading, where the company made a ton of money. Over time, I was involved in power, paper trading (We bought a paper mill!) and a host of smaller commodities, and knew people who supported weather derivatives and broadband trading. I find the idea that traders have the world figured out hilarious.
(We were watching the congressional hearings on the Raptors, and one of my coworkers suddenly exclaimed, "That's what they were doing!" He was involved in supporting them, but couldn't figure out what their purpose was. It turned out that they were for Crime.)
posted by Spike Glee at 8:06 AM on September 10 [7 favorites]
(We were watching the congressional hearings on the Raptors, and one of my coworkers suddenly exclaimed, "That's what they were doing!" He was involved in supporting them, but couldn't figure out what their purpose was. It turned out that they were for Crime.)
posted by Spike Glee at 8:06 AM on September 10 [7 favorites]
Incidentally, the people doing weather derivatives weren't trusted by the senior executives, and regularly had to show their work, and limit their potential losses. Broadband was Skillings baby, and spent money like it was water in rainy season. Skilling would also berate anyone with the termity to mention that there was no way they could make money doing what they were doing.
posted by Spike Glee at 8:10 AM on September 10 [6 favorites]
posted by Spike Glee at 8:10 AM on September 10 [6 favorites]
Wow I don't think I've ever seen so many smug finance apologists on the blue before! Good thing they are all so very smart and that explains why they are very rich.
Well, in their defense, when has the global financial industry ever caused any international financial problems due to rampant speculation and gambling?
posted by entropone at 8:16 AM on September 10 [10 favorites]
Well, in their defense, when has the global financial industry ever caused any international financial problems due to rampant speculation and gambling?
posted by entropone at 8:16 AM on September 10 [10 favorites]
I thought a central insight of economics is that trading is not a zero sum game.
I took his reference to zero sum to mean the gambling part of the financial derivative stuff that didn't produce or distribute anything. If it is strictly gambling, zero sum fits.
Not to spoil anything but the essay ends with the Mercer family who benefited from previous trading math wizardry to become wealthy, and has been using the funds to promote more libertarianism and is given credit for everything Trump. Ironically, their idea of more freedom is packaged for wealth-obsessed evangelicals who also translate it as a restoration of theocracy in order to produce larger and more families, without funding, and then removing competing ideas from school libraries and coursework. It is a plan to produce and indoctrinate maximum followers from day one.
posted by Brian B. at 8:19 AM on September 10 [6 favorites]
I took his reference to zero sum to mean the gambling part of the financial derivative stuff that didn't produce or distribute anything. If it is strictly gambling, zero sum fits.
Not to spoil anything but the essay ends with the Mercer family who benefited from previous trading math wizardry to become wealthy, and has been using the funds to promote more libertarianism and is given credit for everything Trump. Ironically, their idea of more freedom is packaged for wealth-obsessed evangelicals who also translate it as a restoration of theocracy in order to produce larger and more families, without funding, and then removing competing ideas from school libraries and coursework. It is a plan to produce and indoctrinate maximum followers from day one.
posted by Brian B. at 8:19 AM on September 10 [6 favorites]
What's produced is not the mango, but its price, and the societal benefit is that over time, this pricing mechanism works to relentlessly drive down the cost of producing mangoes.
This is a daydream. I'm sorry. Why would you think that a process that is solely focused on getting someone to pay more for something than you paid for it would relentlessly reduce prices?
I buy stuff I can't sell or hedge all the time.
For most Americans, the single largest transaction (by nominal value) they will ever enter into requires the use of a financial product that they lack the practical capacity to sell (most residential mortgages aren't assumable) or hedge (most people do not enter into fixed-floating rate swaps)! But even if we back out to the level of large businesses, for most of recorded history the tools of modern finance have been either completely unavailable or available in only crude form. Yet business went on. (Please note that I am not arguing that there is no value to finance whatsoever or that capitalism has yielded no benefits to anyone, but "whatever is, is right" is an even sillier argument.)
That said, I've always found Lanchester a little off-putting and his novel was a big disappointment.
posted by praemunire at 8:35 AM on September 10 [4 favorites]
This is a daydream. I'm sorry. Why would you think that a process that is solely focused on getting someone to pay more for something than you paid for it would relentlessly reduce prices?
I buy stuff I can't sell or hedge all the time.
For most Americans, the single largest transaction (by nominal value) they will ever enter into requires the use of a financial product that they lack the practical capacity to sell (most residential mortgages aren't assumable) or hedge (most people do not enter into fixed-floating rate swaps)! But even if we back out to the level of large businesses, for most of recorded history the tools of modern finance have been either completely unavailable or available in only crude form. Yet business went on. (Please note that I am not arguing that there is no value to finance whatsoever or that capitalism has yielded no benefits to anyone, but "whatever is, is right" is an even sillier argument.)
That said, I've always found Lanchester a little off-putting and his novel was a big disappointment.
posted by praemunire at 8:35 AM on September 10 [4 favorites]
Why would you think that a process that is solely focused on getting someone to pay more for something than you paid for it would relentlessly reduce prices?
I'd ask the opposite question: Knowing what we know about the horrific conditions that the relentless reduction of prices has created for food producers, especially tropical food producers, why would we think that it's a good thing?
posted by clawsoon at 8:42 AM on September 10 [5 favorites]
I'd ask the opposite question: Knowing what we know about the horrific conditions that the relentless reduction of prices has created for food producers, especially tropical food producers, why would we think that it's a good thing?
posted by clawsoon at 8:42 AM on September 10 [5 favorites]
E.g.:
Fancy a mango? Think twice...
posted by clawsoon at 8:48 AM on September 10 [7 favorites]
Fancy a mango? Think twice...
Poverty wages, forced and unpaid overtime, poor safety conditions, obstruction to free associations and discrimination against pregnant workers – these were just some of the accusations that have been levelled against the largest mango production companies in Peru, in a report produced by SOMO (the Dutch Centre for Research on Multinational Corporations) last year.Behind the sweetness, bitter labour of mango
“We dismissed it as plucking mangoes didn’t really strike us as being labour-intensive,“ said an official.When they finally raided the farm, they found three families, including children, who were ‘sold’ to the orchard owner and forced to work for long hours.... “We were forced to work for 17 hours a day. My children weren’t allowed to go to school. Every hand in the farm was used to pluck, wipe and polish,“ said R Parthiban, a labourer who was rescued from an orchard in Thiruvallur.That's price discovery in action.
posted by clawsoon at 8:48 AM on September 10 [7 favorites]
Not true. I buy stuff I can't sell or hedge all the time.
