$300M To Save 6 Milliseconds 524
whoever57 writes "A new transatlantic cable (the first in 10 years) is going to be laid at the cost of $300M. The reason? To shave 6ms off the time to transmit packets from London to New York. The Hibernian Express will reduce the current transmission time — roughly 65 milliseconds — by less than ten percent. However, investors believe the financial community will be lining up to pay premium rates to use the new cable. The article suggests that a one-millisecond advantage could be worth $100M per year to a large hedge fund."
Cheaper than a huge flying vacuum (Score:4, Insightful)
To suck American's and other peoples' money out of their wallets from overhead. Same basic effect.
Re:Cheaper than a huge flying vacuum (Score:5, Funny)
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Absolute earnings are irrelevant at this point in history. It's the relative wealth holdings and the ability to translate that wealth into political power that really divides the classes. The whole system no longer has to enforce a gap between the rich and poor, it is now so well honed that it can perpetuate a gap between the empowered and the disempowered without requiring a wealth gap any more.
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And when the economy is good. It is a great way to increase world wide wealth.
What it really comes done to is the investors willing to invest into an infrastructure. That is a good thing. Other then a small speed increase they are new lines going across reducing failure.
Re:Cheaper than a huge flying vacuum (Score:4, Insightful)
What it really comes down to is investing in a tool to facilitate the robo-gambling, aka Wall Street. The claimed profit of $100m/ year would come from retirement funds of John Does from the Main Street.
Re:Cheaper than a huge flying vacuum (Score:4, Interesting)
This would imply valuation would no longer matter, but it does. There are enough other competitive investments besides the stockmarket, like real estate, antiques, art, gold and commodities.
What you seem to be describing is a pure Ponzi scheme. It relies on infinite growth (and parts of our current economy unfortunately do) for prosperity. But what happens when Baby Boomers pull out their stock fund during their retirement and it's not replenished?
Bernie Madoff and Penny Stocks - people lose fortunes everyday.
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Bullshit. He's going to get his bonus either way. Remember back when the banks were bailed out? How most of them still got bonuses anyway?
and i thought this was for BF3 (Score:2)
Every MS helps to those battlefield3 servers, bullets are fast.
I need every ms too.
Re:Cheaper than a huge flying vacuum (Score:5, Insightful)
nice fantasy world. here are some books (Score:3)
Diary of a Very Bad Year, by Anonymous Hedge Fund Manager
The Asylum, by Leah McGrath Goodman
The Big Short by Michael Lewis
-- interviews with real people who know how real hedge funds actually work in the real world, not the fantasy land of milton friedman and ayn rand.
Re:How? (Score:5, Insightful)
Because all high frequency trading does is inflate the cost for those of us who do invest in the "old-fashioned" buy-and-hold manner.
I heard it best described in this way: There's a hot new gadget that's being released today, and you *really* want to go buy one. Unfortunately, as you're walking down the street, some hedge fund investors see you coming and quickly jump in front of the store milliseconds before you get there to form a line at the door. The store opens, the investor at the front of the line buys ALL of the gadget inventory. He then turns around and sells all those units to the guy behind him for a small profit, who sells to the guy behind him for a small profit, who sells to the guy behind him, etc.
Eventually, they get back to you, but now if you're going to buy that gadget, it's going to cost you some significant percentage more to purchase for actual use. And you don't really have any option if you're going to buy one, because every store selling the gadget has a pool of financial sharks circling the entrance just waiting for another "traditional investment" sucker.
In the end, the store doesn't benefit, since they still only sold the item at the normal price, and you don't benefit because you just got your price jacked up. The only beneficiaries are the HFT scum who have played the system in such a way to artificially inflate your costs to their own benefit while adding absolutely no actual value to the product as it passed through their hands. This DOES impact you, because the more of your investment that gets siphoned out by the hedge funds, the less you have left to actually invest in the original stock.
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There are two issues.
1) they may be cheating and many have reason think so.
There have been accusations that they find out about orders in advance. In this case when you sell your shares, they sell theirs first (pushing down the price) and then buy yours later (immediately taking your profit). There are even admitted cases (see this document from an HFT company [sec.gov]) where this could happen without the HFT company even doing it deliberately, just because they have the advantage of ultra fast trading and yo
Great (Score:2)
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now they can lose everyone else's money even faster!
FTFY
This seems more suitable for arbitrage (Score:2)
now they can take everyone else's money even faster!
