LWN: Comments on "Linux at NASDAQ OMX"

poverty gap

tialaramex — Sat, 06 Nov 2010 16:57:37 +0000

There is a growing dollar gap between rich and poor. In many industrialised countries the rich have proportionally more money than they did thirty years ago. This worries some people a lot. Even if they happen to be rich, it could be worrying because they sense injustice, or because they fear violent insurrection.

However you and I are interested in the real economy, which is not concerned with money, but with the goods and services which we obtain in exchange for our labour. So we see a different picture. Everybody has better goods and services than thirty years ago, and the richest can afford only very slightly better toys and nicer services than the poor, despite their bulging wallets. Ordinary working people today may easily obtain things that were beyond the reach of the richest people alive a few decades go.

Yet a third way to look at it is happiness. People seem to be not much happier than previous decades, and wealth or poverty seem to have little impact so long as a person is not so very poor that they lack food and shelter and fear for their life.

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linuxrocks123 — Thu, 04 Nov 2010 10:39:16 +0000

I don't understand this view, though I've heard it many times. Do you really believe that the average person in the U.S. is no better off than 30 years ago? Were personal computers, safer automobiles, cell phones, the Internet, and portable music players really so minor in improving people's lives that their benefit was negated entirely? I see a lot of ways in which the lower and middle classes of developed countries are better off today and few if any ways they are worse. Can you elaborate on why your perspective is so radically different from mine?

---linuxrocks123

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marcH — Mon, 01 Nov 2010 16:39:20 +0000

> The volatility is there, whether you let people trade or not. In other words, if my cell phone becomes obsolete overnight or not is not relevant to whether I am allowed to sell it or not.

Is this a disguised car analogy? It does not look any better than one.

½OT: LSE switching over to Linux

buchanmilne — Mon, 01 Nov 2010 08:58:07 +0000

It seems they switch over today:

The news comes ahead a major Linux-based switchover in twelve days, during which the open source system will replace Microsoft .Net technology on the groups main stock exchange.
[...]
Millennium Exchange is set to go live on the LSEs main exchange in 12 days time, on 1 November.

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nix — Sun, 31 Oct 2010 19:18:56 +0000

Uh, the 'great invisible coordinator' of prices... doesn't work. There have now been multiple examples of HFT systems causing extremely radical swings in both trading volume and price, because unanticipated interactions between different systems lead to both choosing to buy or sell or whatever until they've driven the price through the roof or floor. (On top of that, to an HFT system, virtually every market is illiquid because they dominate the trading volume of every market they arrive in sooner or later, and illquid markets are famously hard to price accurately.)

But perhaps you'd rather prefer to believe that prices are mystically perfect, when they plainly are not. Not remotely.

And this is really seriously off-topic, so this will be my last post in this thread.

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martinfick — Sun, 31 Oct 2010 18:37:03 +0000

> You are assuming that all trades high-frequency-trading algorithms make are useful.

No, I don't see any assumption of the sorts in my post(s). I am pointing out that by banning fast trades, you will be placing clear barriers that will prevent the economy from being more efficient. Could plenty of other things make the economy less efficient? ...Sure. But you simply cannot limit trades and not expect to adversely impact things.

> i.e. we have reached a situation where bugs in a massively-distributed system written by thousands of hands without any coordination whatsoever can immediately destroy chunks of the financial system.

Hmm, I suspect that prices are the great invisible coordinator that you seem to be forgetting about.

> Kludge tripwires have been welded into the exchanges to try to stop it, but all these can possibly ever do is ameliorate the problem.

If those exchanges want to provide "fixes" to their customers, great (as long as other exchanges are free to do otherwise). But, those exchanges which do a better job at preventing barriers to trading in the long run are those which people are more likely to use in the long term.

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nix — Sun, 31 Oct 2010 13:23:27 +0000

On average everyone is wealthier.

In the last 30 years? In the US and UK this is only true because the rich have got so much richer: the rest of us have barely gained a thing.