SHHH! Keep it down. If an economist hears you, they'll have a stroke!
posted by AlSweigart at 8:51 AM on September 10 [2 favorites]
SHHH! Keep it down. If an economist hears you, they'll have a stroke!
posted by AlSweigart at 8:51 AM on September 10 [2 favorites]
> A large part of the piece is about how people who think they have trading all figured out do seem to think that means they have the world all figured out, and how they are often extremely wrong in this belief. I note that most of the traders who've revealed themselves quibbled about the opening sections of the piece, confident that this probably means they don't have to worry about what the rest of the piece is saying about people like them.
See also Engineer's disease, academic arrogance and the megalomania sometimes seen in surgeons. Seems like achievement corrupts, and absolute achievement corrupts absolutely. It's bad enough that wealth is hoarded like that while world quality of life erodes and things like housing and education become scarce; the worst part though is that a few kings of finance want to take their unearned hubris and control politics too.
One fix for it is 'epistemic humility,' coined by philosopher Nathan Ballantyne. From that article:
Clearly our society is pretty clever when it comes to spinning up new financial vehicles and driving capitalism to its limits. We need to rethink how we value economic excellence over the people who create the value, and we need to act and vote accordingly. The collateral damage is reaching critical points.
posted by Hardcore Poser at 8:53 AM on September 10 [8 favorites]
See also Engineer's disease, academic arrogance and the megalomania sometimes seen in surgeons. Seems like achievement corrupts, and absolute achievement corrupts absolutely. It's bad enough that wealth is hoarded like that while world quality of life erodes and things like housing and education become scarce; the worst part though is that a few kings of finance want to take their unearned hubris and control politics too.
One fix for it is 'epistemic humility,' coined by philosopher Nathan Ballantyne. From that article:
We should recognise that while we may be able to offer something useful, we’re also flawed actors, hampered by our own lack of knowledge. Let’s build opinions like sandcastles, with curiosity but no great attachment, realising the central argument we missed may just act as the looming wave. This means putting the insight of others ahead of our own, and declining work – or better, referring it to others who can do it to a higher standard – while we seek out the partnerships or training we need to build our own knowledge and skills.The field is tech, but the remedy applies to finance too. How likely this is to happen, in a field with only one motive and few ethical restraints, is left as an exercise for the reader.
Clearly our society is pretty clever when it comes to spinning up new financial vehicles and driving capitalism to its limits. We need to rethink how we value economic excellence over the people who create the value, and we need to act and vote accordingly. The collateral damage is reaching critical points.
posted by Hardcore Poser at 8:53 AM on September 10 [8 favorites]
This is a daydream. I'm sorry. Why would you think that a process that is solely focused on getting someone to pay more for something than you paid for it would relentlessly reduce prices?
Because the less you pay for it to begin with, the less you need to mark it up to make money? Many things can become more efficient to produce when there is scaled demand for them. Sometimes the efficiency is created through evil means, as the working conditions of mangoes above shows. But I don't think it's correct to say that markets are not effective at finding ways to drive down costs.
posted by ch1x0r at 8:57 AM on September 10 [1 favorite]
Because the less you pay for it to begin with, the less you need to mark it up to make money? Many things can become more efficient to produce when there is scaled demand for them. Sometimes the efficiency is created through evil means, as the working conditions of mangoes above shows. But I don't think it's correct to say that markets are not effective at finding ways to drive down costs.
posted by ch1x0r at 8:57 AM on September 10 [1 favorite]
There was a brief moment during the pandemic when the question of valuable and worthwhile work was thrown into focus by the fact that the worst-paid jobs turned out to be the ones on which we all relied: retail staff, transport workers, delivery workers. We’ve done an excellent job of forgetting about that.I've begun to think the opposite. So many societies - large hierarchical ones, anyway - are organized exactly this way that I don't think it's a coincidence.
At a societal level, this is unsatisfactory. To put it as mildly as possible, nobody would deliberately design a society that worked like this.
We maintain a pool of desperate people to do the essential jobs, because people who aren't desperate won't be guaranteed to show up. You're not going to hire a rich kid to stock grocery store shelves or pick fruit, because on the days he doesn't feel like showing up he won't have to.
posted by clawsoon at 8:58 AM on September 10 [9 favorites]
the purpose of trading is price discovery
I mean, sure, for a given idea of an economy, but this is at best tautological. A market-driven system needs markets to determine market price. Who knew? Which isn't really a justification, even ignoring that other concepts of exchange value exist, and aside from whether that's a good way of doing things - marketised pricing has never led to any cyclical and repeated problems financially, eh, so we're all good.
What price discovery doesn't need is people speculating on future prices in different currencies while hedging a bet on predicted prices in a third in order to make money off another fund prepared to gamble the other way. That kind of trading didn't exist for thousands of years, and markets did their market thing with prices just as well as they ever have (which is to say periodically ruinously because price and value aren't the same, only with a smaller but growing reach over time as markets globalised).
Systematised gambling based on metamarket financial activity produces no meaningful value for people beyond a bubble of speculators, and no real value aside from numbers-to-gamble-with-go-up.
The risk is socialised down when banks gamble, so their risk isn't even wholly owned by the organisation ("little" people - who play big but utterly replaceable rote roles - may get sacked because they don't matter to the system or the organisation either). There's no defence of these systems from a rational viewpoint, and "but X gets lots of money sometimes" isn't rational because the win is a vacuum and the cost of that win exists; unlike a loan doesn't generate value for the loser or the bank or state; the cost is seldom as isolated from others as the profit. It's exactly how 2008 happened, and adds additional tiers of ruin on top of an already ruinous system. No matter what individual traders risk, they don't matter to the money system. And no one is enervated by it existing: there's no trickle down or enrichment, just gambling and division.