FTFY.
Just imagine how much better gaming will be! (Score:2)
Wow (Score:2, Funny)
Slashdot is serious business. You Brits will do anything to get first posts!
Proof that the system is corrupt (Score:5, Insightful)
Re:Proof that the system is corrupt (Score:5, Interesting)
This kind of thing is the direct proof that the way the stock exchange is built is deeply flawed. Why don't they try to build it on sounder bases than "the fastest takes all" ?!?
I heard some european head of state (Sarkozy perhaps) suggest that stock transactions be taxed based on speed, i.e. speculators who buy and sell very fast to make a quick buck get taxed a lot, but real investors who're in for the long run and keep their stock for a long time don't. That sounds like a great idea to me. With a scheme like that, the super-fast transatlantic cable would make speculators be taxed even more heavily.
Re:Proof that the system is corrupt (Score:4, Interesting)
Well, my personal recommendation would be to add some white (or log-white) noise to trade timestamps. If you get in 1ms faster, there would be an almost 50% chance the next guy would make the trade, not you. If you were a whole second faster, you win for sure.
Traders would focus *less* on high-speed performance, and more on more useful stuff.
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And, again, that's why a gross receipts tax would be great. 3% on all receipts means that day traders would lose their shirts on all by the craziest of moves, but the long term investor with a 10-30 year time horizon would pay only 3% on the gains and dividends - practically tax free by today's standards. We could just eliminate the "tax advantaged" savings accounts for retirement - the new tax would be so low as to make it trivial.
Re:Proof that the system is corrupt (Score:5, Interesting)
Tax starts at $0.01 and doubles every time you do a buy+sell. Counter doesn't reset for 24 hours after your last buy+sell.
When you get these crazy companies doing trades measured in microseconds, this adds up really fast. Think binary. First transaction cost is (2^1-1)*0.01, second is (2^2-1)*0.01, third is (2^3-1)*0.01.. etc.. Those pennies add up. It doesn't stop people from doing short term buy+sells, but it discourages them from doing a bunch of them in a row.
Or something that scales exponentially.
Re:Proof that the system is corrupt (Score:5, Informative)
I heard some european head of state (Sarkozy perhaps) suggest that stock transactions be taxed based on speed, i.e. speculators who buy and sell very fast to make a quick buck get taxed a lot, but real investors who're in for the long run and keep their stock for a long time don't. That sounds like a great idea to me.
This concept actually was first proposed in 1972 by Nobel-winning economist James Tobin, with the idea that it would apply to currency transactions to prevent speculators from rapid trading like the kind you're describing. Basically, the concept is that with such a tax in place, traders would have to hold onto the asset long enough that they could pay for the tax, plus whatever gains they were anticipating, so that meant that they'd have to expect to own something for longer than a few minutes. There have since been discussions of applying the same idea to stocks, bonds, mortgage-backed securities, and other assets.
The purpose of that tax isn't so much to generate revenue (although this definitely would happen), it's to slow down the markets enough so that the assets could be properly valued rather than people making money on millisecond-level differences.
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"How would you like to be in the situation 100 years ago where you want to sell your stock but no one is around to buy it? "
There are always going to be people around to buy a stock that has an intrinsic value as of itself - eg foodstuffs. More exotics? Well sucks to be you if there are no buyers then. Buy something more sensible next time.
"you literally can lose all your money in a matter of hours in a rough market "
Tough. The stock market is just long term gambling. If you can't take the heat...
Re:Proof that the system is corrupt (Score:4, Insightful)
When will people understand that liquidity is a GOOD thing?
When it is measured in microseconds and milliseconds? Seriously! And then you bring up trading stocks 100 years ago? WTF! 1 second to make a trade IS liquid.
Re:Proof that the system is corrupt (Score:4, Interesting)
When will people understand that liquidity is a GOOD thing? How would you like to be in the situation 100 years ago where you want to sell your stock but no one is around to buy it?
Those are not the only two options. We didn't have millisecond buy/sell operations 30 years ago, the market was still working so there is no reason to assume that restricting trade speeds would cause us problems. Conversely excessive trade speed is a genuine problem. The taxation plan suggested is a reasonable way to address this.
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Why not just execute trades once per day, collecting asks/bids all day long. The close of the day will be sometime between 4PM and 6PM each day, determined randomly and with the time not announced in advance. After the close all bids/asks go to the next day. You can cancel a bid/ask an hour after you make it.