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nix — Sun, 31 Oct 2010 13:07:31 +0000

I wish people would pay attention to the history of the Soviet Union instead of just using it as a whipping boy. What killed their dream of near-optimal central planning from the start was two things: firstly, the available computer power and communications bandwidth was nowhere near sufficient to optimize the whole economy, or to react to changing external conditions fast enough; secondly, they relied on people reporting what was happening on the ground, and most of those people had an incentive to *lie*. (Later on, a third thing killed them: that the existing productive systems had grown into empires and the people running those empires fought to stop them being torn down: also, by then the lies were so pervasive that not many people thought to tear them down. Capitalism's "creative destruction" may not be all it's given credit for but it's a hell of lot better than what they had.)

But the idea of optimizing an entire economy is not hopeless. You just can't do it with humans doing the data collection and reporting :/ in this it was very similar to much else about communism: it would work great if we were all selfless robots.

The nice thing about price signals is not that they are particularly brilliant or insightful. It is that they are relatively hard to manipulate, so individual liars can't bugger up your economy.

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nix — Sun, 31 Oct 2010 13:03:13 +0000

You are assuming that all trades high-frequency-trading algorithms make are useful. Have you *seen* what those things do? Millions of tiny trades of the same stocks backwards and forwards to capitalize on tiny shifts in price seem reasonable until you realise that these things are all running secret algorithms and nobody's figured out their ensemble behaviour. And their ensemble behaviour fairly often (from our perspective: rarely, from their millions-of-trades-an-hour perspectie) seems to include huge bursts of buying or selling that no sane human would ever have asked the bots to do.

i.e. we have reached a situation where bugs in a massively-distributed system written by thousands of hands without any coordination whatsoever can immediately destroy chunks of the financial system. Kludge tripwires have been welded into the exchanges to try to stop it, but all these can possibly ever do is ameliorate the problem.

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giraffedata — Sun, 31 Oct 2010 08:13:46 +0000

if all you are worried about is your money, then just don't give your money to money managers that do things you don't like.

I don't think anyone is posting worries about his own money, even though the posts might be worded that way out of simplicity. What people are worried about is their wealth, and having a mattress stuffed with money doesn't make you wealthy if the price of everything is high. Certain behaviors of financial institutions make prices high so that no matter what one person does with his own money, he ends up poorer.

And it's rather arbitrary what money we call mine and what money we call yours (laws can easily change that accounting), so it's legitimate to complain about things that waste "our money."

Linux at NASDAQ OMX

giraffedata — Sun, 31 Oct 2010 07:59:34 +0000

You are completely missing the point.
I don’t care about people playing casino in such places. As long as they don’t do it with our money.

No, I just wasn't addressing that point. I was addressing the point from your immediate previous post that the Cayman islands, etc. are today the finance capitals of the world, and that that revelation should disappoint zlynx (who said places like North Korea could become finance capitals if laws were to restrict trade in today's finance capitals).

If those weren't points you intended to make, you shouldn't have said it.

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Np237 — Sun, 31 Oct 2010 07:51:00 +0000

Do you actually know how the economic system works?

Not everyone of us wants to spend his life alone in the mountains raising goats.

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bronson — Sun, 31 Oct 2010 07:24:13 +0000

Have you forgotten about the great bank bailout of 2008?

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dlang — Sun, 31 Oct 2010 07:04:50 +0000

if all you are worried about is your money, then just don't give your money to money managers that do things you don't like.

unless you are forced into a union, they don't force you to give them any money, you can do whatever you want with it.

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Np237 — Sun, 31 Oct 2010 06:18:10 +0000

You are completely missing the point.

I dont care about people playing casino in such places. As long as they dont do it with our money.

There are ways to prevent people from using money and goods from our countries in such places. Running a competition for which country has the laxest laws to allow the fastest transactions with the least control is not one.

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giraffedata — Sat, 30 Oct 2010 22:43:28 +0000

As for other places becoming the finance capital of the world: sorry to disappoint you, but it has already happened. Bahamas, Cayman, Isle of Man, to a lesser extent Delaware and Singapore… This is where the large transactions are happening.