That our society seems centred around the normalcy of being addicted to it is a symptom of that addiction, not good reason for it being normal. And the staggering growth inequality and vanishing futures of those outside finance are the everyday legacy - people who at best get screwed because another recession was built on financial disregard and self-reinforcing unreason. Honestly, the church of finance is the biggest faith industry today and contains just as little value as a piece of the true cross. Claiming that the man describing the face-eating machine doesn't understand the elegance and efficiency of the gears rather misses the fact that the article is precisely diagnosing why so many people who admire the gears still have their faces eaten by it.
posted by onebuttonmonkey at 8:59 AM on September 10 [11 favorites]
I mean, sure, for a given idea of an economy, but this is at best tautological. A market-driven system needs markets to determine market price. Who knew? Which isn't really a justification, even ignoring that other concepts of exchange value exist, and aside from whether that's a good way of doing things - marketised pricing has never led to any cyclical and repeated problems financially, eh, so we're all good.
What price discovery doesn't need is people speculating on future prices in different currencies while hedging a bet on predicted prices in a third in order to make money off another fund prepared to gamble the other way. That kind of trading didn't exist for thousands of years, and markets did their market thing with prices just as well as they ever have (which is to say periodically ruinously because price and value aren't the same, only with a smaller but growing reach over time as markets globalised).
Systematised gambling based on metamarket financial activity produces no meaningful value for people beyond a bubble of speculators, and no real value aside from numbers-to-gamble-with-go-up.
The risk is socialised down when banks gamble, so their risk isn't even wholly owned by the organisation ("little" people - who play big but utterly replaceable rote roles - may get sacked because they don't matter to the system or the organisation either). There's no defence of these systems from a rational viewpoint, and "but X gets lots of money sometimes" isn't rational because the win is a vacuum and the cost of that win exists; unlike a loan doesn't generate value for the loser or the bank or state; the cost is seldom as isolated from others as the profit. It's exactly how 2008 happened, and adds additional tiers of ruin on top of an already ruinous system. No matter what individual traders risk, they don't matter to the money system. And no one is enervated by it existing: there's no trickle down or enrichment, just gambling and division.
That our society seems centred around the normalcy of being addicted to it is a symptom of that addiction, not good reason for it being normal. And the staggering growth inequality and vanishing futures of those outside finance are the everyday legacy - people who at best get screwed because another recession was built on financial disregard and self-reinforcing unreason. Honestly, the church of finance is the biggest faith industry today and contains just as little value as a piece of the true cross. Claiming that the man describing the face-eating machine doesn't understand the elegance and efficiency of the gears rather misses the fact that the article is precisely diagnosing why so many people who admire the gears still have their faces eaten by it.
posted by onebuttonmonkey at 8:59 AM on September 10 [11 favorites]
the purpose of trading is price discovery
I'm probably arguing with someone who knows much, much more about this than I do (but I'm a man and I get to do that).
This is wrong.
It seems clear that an outcome of trading is price discovery, but is that why we do it?
posted by It's Never Lurgi at 9:10 AM on September 10 [11 favorites]
I'm probably arguing with someone who knows much, much more about this than I do (but I'm a man and I get to do that).
This is wrong.
It seems clear that an outcome of trading is price discovery, but is that why we do it?
posted by It's Never Lurgi at 9:10 AM on September 10 [11 favorites]
"The purpose of trading is price discovery" is a provocative phrasing but it has a good amount of truth to it especially if you put a second order gloss on the word "purpose" - the most superficial "purpose" of trading being traders' profits or mitigated losses.
The phrasing resonates with the Austrian criticisms of Marxism that the prices are a critical signal to producers to know what to supply and how much to invest in supplying, and that socialism fails because it in putting important transactions outside the market, it deprives the producers of that essential signal.
posted by MattD at 9:37 AM on September 10 [4 favorites]
The phrasing resonates with the Austrian criticisms of Marxism that the prices are a critical signal to producers to know what to supply and how much to invest in supplying, and that socialism fails because it in putting important transactions outside the market, it deprives the producers of that essential signal.
posted by MattD at 9:37 AM on September 10 [4 favorites]
I took his reference to zero sum to mean the gambling part of the financial derivative stuff that didn't produce or distribute anything
Reading the piece I do think he means speculative activity in particular but I’m not sure it’s that easy to draw a line beyond which the conventional arguments about trade don’t apply? If we accept that some people want mangoes and other people want bananas, someone who buys mangoes at $1.20 and sells them at $1.10 has lost in one sense but gained the flexibility to buy bananas (or apples, or oranges) instead. And someone who held onto their cash when they could have bought mangoes at $1.00 has lost anyway in an opportunity cost sense. As long as mangoes can be bought, can you really escape?
I do think a lot of finance activity is gambling in spirit, as far as the mindset that goes into it. It’s not as much of an obvious immediate negative as casino gambling though because it’s built on top of something that is actually positive-sum, and not as much rigged just to take people’s money… though some parts might be. The big problem is when all of those entangled risks compound and expose all of us to risk. Or when the finance world contributes to bad incentives in the “real” economy.
posted by atoxyl at 10:20 AM on September 10 [2 favorites]
Reading the piece I do think he means speculative activity in particular but I’m not sure it’s that easy to draw a line beyond which the conventional arguments about trade don’t apply? If we accept that some people want mangoes and other people want bananas, someone who buys mangoes at $1.20 and sells them at $1.10 has lost in one sense but gained the flexibility to buy bananas (or apples, or oranges) instead. And someone who held onto their cash when they could have bought mangoes at $1.00 has lost anyway in an opportunity cost sense. As long as mangoes can be bought, can you really escape?
I do think a lot of finance activity is gambling in spirit, as far as the mindset that goes into it. It’s not as much of an obvious immediate negative as casino gambling though because it’s built on top of something that is actually positive-sum, and not as much rigged just to take people’s money… though some parts might be. The big problem is when all of those entangled risks compound and expose all of us to risk. Or when the finance world contributes to bad incentives in the “real” economy.
posted by atoxyl at 10:20 AM on September 10 [2 favorites]
signal: I buy stuff I can't sell or hedge all the time.