Oh, to place a bid you put money in escrow with the exchange, and to place an ask you must hold the stock in escrow with the exchange.
Then you run the whole exchange off of a website that anybody can
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This just further illustrates that those with the deepest pockets can buy the fastest iron to profit the most from the stock market. This just raises the level of the "game" a bit higher.
I say there should be a mandatory artificial trading delay for every single trade to prevent this sort of thing from being used to game the system. There is absolutely no need, beyond pure greed, for trades to be made this quickly.
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... beyond pure greed...
You've pretty much summed up the stock market there.
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There was a test done between an experienced stock trader, a stock buying AI program, a 5 year old child, and a random number generator ... the Stock trader came last, the 5 year old child won ... and these guys get paid for their insight and experience ....
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Actually, it was a 4 year old girl against an astrologer and an investment analyst - see here [gimundo.com], and here's an article about random vs expert [firstpost.com] portfolios.
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They should go to turn-based trading. Everyone line up your bids and resolve them on 1-second intervals or some such scheme.
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Do a little wikipedia search on Euler's Number, and read about how Bernoulli used it to calculate continuous interest. Then you'll understand why this is all a scam.
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I second AC, this is blatantly nothing to do with how fast you'll get your news of hailstorms in Florida, as you'll spend more that 6ms deciding whether to type FOJ or OJ (is this a reference to Trading Places?) in your email. This is purely so that traders with the fastest black boxes can take advantage of tiny changes in values.
HFT (High Frequency Trading) [wikipedia.org] is all about betting (vast volumes of shares etc) that there will have a minute change in value, and do it continuously. It has absolutely no relation
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actually for commodities trading, he's not far off....
New performance metric. (Score:4, Insightful)
"...The article suggests that a one-millisecond advantage could be worth $100M per year to a large hedge fund."
I think we now have real proof that life is moving too fast when the metric to measure your performance as a large hedge fund investor is now measured in single milliseconds.
I'm glad I'm not a large hedge fund investor. Think your 30-minute lunch break is shitty? These guys don't have time to blink.
Only Milliseconds You Say? (Score:2)
Re:New performance metric. (Score:5, Funny)
"...The article suggests that a one-millisecond advantage could be worth $100M per year to a large hedge fund."
I think we now have real proof that life is moving too fast when the metric to measure your performance as a large hedge fund investor is now measured in single milliseconds.
I'm glad I'm not a large hedge fund investor. Think your 30-minute lunch break is shitty? These guys don't have time to blink.
Who'd have thought there'd be that much interest in buying shrubbery?
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Computerized trading means they can take all-day lunches and laugh all the way to the bank with their bonuses while not contributing any value whatsoever!
If you gain a $100m in a day, you buy lunch. If you lose $100m in a day, someone else buys lunch. Overall there's no net gain, but someone always affords lunch.
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while not contributing any value whatsoever!
liquidity [li-kwid-i-tee] noun 1.a liquid state or quality. 2.the ability or ease with which assets can be converted into cash.
I'd say liquidity is pretty valuable. Try doing a transaction in an illiquid market. Next you are going to try to convince me that short sellers are the ones who push stock prices down (hint, short selling is not allowed in Asia, and Asian markets have had some pretty spectacular crashes despite this).
1ms is worth 100m USD isn't relavent in this case (Score:3)
This 1ms advantage is worth 100m USD, isn't relevant to transatlantic bandwidth.
The quote from wikipedia https://secure.wikimedia.org/wikipedia/en/wiki/Low_latency_(capital_markets) [wikimedia.org] is
"A 1-millisecond advantage in trading applications can be worth $100 million a year to a major brokerage firm, by one estimate."
I can't find the original source of this - but IIRC its from the CTO of someone like Goldman's or BoA.
If you are doing high frequency trading on a NY or London based exchange, you don't buy the lowest latency connectivity from the exchange to you. You put your systems as close to the exchange as possible AND THEN you buy the lowest latency connectivity from the exchange to you. Your systems which trade in NY are based in NY, and your systems which trade in London are based in London.
I'm sure there is some minor advantage of NY and London being slightly closer together from a latency perspective, but I'm sure its not as much as 100M USD.
Alex
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Don't you think, though, that the people investing $300m in this cable have thought a little bit about their business model and believe it to be sound? Clearly those 6ms are really valuable to some people, and if not high frequency traders then who?