Let's not exaggerate. Far more money changes hands in New York, London, etc. than those places. These are the finance capitals of the world. And it's because laws in New York and London allow exchanges to run Linux and execute a million orders a second. If they didn't, then the transactions would move to those other places.

I don't get the "sorry to disappoint" angle at all, since you're at best confirming zlynx's point: places like North Korea and the Bahamas can have fewer restrictions and be the marketplace of choice.

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martinfick — Sat, 30 Oct 2010 18:22:54 +0000

What does the human mind have to do with it? If a certain price makes purchasing a product suddenly cost effective, then why should I (or my computer) be prevented from buying that product just because that price only stayed cost effective for milliseconds? This is not a hard scenario to imagine. Perhaps phones cost $70 from the warehouse. If some warehouse has a glut suddenly (they need to move them out to make room for something else), and they offer them for $65. The first (fastest) buyer/retailer gets the lot. Surely it would be unjust to limit this sale.

But take this further, as soon as that transaction has been performed, another one could potentially become valuable! Many transactions only become valuable because of several other transactions. In other words, the reason the warehouse may have wanted to make the sale as quickly as possible at $65 (even though perhaps they could get $67 if they waited longer) is because they were faced with a similar deal on the other end; that is why they needed to empty their warehouse of the phones. If they could not sell the phones, they might not be able to purchase the other product in time at the right price. They would lose out, and so would their supplier and buyer, everyone in the chain looses! As you can perhaps extrapolate, this becomes a large global chain of best deals. The faster they are made, the more efficient the economy can operate, any delay is a potential waste of resources.

If there is one thing that open source should have made clear is that even minute barriers become problematic in a global collaborative environment. Those open source projects which understand this and work hard to minimize barriers are those which are most likely to succeed (because they are likely more efficient). Imagine if someone unrelated to your project, thought that it were OK (and they had the power) to limit the rate of contribution to your favorite project, would it not be unjust? Time and time again this is questioned, wikipedia vs. nupedia..., and time and time again, those with the lowest barriers displace those with higher barriers. This is not just theory, this is science, look at the empirical data, not some economist's or politician's analysis.

Play "Settlers of Catan" a bit with a competent crowd and you will quickly realize how valuable it is to respond quickly to offers and also how valuable it is to make them quickly! :)

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jpnp — Sat, 30 Oct 2010 17:40:33 +0000

Now I can well imagine that if we regulated cell phone transactions so that, say, you could only buy and sell your phone on one day of the month, then you and your potential buyers would lose out and fail to allocate your resources efficiently.

I'm not convinced that this can be extrapolated to trading times less than a millisecond (way faster than the human mind).

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kleptog — Sat, 30 Oct 2010 16:12:56 +0000

I suppose whether it's a zero-sum game depends on what you're measuring. The economy now is vastly larger than it was 30 years ago. On average everyone is wealthier.

One important thing to note is that the total amount of money in the system is not the important factor (though it is the easiest to control). What is important is the *flow* of money, represented by the velocity of money (how money times is the average dollar spent in a year). Actually, it's the goods and services that the money is exchanged for that is the real economy, but the flow of money is the easiest way to measure it.

(Yes I'm glossing over the various types of money, that not really relavent here).

Money that isn't moving is dead. Money under your bed or in a bank that's not allowed to use it is essentially non-existent for the economy.

So if everyone is spending money like mad, you don't need very much real money in the system to support it. Conversely, if everyone stops spending all of a sudden, you need to make more of it to avoid your economy grinding to a halt.

(BTW, in NL the savings are guaranteed by the other banks in the country. In return they end up the queue of creditors in place of the original customers. Sounds like a nice idea, until the amount guaranteed exceeds a significant amount of the total savings in the country, in which case you're still fucked.)