And the stuff I don't buy, I fence.
posted by k3ninho at 11:13 AM on September 10 [1 favorite]
And the stuff I don't buy, I fence.
posted by k3ninho at 11:13 AM on September 10 [1 favorite]
If options and hedges are so important to markets, why do farmers still sell onions?
posted by autopilot at 11:36 AM on September 10 [7 favorites]
posted by autopilot at 11:36 AM on September 10 [7 favorites]
why do farmers still sell onions?
it remains the style of the times
posted by chavenet at 12:08 PM on September 10 [5 favorites]
it remains the style of the times
posted by chavenet at 12:08 PM on September 10 [5 favorites]
It's been 20+ years, but I vaguely remember a trader telling me that speculators are important because they help provide liquidity, and they eat risk. We traded physical volumes, so part of what we did was hedge against price fluctuations. We could buy from company A at market value, convert the fluctuations to a financial instrument which we sell to a speculator, and sell at a fixed price to company B. Everybody wins, except for maybe the speculator.
posted by Spike Glee at 1:57 PM on September 10 [2 favorites]
posted by Spike Glee at 1:57 PM on September 10 [2 favorites]
If options and hedges are so important to markets, why do farmers still sell onions?
The answer is that hedges are important to some markets, but just like the difference between 'laws' and 'norms or customs' or GRAS (generally recognized as safe) if you are into food, which individual products they are not useful or are easy to exploit hasn't necessarily been recognized and studied. And the simpler answer is farmers still sell onions because onion farmers exist because people like onions. Sometimes people do things for no net money because they like doing them or it's all they know how to do.
Also, derivatives are misunderstood and certainly not always gambling (certainly are sometimes) nor zero sum, and plenty of people before traders white-washed their ill gotten gains through works of charity or attempts to adjust public perception of their work.
posted by The_Vegetables at 2:00 PM on September 10 [2 favorites]
The answer is that hedges are important to some markets, but just like the difference between 'laws' and 'norms or customs' or GRAS (generally recognized as safe) if you are into food, which individual products they are not useful or are easy to exploit hasn't necessarily been recognized and studied. And the simpler answer is farmers still sell onions because onion farmers exist because people like onions. Sometimes people do things for no net money because they like doing them or it's all they know how to do.
Also, derivatives are misunderstood and certainly not always gambling (certainly are sometimes) nor zero sum, and plenty of people before traders white-washed their ill gotten gains through works of charity or attempts to adjust public perception of their work.
posted by The_Vegetables at 2:00 PM on September 10 [2 favorites]
MattD: Every one of us transacts expressly or implicitly constantly for our very survival.
Blink twice if you're being held hostage and can't leave! Oh, you're not talking about your workplace mudering you, but humans in general! Hahaha, what a misunderstanding!
(Surviving a disaster shows that communities come together and share what they have, not transacting-and-keeping-score for survival.)
posted by k3ninho at 2:28 PM on September 10 [2 favorites]
Blink twice if you're being held hostage and can't leave! Oh, you're not talking about your workplace mudering you, but humans in general! Hahaha, what a misunderstanding!
(Surviving a disaster shows that communities come together and share what they have, not transacting-and-keeping-score for survival.)
posted by k3ninho at 2:28 PM on September 10 [2 favorites]
The_Vegetables: And the simpler answer is farmers still sell onions because onion farmers exist because people like onions.
I'm not sure if your username makes your answer more trustworthy or less.
posted by clawsoon at 2:54 PM on September 10 [5 favorites]
I'm not sure if your username makes your answer more trustworthy or less.
posted by clawsoon at 2:54 PM on September 10 [5 favorites]
Finance people often glorify their work as serving the honorable duty of price discovery. But I always want to ask them, would they volunteer to do some price discovery on their own time, or work for a non-profit doing price discovery at crap wages? Like how committed are they to this admirable social goal?
Did they learn about the evils of price obfuscation at their grandpa's knee, their grandpa who marched with Dr. Milton Friedman in the price discovery rights movement in the '60s?
Or on the other hand, would they hide prices if you gave them a bigger bonus?
posted by cron at 3:41 PM on September 10 [2 favorites]
Did they learn about the evils of price obfuscation at their grandpa's knee, their grandpa who marched with Dr. Milton Friedman in the price discovery rights movement in the '60s?
Or on the other hand, would they hide prices if you gave them a bigger bonus?
posted by cron at 3:41 PM on September 10 [2 favorites]
This is dumb and I'm not reading it beyond the first sentence which is so dumb goodbye.
posted by DeepSeaHaggis at 6:01 PM on September 10 [1 favorite]
posted by DeepSeaHaggis at 6:01 PM on September 10 [1 favorite]
Modern nations determined that a barter system was not efficient enough to meet the goals of the state (welfare and subsidies, fighting wars, covert operations etc.), and switched to a fiat system i.e. the printing and use of money as a mean and mode of exchange and value. At some point, fiat was taken off the gold standard (real wealth), and became simply paper backed by the power of the state.
Now we are in highly synthetic, financialized and securitized economies that are delinked from actual productivity, and requires liquidity at all times to run smoothly. A great deal of money is printed on the regular, and loaned out at dirt cheap rates. Where is it to go? This money is rent seeking to a great extent, and comes into the markets.
So traders are a symptom of the disease perhaps. They take that liquidity and spin it in the markets, to make money off of mispricing, hidden information, manipulation or surprise events. But hardly a new occupation in a sense.
Do they add value? I don't know...as much as PR, bloated governments with its thousands of hangers-on, pill-pushing pharma companies add I suppose.
posted by summerfey at 8:41 PM on September 10
Now we are in highly synthetic, financialized and securitized economies that are delinked from actual productivity, and requires liquidity at all times to run smoothly. A great deal of money is printed on the regular, and loaned out at dirt cheap rates. Where is it to go? This money is rent seeking to a great extent, and comes into the markets.
So traders are a symptom of the disease perhaps. They take that liquidity and spin it in the markets, to make money off of mispricing, hidden information, manipulation or surprise events. But hardly a new occupation in a sense.