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Don't you think, though, that the people investing $300m in this cable have thought a little bit about their business model and believe it to be sound? Clearly those 6ms are really valuable to some people, and if not high frequency traders then who?
You don't know many people in the financial sector, do you?
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The reason why a low latency connection is valuable is than many identical stocks and commodities are traded in both NY and London. If you are the first one to detect a pricing difference you can make a sure profit.
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Well, for someone trading in both Europe and the US it would probably make sense to have the lowest possible latency between their own systems to coordinate trading.
Now, if this would be worth $100M I don't know. But it does kind of make sense if you want your different systems to communicate with each other.
Arbitrage (Score:5, Informative)
If you're in London and you know 6ms before anyone else that the price of oil in New York just shot up, you can buy oil right now and then sell it in 6ms for a tidy profit.
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No everyone now has to buy bandwidth on the cable so they are not on the wrong side of this.
I don't think anything will change except the company who put the cable in will be charging more than the old company.
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Yup. This isn't much different than offering a new TLD - everybody has to pay an extra $20/yr or whatever to make yet another clone of .com.
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Indeed. And it is really no problem to remotely administrate such a system close to the exchange. The reasoning given in the article is flawed. That said, the lower delay and additional redundancy can be worth a lot.
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The giant leach on society (Score:5, Insightful)
Sorry, we do not have future anymore... (Score:2)
Re:The giant leach on society (Score:5, Interesting)
Re:The giant leach on society (Score:4, Insightful)
My "Monster" cable transatlantic line is better (Score:2)
Because it is made of "Monster" cables . . . http://www.monstercable.com/ [monstercable.com]
However, investors believe the financial community will be lining up to pay premium rates to use the new cable. The article suggests that a one-millisecond advantage could be worth $100M per year to a large hedge fund.
So obviously, a cable made of "Monster" cables will be worth* even more! Roll out your checkbooks, all you unfeasibly large hedge funds!
*Your actual worth is subject to local regulation, taxes, palm grease, wind velocity of an unladen swallow, global warming, sea temperatures, etc . . .
Zero sum game (Score:5, Interesting)
Sadly, the high speed trading for which this is designed is a zero sum game - the extra dollars made by the hedge funds are shaved off someone else.
Banking has a very valid job to do: transferring money from savers to borrowers, aggregating small savings into large investments, and ironing out risk by spreading it over many loans. But these are, fundamentally, decisions made by humans, and such decisions will be made on timescales of, at the fastest, a minute or so. In order to ensure liquidity, and to even out large lumps in the trading,it is useful to have automated system which work on a timescale which is, say, ten times faster. Such banking and trading adds value. and it the reason we need banks. But any trading faster than that is purely profiting from irregularities in the system, and adds no value to the world. So any value extracted by the traders, or used to build links for such traders (as described in the article) is money wasted: a net loss to humanity.
I would like to put a drag on such trading: one which would dissuade high speed trades while not harming legitimate trades, including legitimate spreading of large risks. A nano-tax might do it - and the premium traders will pay to use this cable suggests the magnitude of such a nano-tax.
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The quants are just messing wallstreet (Score:2)
This has been their plan all along. Get Gold Man-Sacks to pay for world-beating ping-times.
Screw hedgefunds, those guys are going to rule in deathmatch mode.
This was noted earlier (Score:2)
by yours truly in 'DailyKos [dailykos.com]
Me too (Score:2)
So if using this connection gives $600M advantage a year over those that aren't using it, everyone will simply start using it. That way nobody will have the advantage and it's back to square one - only everyone be paying extra for the faster connection.
But this also adds more bandwidth as well right? (Score:5, Interesting)
But this also adds more bandwidth as well right? as well acting as a back up for other cables.
A short history of unfair trading practices... (Score:5, Insightful)
1836 : Major Brokerage house installs first telegraph!!
1890 : Major Brokerage house installs first telephone!!!
1990 : Major Brokerage house has access to internet!!!!
Sound investing is based on research but it is also based on the ability to react quickly to that information. If a company in the US announces that their CFO has been indicted, then investment firms in the UK are definitely going to pay to get that information and react to it as quickly as possible. Before you could submit bids to the fed electronically, investment firms used to place runners in pay phone booths next to the Fed so they could call them at the last minute and have them get in the best bid. Fundamentally, there is no difference between that and this.
And yes, "black box" high-frequency traders are going to be the primary users of this line but that doesn't mean there aren't valid and legitimate (as far as the average consumer is concerned) uses for this line.