Incidentely, this explains the problem with your solution. Because you are no longer allowed to use deposits to finance other things, the governments would need to print a *lot* more money to keep the economy the same size. I'd guess about 20 times what is currently in circulation (you can't use substitutes like gold for savings, because its value isn't constant). At any particular moment a significant chunk of the total cash in circulation would be stuck in warehouses, rusting.

Suppose someone sells a house and puts that money in a bank account. This money is for all intents and purposes removed from the economy. To keep everything going the government would need to print that amount again to keep the total up, and also destroy it again when they do decide to spend it. That requires a lot more government intervention (and crystal ball gazing) that what we have now.

½OT: LSE switching over to Linux

mab — Sat, 30 Oct 2010 01:06:12 +0000

I hope it wasn't the cause of this http://www.telegraph.co.uk/finance/newsbysector/banksandf...

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Np237 — Fri, 29 Oct 2010 20:03:54 +0000

Economy as a whole is not necessarily a chaotic system. But the market with no control (or joke control, as currently) is definitely one.

As for other places becoming the finance capital of the world: sorry to disappoint you, but it has already happened. Bahamas, Cayman, Isle of Man, to a lesser extent Delaware and Singapore This is where the large transactions are happening. The solution is not to just imitate them and hope for the best when speculation and market manipulation takes away any kind of value from the real world economy. The solution is, on the contrary, to impose strong regulations (with high legal risk costs, as you point out) and to make it costly to make money flee in such places. Several realistic solutions, from Tobin tax to various kinds of oversight, have been proposed in this direction, but have not been implemented because of beliefs in the market that confine to religion.

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zlynx — Fri, 29 Oct 2010 19:45:36 +0000

The market isn't chaotic in that sense. Food and water will always be valuable. So will labor reduction (employees, slaves, machines) and entertainment. At a medieval feudal level a planned economy can be run from the top down. That couldn't be done if it was a truly chaotic system.

In the modern world eliminating the market or placing too much control on it will always fail.

The market will resurrect itself in the form of an underground economy where supply and demand (plus legal risk fees) will result in exchanges at the true market value of goods and services.

A regulated market that respects true values will still fail when the regulation cost exceeds the legal risk costs. At that point it becomes much cheaper to avoid the legal markets (pay workers cash under the table, hire illegal aliens, buy drugs from Canada, etc).

Take the old USSR for example or any government that has attempted to enforce a rationing system. Ticket sales and scalpers are another example.

To take this back to the subject, if there was any attempt to impose month long waits on stock sales, investment brokers would go somewhere else, to another country probably, where such ridiculous laws were not in force.

There will always be someone. North Korea or Venezuela could become the finance capital of the world.

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Np237 — Fri, 29 Oct 2010 19:23:47 +0000

That, I can agree with. More transparency, from all companies and public institutions, can only help.

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martinfick — Fri, 29 Oct 2010 19:09:07 +0000

> The dogma is that if each actor makes his own, well-informed decisions, according to his own interests, the economy as a whole will work in an optimal way.

I could see how it would seem like I was saying that, sorry. To rephrase your words closer to something closer to what I did mean:

The economy as a whole will likely work in a LESS optimal way if each actor makes his own, according to his own interests (how can they do otherwise?) LESS informed decisions, than if those decisions were better informed.

In other words, I am not pinpointing the road to optimality, but I am pointing out a road which can clearly be deduced to point away from it.

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Np237 — Fri, 29 Oct 2010 18:32:53 +0000

Monte Carlo and similar techniques do not work for chaotic systems.

And you dont need such a far-fetched analogy to see that letting the market optimize the economy just doesnt work. Historically, every time the market was left with more power and less regulation, it lead to increased poverty and economical crisis.

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Np237 — Fri, 29 Oct 2010 18:30:10 +0000

I agree that if information is good, people will make better decisions, from their point of view.

The dogma is that if each actor makes his own, well-informed decisions, according to his own interests, the economy as a whole will work in an optimal way.

Such theories have been proved wrong again and again, whether in the real-world economy, or in similar mathematical and physical phenomenons. As a chaotic system, the economy as a whole cannot be predicted nor optimized.