Do they add value? I don't know...as much as PR, bloated governments with its thousands of hangers-on, pill-pushing pharma companies add I suppose.
posted by summerfey at 8:41 PM on September 10
"Every trade has a winner and loser" includes trading your labour for diluting a currency.
Further, letting a diluting currency accumulate in your account is a defacto trade. Someone is has a position against your savings.
It's like the trolley problem in that not pulling the lever is still a decision.
We're all traders whether we like it or not.
posted by neonamber at 8:55 PM on September 10
Further, letting a diluting currency accumulate in your account is a defacto trade. Someone is has a position against your savings.
It's like the trolley problem in that not pulling the lever is still a decision.
We're all traders whether we like it or not.
posted by neonamber at 8:55 PM on September 10
I'm about as real and meaningful a sense as managing to make it through your day makes you a manager, or a rich boss doing some work makes him a worker.
posted by Dysk at 9:35 PM on September 10
posted by Dysk at 9:35 PM on September 10
This is a daydream. I'm sorry. Why would you think that a process that is solely focused on getting someone to pay more for something than you paid for it would relentlessly reduce prices?
It's hard to overstate how much finance has influenced and continues to influence agricultural production and distribution. Take for example the futures contract, which has an interesting history. The story goes that the world's first futures exchange, for rice, was established in 18th century Japan, when rice merchants successfully petitioned the authorities to allow trade in futures. Previously this had been forbidden, because - plus ca change - futures were seen as a form of gambling.
A futures contract is a standardized agreement to buy or sell a specific quantity of such-and-such product at a predetermined time in the future. This makes it possible to ensure ahead of time that you will have enough rice to, say, feed the entire village, and to do so at a fixed, known cost. If for whatever reason the price of rice goes up, the futures contract ensures that you can still buy the rice at the price agreed when you signed the contract.
Now of course, if the price of rice goes up, the seller can make more money if they don't sell the rice to you, but if instead they sell it to someone else for the (higher) market price. You can sue them, perhaps, but that won't get you the rice you need, at least not when you need it most.
This is where the futures exchange comes in. The exchange mediates between rice buyers and sellers, and guarantees the delivery of the rice at the agreed date.
But if the rice can come from any random seller, then how does the buyer know that they're getting the kind and quality of rice that they're after? Well, by standardization. Futures contracts describe in detail the rice what kind and quality of rice must be supplied in order to satisfy the contract (for example, this is the specification for Rough Rice Futures at the Chicago Mercantile Exchange).
This means that a future is not so much an agreement between a buyer and a seller. Rather, a future standardizes entire categories of products. Because producers can sell more to the exchange if more of their product meets the standard. And the more product there is to back the trade in futures, the more the exchange stands to profit. This creates a feedback loop that continuously eliminates 'inefficiencies' (like a living wage) from the production process, and over time relentlessly increases yield and/or reduces cost.
Of course, what's left at the end of that process is almost never quite as nutricious, delicious, and happy as the stuff that went into it. But it is cheap, and you never have to go without.
posted by dmh at 9:42 PM on September 10 [1 favorite]
It's hard to overstate how much finance has influenced and continues to influence agricultural production and distribution. Take for example the futures contract, which has an interesting history. The story goes that the world's first futures exchange, for rice, was established in 18th century Japan, when rice merchants successfully petitioned the authorities to allow trade in futures. Previously this had been forbidden, because - plus ca change - futures were seen as a form of gambling.
A futures contract is a standardized agreement to buy or sell a specific quantity of such-and-such product at a predetermined time in the future. This makes it possible to ensure ahead of time that you will have enough rice to, say, feed the entire village, and to do so at a fixed, known cost. If for whatever reason the price of rice goes up, the futures contract ensures that you can still buy the rice at the price agreed when you signed the contract.
Now of course, if the price of rice goes up, the seller can make more money if they don't sell the rice to you, but if instead they sell it to someone else for the (higher) market price. You can sue them, perhaps, but that won't get you the rice you need, at least not when you need it most.
This is where the futures exchange comes in. The exchange mediates between rice buyers and sellers, and guarantees the delivery of the rice at the agreed date.
But if the rice can come from any random seller, then how does the buyer know that they're getting the kind and quality of rice that they're after? Well, by standardization. Futures contracts describe in detail the rice what kind and quality of rice must be supplied in order to satisfy the contract (for example, this is the specification for Rough Rice Futures at the Chicago Mercantile Exchange).
This means that a future is not so much an agreement between a buyer and a seller. Rather, a future standardizes entire categories of products. Because producers can sell more to the exchange if more of their product meets the standard. And the more product there is to back the trade in futures, the more the exchange stands to profit. This creates a feedback loop that continuously eliminates 'inefficiencies' (like a living wage) from the production process, and over time relentlessly increases yield and/or reduces cost.
Of course, what's left at the end of that process is almost never quite as nutricious, delicious, and happy as the stuff that went into it. But it is cheap, and you never have to go without.
posted by dmh at 9:42 PM on September 10 [1 favorite]
It never ceases to mystify me how people look at their present contingent historical and social situation and declare it to be necessary, inevitable, and good.
posted by Pyrogenesis at 11:20 PM on September 10 [4 favorites]
posted by Pyrogenesis at 11:20 PM on September 10 [4 favorites]
Wow I don't think I've ever seen so many smug finance apologists on the blue before! Good thing they are all so very smart and that explains why they are very rich.
This here is a huge misconception that I'm always trying to correct, the goal of finance is primarily to reduce risk, rather than to take on extra risk to earn an outsized profit.
I'm making various investments in domestic stocks, overseas stocks, fixed interest instruments, multiple properties, etc, not because I believe I'm smarter than the rest of the world and I somehow know those exact instruments I'm buying will go up in value - that would be supremely arrogant and misguided.
But rather I'm diversifying my assets to reduce the risk that any one investment will be wiped out by bad luck.
Even a seeming non-decision like putting all your savings in the bank in term deposits is an undiversified investment - you're exposed to inflation risk (which erodes the value of your money) and exposed to interest rate risk (rates go down, the yield on your cash also goes down), even exposed to currency risk if your national currency devalues. These are all risks which are trivial and very cheap to hedge against by holding other asset classes or using financial instruments, so why wouldn't you?
posted by xdvesper at 2:43 AM on September 11 [1 favorite]
This here is a huge misconception that I'm always trying to correct, the goal of finance is primarily to reduce risk, rather than to take on extra risk to earn an outsized profit.
