Actually, not. These market makers are often prop shops. That means they use their own fund (prop = proprietary) to do the trading. They can do that because they don't need much capital to run.
So the story here is that over the last twenty years they stole the lunch from the traditional market makers like eg banks.
Of course, they got rich in the process. But they started from relatively modest means, compared to the companies they took on.
Michael Lewis's 'Flash Boys' is an hilarious account of this process. Well, it's involuntarily hilarious, because to tell his story, Lewis needs to cast Goldman Sachs (!) and other big banks as the victim. See the rebuttal 'Flash Boys: Not so fast' by Peter Kovac for more insight.
Perhaps some start this way. But in terms of the general trend of talented engineers and mathematicians being sucked into this quant vortex, it is a matter of making wealthy people wealthier.
Automation in trading makes all investors wealthier via lower fees. Trading costs basically nothing nowadays, and that is because far fewer people are employed to do it.
Obviously, the people who own the automation will want a cut of the rewards, like any other business.
Obviously NASDAQ and electronic trading systems are a good innovation. But firms basically doing arbitrage or exploiting uneven network latency are not that economically productive.
Well lowering market spreads is all about increasing the returns for capital, and incenctivising overfinancialisation. It's hardly curing cancer is it?
At worst it's actively harmful if you believe that the current state of turbo-financialised capitalism has its drawbacks.
> Network latency
Not really sure what you're talking about but surely spending billions of dollars to bring rtt latencies to 50 micros or whatever is not really a great use of money and top engineering talent. Again, it's playing an arbitrage game but not really delivering any value.
lol I said "closeted dictator" for the record. But alrighty why don't we start over and see if we can both argue in good faith. I can certainly be a dick on the internet sometimes.
I honestly can't tell what your concrete points are. I come from the position that economies are naturally occurring phenomena which cannot be centrally planned or controlled. If people can find ways to profit off market inefficiencies, they should! The HFT/Quant firms make their arbitrage money (value for them) and all market participants in return see: (non-exhaustive list)
If your bar is that "all smart people should be working on curing cancer or andrepd-approved endevours" then almost nobody in the economy is providing value. Is my lowly SecEng job at $MEGACORP good enough? What about my buddy who writes firmware for toothbruhes? Are professional starcraft players wasting their talents?
> EDIT: The funny part is even the exchanges and hft firms agree with me see PLP/speed bumps on exchanges like Eurex lol
This debate has been going on for ages, and it's silly to pretend that it's been settled and everyone agrees with you.
> I come from the position that economies are naturally occurring phenomena which cannot be centrally planned or controlled.
This is a challenge to untangle. It sounds like you're saying that there is no point trying to regulate, legislate or control what happens in the economy at all. But that sounds bonkers to me.
For starters, there are (and should definitely remain) absolute limits to business activities. We've moved on from Victorian-era child and slave labour for good reasons, even though such a situation was "naturally occurring" at the time. Moreover economic activity is dictated by cultural mores - if your service is morally reprehensible in some way then you won't get much business whatever your matgins are. Economies are inherently subject to the laws and customs of the agents.
Secondly, some regulation is pretty clearly beneficial. For example, there's a recurrent tendency for market power to concentrate in modern economies; we need robust anti-trust regulation to prevent consumers from getting ripped off and to prevent fragile supply chains. A well-conisdered balance of public and private provision supports the least well-off in society while allowing room for the fruits of individual flourishing.
Thirdly, we must consider what makes one economic system better than others. One way to measure this is to look at how efficiently it converts resources to social utility. I'm far from convinced that it's efficient to employ our brightest minds to build trading models with brief lifespans so that investors who are already well-off become slightly more so. It's worth investigating what regulations and incentives could put those minds towards things of greater value - solving climate change, cancer, sending humans into space etc... .
> This is a challenge to untangle. It sounds like you're saying that there is no point trying to regulate, legislate or control what happens in the economy at all. But that sounds bonkers to me.
I really do not appreciate this mischaracterization of my position. Focus on my actual words. I don't care about 'winning' this online argument. I take effort to engage because I am disturbed by the number of intelligent people who believe if only _THEY_ were in charge (or at least the right person), we would be able to fix all of society's problems.
> For starters, there are (and should definitely remain) absolute limits to business activities...
I agree with everything that follows. Government needs to be around to keep the peace. I want to be explicit: When I say "centrally planned/controlled economies" I am NOT talking about the general concept of regulation. If you are debating in good faith, this should be obvious. Look at all the history of failed states who tried to implement top-down control of their economies.
Also, YSK that not all regulators are government entities.
> Thirdly, we must consider what makes one economic system better than others. One way to measure this is to look at how efficiently it converts resources to social utility.
Never before in history has mankind been so prosperous. What system would you like to emulate? The US capitalist system is not perfect (and never will be)...but it blows all of its peers out of the water in terms of economic prosperity. Here's a couple data points: (Please read the technical definitions if you are truly interested in this subject)
> I'm far from convinced that it's efficient to employ our brightest minds to build trading models...
This is where my "closeted dictator" quip comes from. Nobody is "allocating" these minds...they are acting on their own free will. Why should you or anyone else be the arbiter? What if individuals disagree with your beliefs? Space exploration is a great example of a debatable "worthy endeavor"
Do you mean that high salaries indicate a demand in the market? Not much argument there, although it is sometimes the case that large companies hire talent purely to starve competition. But what I'm really questioning is whether those high salaries translate to value to society.
So the story here is that over the last twenty years they stole the lunch from the traditional market makers like eg banks.
Of course, they got rich in the process. But they started from relatively modest means, compared to the companies they took on.
Michael Lewis's 'Flash Boys' is an hilarious account of this process. Well, it's involuntarily hilarious, because to tell his story, Lewis needs to cast Goldman Sachs (!) and other big banks as the victim. See the rebuttal 'Flash Boys: Not so fast' by Peter Kovac for more insight.