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zlynx — Fri, 29 Oct 2010 17:48:42 +0000

Do you believe in solving NP-hard problems using techniques such as Monte Carlo and simulated annealing?

"The Market" is just such a technique for optimizing the economy. The global economy (even a country's economy) is a problem impossible to solve with a giant computer or central planning bureaucracy (gag).

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martinfick — Fri, 29 Oct 2010 17:25:12 +0000

The volatility is there, whether you let people trade or not. In other words, if my cell phone becomes obsolete overnight or not is not relevant to whether I am allowed to sell it or not. You can mask volatility by not allowing me to trade, but you cannot eliminate (or even change) it. Pretending my cellphone is not obsolete, by preventing me from selling it as soon as I realize it is obsolete, may make the market look less volatile, but it is a coverup, a lie, no one benefits. If I can't sell it, I am robbed of an opportunity, so is my potential buyer, who else could potentially benefit from our mutual loss? Lies may make some people feel better, they do not make me feel better. These types of lies are highly likely to make the economy less efficient, and likely to waste a great deal of resources.

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martinfick — Fri, 29 Oct 2010 16:52:49 +0000

I agree, ignore the economists, most of them are politicians.

Nevertheless, which part of my statement/implications are you calling dogma? ...and please explain.

1) Economic value changes
2) Out of date information about a changing value could be bad information
3) Decisions based on inaccurate information have a greater chance of being bad decisions than those based on accurate information
4) Economic value information influences resource allocation
5) Less accurate information about economic value will lead to less accurate resource allocation
6) Less accurate resource allocation prevents more efficient resource allocation

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nix — Fri, 29 Oct 2010 15:45:55 +0000

But we also see increased volatility when high-frequency traders get involved.

It is reasonable to presume that there is a low-volatility sweet spot where trading is neither too fast nor too slow/thin, but as far as I know nobody has even proposed looking for one, let alone figuring out how to approximate the location of that spot or figuring out how it varies (and even along which dimensions it exhibits variance).

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nix — Fri, 29 Oct 2010 15:43:53 +0000

I was thinking from a UK perspective, where we didn't actually loosen the regulations: we just had a famously 'light-touch' regulator (the FSA) which turned out in the end to be very much too light with its touch, allowing major banks to finance themselves entirely on the wholesale market and take on exposures to massive amounts of US subprime risk until we had the first bank run for generations and an emergency government takeover.

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Np237 — Fri, 29 Oct 2010 07:18:35 +0000

I meant anything else but

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Np237 — Fri, 29 Oct 2010 07:18:03 +0000

This is purely a dogma. It has never been proved by anything else by self-called economists who rely on the assumption that their economical model is right.

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butlerm — Fri, 29 Oct 2010 06:53:52 +0000

"You assume a zero sum where there is no evidence for one."

I am referring to systems comparable to the contemporary U.S. banking system: fractional reserve, fiat currency, government guarantee of "deposits". The first property of any such banking system is the real interest rate earned by savers (prior to government overhead) is the nominal rate minus the inflation rate. The real rate is *much* smaller than the nominal rate.

During the 1970s it was sharply negative, in other words savers lost money in real terms every year, because inflation was so high. Most of the time the real interest on government guaranteed savings accounts is one percentage point at best. Whether the the $200 billion we are churning out to sustain Fannie Mae and Freddie Mac is enough to reduce government guaranteed savings deposits to a true zero sum game is hard to say. There is no question that they are _close_ to a zero sum game.

There is a perfectly good way to accomplish what you are suggesting without fractional reserve _banking_ or government guaranteed deposits. Have individuals invest in diversified bond funds that purchase bonds issued by building societies, credit unions, and the like. People still get loans to build homes, investors earn more in real terms, and the rates automatically and properly float with the risk the bond issuers undertake - instead of as now where you earn half a percent in real terms whether your bank is about to go under or not, which is a very high price to pay for a taxpayer guarantee.