I'm making various investments in domestic stocks, overseas stocks, fixed interest instruments, multiple properties, etc, not because I believe I'm smarter than the rest of the world and I somehow know those exact instruments I'm buying will go up in value - that would be supremely arrogant and misguided.
But rather I'm diversifying my assets to reduce the risk that any one investment will be wiped out by bad luck.
Even a seeming non-decision like putting all your savings in the bank in term deposits is an undiversified investment - you're exposed to inflation risk (which erodes the value of your money) and exposed to interest rate risk (rates go down, the yield on your cash also goes down), even exposed to currency risk if your national currency devalues. These are all risks which are trivial and very cheap to hedge against by holding other asset classes or using financial instruments, so why wouldn't you?
posted by xdvesper at 2:43 AM on September 11 [1 favorite]
I get that you see the role of finance as reducing risk and, again, if you accept that our current reality of a world built around finance is inevitable and natural rather than a set of historic choices we continue to uphold, it isn't untrue that that's a part; I think the point some people are making is that the risks that finance is used to reduce are primarily caused by finance in the first place.
If we didn't organise around marketised value and extraction of profit, the risks we would need to mitigate as a society wouldn't be financial, and we wouldn't require the kind of things finance cannot see aren't inevitable. I'm not sure using the same medicine that is actually making us sick to treat the sickness it causes really reduces the risk of us all being sick. The root cause here is finance as we currently normalise and operate it creates risk and can't see any other cure than itself.
posted by onebuttonmonkey at 3:01 AM on September 11 [2 favorites]
If we didn't organise around marketised value and extraction of profit, the risks we would need to mitigate as a society wouldn't be financial, and we wouldn't require the kind of things finance cannot see aren't inevitable. I'm not sure using the same medicine that is actually making us sick to treat the sickness it causes really reduces the risk of us all being sick. The root cause here is finance as we currently normalise and operate it creates risk and can't see any other cure than itself.
posted by onebuttonmonkey at 3:01 AM on September 11 [2 favorites]
risks that finance is used to reduce are primarily caused by finance in the first place.
This is such a broad statement - effectively saying that finance is the root of all the things wrong in the world - which, if that's the accepted premise, then obviously there's nothing to debate at this point - which is not to say it's an invalid opinion, it just unfortunately ends the discussion.
To draw upon an argument made earlier (but not fully expanded upon) - the main innovation of markets is that it leads to price discovery - as opposed to say, the Soviet Union killing hundreds of thousands of whales to meet state production quotas which they actually had no use for since blubber had since been replaced by more modern industrial products. Or 40 million starving to death in the Great Leap Forward as the state mandated everyone build backyard steel mills to maximize steel production even though there was a desperate need for food rather than steel.
That's basically how decisions get made in the absence of markets and financial markets - either top down by bureaucrats with imperfect information (imagine the President dictating how many people should work in agriculture versus steel and what price those products be sold for) or else made bottom-up by individuals with imperfect information - imagine each person making individual decisions around production and sales with no guidance as to what the real supply / demand / value of their product is.
Imagine the wildly fluctuating price of goods in a system where no one had the ability to hedge against price volatility. No "finance" boogeyman needed, just fundamental supply and demand.
In the electricity market, the price of electricity in the spot market could vary as much as 100x within a single day due to supply and demand - everyone wakes up at 6am and turns on the kettle and has a hot shower, but then maybe solar and wind isn't producing at that moment, well as the electricity retailer, your customers want power, and you are bound by contract to sell it to them at 20c/kWh but when you go to the open market you're buying it at 1500c/kWh from the power producers.
As a customer, you've unknowingly ALREADY signed a financial instrument - contract - that pre-purchases guaranteed supply of electricity at a fixed rate of 20c/kWh regardless of the real cost, which could be 100x higher. And your retailer - could also buy a financial instrument - that allows them to pre-buy supply of electricity from a specific power plant at a fixed rate of 12c/kWh regardless of the real cost at the time. These contracts are transferable, and saleable. There was a bit of a scandal during the gas price increases as a result of the Ukraine war where electricity retailers found it was more profitable to wind up and cease operations permanently and resell their power hedging contracts rather than continue to utilize them to sell electricity to their customers below cost.
A world without financial instruments to manage risk would be terrible - basic, fundamental supply and demand (which already existed for as long as the barter economy has) already creates the volatility we want to avoid.
Financial markets go a step further in improving price discovery and thus efficient allocation of resources. Sure, we could make the argument that misuse of the financial markets can itself cause instability. That's a totally valid argument - a scalpel can be used to kill too - but it doesn't invalidate the primary purpose of those instruments, nor does it say anything about what the predominant effect is.
I definitely believe markets (and financial markets) are a huge net positive to society, based of what I've seen of history.
posted by xdvesper at 4:03 AM on September 11 [3 favorites]
This is such a broad statement - effectively saying that finance is the root of all the things wrong in the world - which, if that's the accepted premise, then obviously there's nothing to debate at this point - which is not to say it's an invalid opinion, it just unfortunately ends the discussion.
To draw upon an argument made earlier (but not fully expanded upon) - the main innovation of markets is that it leads to price discovery - as opposed to say, the Soviet Union killing hundreds of thousands of whales to meet state production quotas which they actually had no use for since blubber had since been replaced by more modern industrial products. Or 40 million starving to death in the Great Leap Forward as the state mandated everyone build backyard steel mills to maximize steel production even though there was a desperate need for food rather than steel.
That's basically how decisions get made in the absence of markets and financial markets - either top down by bureaucrats with imperfect information (imagine the President dictating how many people should work in agriculture versus steel and what price those products be sold for) or else made bottom-up by individuals with imperfect information - imagine each person making individual decisions around production and sales with no guidance as to what the real supply / demand / value of their product is.
Imagine the wildly fluctuating price of goods in a system where no one had the ability to hedge against price volatility. No "finance" boogeyman needed, just fundamental supply and demand.
In the electricity market, the price of electricity in the spot market could vary as much as 100x within a single day due to supply and demand - everyone wakes up at 6am and turns on the kettle and has a hot shower, but then maybe solar and wind isn't producing at that moment, well as the electricity retailer, your customers want power, and you are bound by contract to sell it to them at 20c/kWh but when you go to the open market you're buying it at 1500c/kWh from the power producers.
As a customer, you've unknowingly ALREADY signed a financial instrument - contract - that pre-purchases guaranteed supply of electricity at a fixed rate of 20c/kWh regardless of the real cost, which could be 100x higher. And your retailer - could also buy a financial instrument - that allows them to pre-buy supply of electricity from a specific power plant at a fixed rate of 12c/kWh regardless of the real cost at the time. These contracts are transferable, and saleable. There was a bit of a scandal during the gas price increases as a result of the Ukraine war where electricity retailers found it was more profitable to wind up and cease operations permanently and resell their power hedging contracts rather than continue to utilize them to sell electricity to their customers below cost.
A world without financial instruments to manage risk would be terrible - basic, fundamental supply and demand (which already existed for as long as the barter economy has) already creates the volatility we want to avoid.
Financial markets go a step further in improving price discovery and thus efficient allocation of resources. Sure, we could make the argument that misuse of the financial markets can itself cause instability. That's a totally valid argument - a scalpel can be used to kill too - but it doesn't invalidate the primary purpose of those instruments, nor does it say anything about what the predominant effect is.
I definitely believe markets (and financial markets) are a huge net positive to society, based of what I've seen of history.
posted by xdvesper at 4:03 AM on September 11 [3 favorites]
I think we're both guilty of generalisations when it suits us, but I am also being more specific than you think. I'm not saying the current concept of finance is the root of all problems in the world (although I do think all problems can be productively examined in terms of our relation to capital at the time). But I do think that the things finance claims to mitigate the risk of - hyperinflation, price instability, asset value on a market, their management as a concept being predicates on an idea of the need to own them and what they need to be managed for - relate to finance. Even being glib, if you look at post privatised infrastructure in the UK as a massive simplified indicator, all the costs are up and all the services are down, and the kicker floating on the literal shit in our actual rivers is the successful stock and dividend business they ran and how still the idea of this being done differently is the thing that's radical. And again, that's with me having already accepted for the argument that organising any of these around markets and businesses to start with is a good idea, or the best idea.
I also don't think the alternative to price discovery is Stalinist economic planning - it's interesting you'd accuse me of lack of specific understanding to then counterpoint one example of catastrophic application of one failed idea of an alternative. But sure, markets are very good at establishing market values. When generations were destroyed by market problems every few years, these weren't market problems, they were people problems. The wars over resources are politics, not finance, right?
Who knows what the net positive or negative of a world run by capital is, how many great discoveries have been made that we want to attribute to how great markets are, and how many lives have been destroyed or enslaved that we in the isn't marketisation great camp generally say isn't anything to do with finance as a motive, either. We have our opinions, they differ, and I genuinely respect our ability to do that.
But again, my assertion is simpler and broader than that: financial solutions to risk are necessitated by risks caused by finance. Other systems would not be without risk and who knows what they'd look like - as Mark Fisher famously said, "It's easier to imagine the end of the world than the end of capitalism." That's a mark of how capitalist finance is exactly seen as inherent and not as an imposition, and that its internal logic has been so externalised onto the world that people attribute failings inherent in the system to everything else. Which is again just me agreeing with the article.
posted by onebuttonmonkey at 4:58 AM on September 11 [3 favorites]
I also don't think the alternative to price discovery is Stalinist economic planning - it's interesting you'd accuse me of lack of specific understanding to then counterpoint one example of catastrophic application of one failed idea of an alternative. But sure, markets are very good at establishing market values. When generations were destroyed by market problems every few years, these weren't market problems, they were people problems. The wars over resources are politics, not finance, right?
Who knows what the net positive or negative of a world run by capital is, how many great discoveries have been made that we want to attribute to how great markets are, and how many lives have been destroyed or enslaved that we in the isn't marketisation great camp generally say isn't anything to do with finance as a motive, either. We have our opinions, they differ, and I genuinely respect our ability to do that.
But again, my assertion is simpler and broader than that: financial solutions to risk are necessitated by risks caused by finance. Other systems would not be without risk and who knows what they'd look like - as Mark Fisher famously said, "It's easier to imagine the end of the world than the end of capitalism." That's a mark of how capitalist finance is exactly seen as inherent and not as an imposition, and that its internal logic has been so externalised onto the world that people attribute failings inherent in the system to everything else. Which is again just me agreeing with the article.
posted by onebuttonmonkey at 4:58 AM on September 11 [3 favorites]
Mod note: One comment above deleted for violating the Content Policy. Let's not call other fellow members "smug".
posted by loup (staff) at 1:50 PM on September 11
posted by loup (staff) at 1:50 PM on September 11
That's basically how decisions get made in the absence of markets and financial markets - either top down by bureaucrats with imperfect information (imagine the President dictating how many people should work in agriculture versus steel and what price those products be sold for)
And with markets and financial markets, decisions are still made top down by bureaucrats with imperfect information, except they're accountable to Nvidia and Walmart and Ford and Dole and Tyson.
In the electricity market, the price of electricity in the spot market could vary as much as 100x within a single day due to supply and demand
I find it difficult to believe (but am open to being convinced) that the marginal cost of production varies 100-fold over the course of the day. And if price != marginal cost, then whatever we're talking about is exploitation and not a free market.
posted by GCU Sweet and Full of Grace at 6:32 AM on September 12 [1 favorite]
And with markets and financial markets, decisions are still made top down by bureaucrats with imperfect information, except they're accountable to Nvidia and Walmart and Ford and Dole and Tyson.
In the electricity market, the price of electricity in the spot market could vary as much as 100x within a single day due to supply and demand
I find it difficult to believe (but am open to being convinced) that the marginal cost of production varies 100-fold over the course of the day. And if price != marginal cost, then whatever we're talking about is exploitation and not a free market.
posted by GCU Sweet and Full of Grace at 6:32 AM on September 12 [1 favorite]
As a customer, you've unknowingly ALREADY signed a financial instrument - contract - that pre-purchases guaranteed supply of electricity at a fixed rate of 20c/kWh regardless of the real cost, which could be 100x higher.