Poorly managed building societies might fail (affecting the return on bond funds), but the commercial banking system as a whole will be immune from systemic failure, because true _deposits_ will no longer be lent out, but rather only the proceeds of what are in effect loans to independent lending institutions, with the risk widely distributed, instead of concentrated with those so unfortunate to make a direct loan to a bank and/or the taxpayers that guarantee whatever crazy scheme the banks will cook up next.

Linux at NASDAQ OMX

martinfick — Thu, 28 Oct 2010 22:13:23 +0000

Slowing down transactions slows down value resolution. The better value can be resolved, the more efficient a global economy can run. The slower value can be resolved, the more "wrong" that information will be. The more people make resource allocation decisions based on bad info, the more bad decisions are likely. This is simple economics. Like it or not, ethics aside, you cannot sacrifice resolution without sacrificing efficiency.

Linux at NASDAQ OMX

jhhaller — Thu, 28 Oct 2010 21:09:19 +0000

The high volume transactions are not always exercised, they can be canceled before be executed. One could see this used as an offensive weapon, by sending in many small orders which won't be executed, but swamp your competitor's ability to see what are the real market prices. There is a small tax on executed trades (charged to the seller), so there is some financial incentive to minimize the number of successful trades, particularly for small gains. Of course, with NASDAQ being in the middle of this, they need to be even faster than the broker/dealers making and/or canceling trades.

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Np237 — Thu, 28 Oct 2010 20:30:22 +0000

Im amazed that there are still people to believe in Adams Smith invisible hand.

There is no argument that can be opposed to such a religious belief.

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wahern — Thu, 28 Oct 2010 19:20:43 +0000

The implication of using transparency as a device is that rather than government officials needing to pour over transactions and to police the minutiae of corporate decision making to detect improper behavior, the market would be able to do it. For example, the market wouldn't have allowed the mortgage bubble to become so inflated if it could have clearly seen the ridiculous positions of the major investment banks and institutional investors viz-a-viz those instruments. As it was nobody knew whether investor A had 5% invested in that particular segment or 95%. Overall you would need fewer government officials and fewer rules.

Financial markets are based on risk, and risk is lack of information. The more information a market has access to, and the less costly it is to leverage that information, the less risk in the system.

Economists would say that the only information a market needs is open pricing signals (i.e. you just need exchanges). But that can't literally be true because you have complex derivative products which manifestly nobody can properly price; and the reason these derivative products are so popular is because of the problem of managing risk. Reduce risk and you reduce the pathologies for pricing at the margins. You also avoid the moral dilemma of too big to fail, because the "too big" institutions couldn't as easily get close to failure mode.

Enforcing transparency is a rule which addresses the illness. Adding ad hoc rules on holding requirements, etc., merely addresses a symptom. Reduce risk and you alleviate--to some extent--all the symptoms.

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Np237 — Thu, 28 Oct 2010 13:48:01 +0000

You are contradicting yourself. How will you enforce transparency, if not by making more rules? If not by adding oversight to control this transparency?

You may disagree on the nature of rules there is to implement but at least you seem to share this view.

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wahern — Thu, 28 Oct 2010 03:47:51 +0000

More rules is a horrible idea. More rules means more oversight which means the government and the taxpayers are taking on more of a burden.

IMO the better solution is radical transparency. The account of every trader, broker, and fund should be completely open. We should have bonds, securities, commercial paper and everything else flow through transparent exchanges. We should have an open national database of corporate holdings so you couldn't setup shell companies to hide market transactions.

This way the market could police itself. And when rules are broken they'd be broken by more than one party (as both parties would be responsible for ensuring transparency of the overall transaction), so enforcement of the few remaining rules would be even easier.

Of course, this wouldn't be well received in Europe because of their peculiar views on privacy (gov't invasion okay, private invasions so intolerable as to be immoral), and it wouldn't be well received in America because, well, the corporations wouldn't appreciate not being able to extract rents--and bailouts--from the shoddy "markets" they construct.