I'm with Amber Electric, which charges me the market spot rate averaged over each half-hour block (the Australian spot rate is set in five-minute blocks, but the "smart" meters here log consumption per half hour).
Amber makes its money off the fixed monthly subscription they charge me rather than as a markup on the energy they sell me, so they have no incentive to keep my consumption high.
Amber has an app and a website that show the current spot rate as well as rate predictions for the next 24 hours, making it easy to know e.g. how many hours to set the dishwasher's delay timer to. They also show me, again in half-hour blocks, what percentage of the grid was or will be supplied by renewable sources. So it's very easy for me to see how that percentage affects the spot price, and what I've seen is that when the percentage of renewables feeding the grid is high, the spot price goes down and in some cases even becomes negative - I get paid to consume electricity during those blocks.
I find it difficult to believe (but am open to being convinced) that the marginal cost of production varies 100-fold over the course of the day.
Australia has yet to overbuild its renewable generation capacity to the extent that renewables, whose marginal cost of electricity production might as well be zero, can supply 100% of demand even when wind and insolation are low. So on a few days every year there will be times during the evening peak demand period when fixed-output coal-fired plant plus zero-marginal-cost renewables simply don't have the capacity to meet demand, and that's when the gas-fired peaker plants spin up.
Those are the guys driving the spot rate to 100x normal per kilowatt hour, and although the immediate reason they do that is because they can, the underlying reason is that those generators sit completely idle most of the time, so billing through the nose when they are the only game in town is the way they make enough of a return off that normally-idle plant to justify having invested in it.
Gas peaker operators also know full well that their days are numbered as more and more Australian households acquire home batteries and/or grid-interactive EVs, which is again an incentive to soak us all for as much as they possibly can before they pass their use-by date. So yeah, they're greedy exploitative corporate fucks but no more so than any other commercial enterprise.
posted by flabdablet at 10:09 AM on September 12 [1 favorite]
I'm with Amber Electric, which charges me the market spot rate averaged over each half-hour block (the Australian spot rate is set in five-minute blocks, but the "smart" meters here log consumption per half hour).
Amber makes its money off the fixed monthly subscription they charge me rather than as a markup on the energy they sell me, so they have no incentive to keep my consumption high.
Amber has an app and a website that show the current spot rate as well as rate predictions for the next 24 hours, making it easy to know e.g. how many hours to set the dishwasher's delay timer to. They also show me, again in half-hour blocks, what percentage of the grid was or will be supplied by renewable sources. So it's very easy for me to see how that percentage affects the spot price, and what I've seen is that when the percentage of renewables feeding the grid is high, the spot price goes down and in some cases even becomes negative - I get paid to consume electricity during those blocks.
I find it difficult to believe (but am open to being convinced) that the marginal cost of production varies 100-fold over the course of the day.
Australia has yet to overbuild its renewable generation capacity to the extent that renewables, whose marginal cost of electricity production might as well be zero, can supply 100% of demand even when wind and insolation are low. So on a few days every year there will be times during the evening peak demand period when fixed-output coal-fired plant plus zero-marginal-cost renewables simply don't have the capacity to meet demand, and that's when the gas-fired peaker plants spin up.
Those are the guys driving the spot rate to 100x normal per kilowatt hour, and although the immediate reason they do that is because they can, the underlying reason is that those generators sit completely idle most of the time, so billing through the nose when they are the only game in town is the way they make enough of a return off that normally-idle plant to justify having invested in it.
Gas peaker operators also know full well that their days are numbered as more and more Australian households acquire home batteries and/or grid-interactive EVs, which is again an incentive to soak us all for as much as they possibly can before they pass their use-by date. So yeah, they're greedy exploitative corporate fucks but no more so than any other commercial enterprise.
posted by flabdablet at 10:09 AM on September 12 [1 favorite]
And for what it's worth, those price signals do actually work. My own house runs only lighting during price spikes - we even turn off the fridge for those few hours each year - and there must be a fair bit of demand that responds much the same way; I've never seen a price spike go quite as high as the app predicted it would.
Even when the price isn't spiking, we do get charged quite a lot more for late afternoon and evening electricity than for other times. So on hot summer days I'll pre-cool the house by running the heat pumps aggressively from about 10am, then turning them off when the evening peak hits and relying on just the ceiling fans. The hot water service (also a heat pump) is set to cook up each day's tankful starting at 11am when the grid is overflowing with rooftop solar. House stays comfy, hot water stays plentiful, and the energy powering those major sinks typically costs us well under 10c/kWh. I like Amber.
posted by flabdablet at 10:31 AM on September 12 [1 favorite]
Even when the price isn't spiking, we do get charged quite a lot more for late afternoon and evening electricity than for other times. So on hot summer days I'll pre-cool the house by running the heat pumps aggressively from about 10am, then turning them off when the evening peak hits and relying on just the ceiling fans. The hot water service (also a heat pump) is set to cook up each day's tankful starting at 11am when the grid is overflowing with rooftop solar. House stays comfy, hot water stays plentiful, and the energy powering those major sinks typically costs us well under 10c/kWh. I like Amber.
posted by flabdablet at 10:31 AM on September 12 [1 favorite]
FT: Gary Stevenson claims to have been the best trader in the world. His old colleagues disagree
posted by Lanark at 3:12 PM on September 12
posted by Lanark at 3:12 PM on September 12
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I don't think that's accurate, the purpose of trading is price discovery, so that the seller of mangoes and the buyer of mangos both find the best deal available.
"$667 trillion. That makes it the biggest business in the world"
Turnover is not the same as profit, it is very unlikely that a mango farmer is getting a return that is as low as the returns on day trading—which are often fractions of a percent.
I get the impression that this author has a very limited understanding of financial markets and would be better served using source material written by successful traders rather than people who burned out and left the industry.
posted by Lanark at 1:06 AM on September 10 [11 favorites]