Already Noted in Slashdot (Score:5, Insightful)
by yours truly, here [slashdot.org].
I just read an article in Popular Science that almost made me sick to the stomach. The headline says it all "Pricey Transatlantic Cable Could Save Milliseconds, Millions by Speeding Data to Stock Traders".
Here is $400M being spent just to give flash traders a 5 ms advantage in trans-atlantic trading. It adds nothing to the economy, just lets the Wall Street Casino operators skim more money from the economy. I addition, it diverts talent from productive projects.
Never has Matt Taibbi's description of Goldman Sachs, and by extension, all the big banks, as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money" seem even more apt.
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To the extent that it's adding more bandwidth it counts. The extra cost, due to the different route, is not adding anything and is the equivalent of a "bridge to nowhere." The excess construction cost added money to the economy but it produces no extra productivity afterwards.
As a side comment, I suspect most of the money will be spent offshore as the cable industry is global.
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This is supposed to be sarcasm, right? Fractional reserve banking actually creates money. It doesn't create an artificial scarcity.
Re:Blame the market (Score:5, Insightful)
Fractional reserve banking actually creates money. It doesn't create an artificial scarcity.
Yep, it creates money and debases it in the process. So you're correct, it doesn't create artificial scarcity, but it creates real poverty in the long term for those who have a little money.
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Only if you assume the underlying economy doesn't grow. Alternatively, it would be bad if the economy grew, but not enough money was created to handle the increased value. The trick is to keep both in balance.
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Only if you assume the underlying economy doesn't grow
Cue in the real world. The only growing economies are NOT the US and Europe. Thus we have fiscal, monetary and government policies that require growth to succeed, except there is no growth. Classic "can't see the wood for the trees" situation. Every year that the US and Europe fail to put their house in order, China grows another 10% and Latin America grows another 5. Who cares? Well for a start it means that the US and Europe are facing ever tougher competition for scarce, exhaustable resources like oil. I
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Yes, that is a problem. On the other hand, the post WW-2 years would have been pretty bad if the money supply didn't keep up. It's not easy to come up with a system that works in all cases.
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Er, I don't know about the rest of Europe but Germany's economy is growing. Not that strongly this year but it'll probably recover. You can't use the economic development in a recession as an argument against inflation.
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The only growing economies are NOT the US and Europe. Thus we have fiscal, monetary and government policies that require growth to succeed, except there is no growth. Classic "can't see the wood for the trees" situation. Every year that the US and Europe fail to put their house in order, China grows another 10% and Latin America grows another 5.
What? Every year we've had a steady growth rate of around 2% (varying slightly... sometimes it's as high as 4% or as low as .5%, but it still averages out to about 2%). That is an ideal rate. Anything higher leads to hyperinflation and a currency that's pretty much useless. By your standards, Yugoslavia should be one of the most powerful countries in the world due to their period of hyperinflation in the early '90s. They went through 4 different currency reforms between 1989 and 1994, exchanging vast amount
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The US economy is growing by at least 2% every year. And it's already really huge - 2% growth is a lot of growth.
BTW, China's growth includes the parts of China that are owned by Americans and Europeans, the fastest part of that growth. At the deep costs to China's environment and labor health.
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Ahh denial, that strongest and most basic of instinctual coping mechanisms. Please explain the new-found strengths in the Swiss Franc and the Japanese Yen for me if the US is in such great shape?
Americans and Europeans are not allowed to own any part of China. Any corporation created by foreign devils sorry allowed to operate in China must meet specific requirements, like having majority shareholders who are Chinese nationals. Have you actually BEEN to China - apart from the designated tourist areas I mea
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It only debases money when government gets involved and creates fiat currencies, and does bailouts. If you had currency tied to commodity of limited supply, and banks that go bankrupt when they make to many bad loans there would be no debasement.
Banks can create as much additional money through lending as the market can support. When the markets value expand the quantity of currency expands to match, if the bank over steps the loans go bad and have to be written down, the extra money is destroyed. If the
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Re:Blame the market (Score:4, Insightful)
It only creates money if it is distributed to all. Currently it creates artificial abundance for a tiny percentage at the top and creates a scarcity for the rest of us.
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This already happens. Except the tax is more on the order of 3 cents, and the "deserving charities" are neither charities nor deserving.
FTFY.
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why should the bank collect interest on money they borrowed from the people's government for next to nothing?
- where did you read my endorsement of such a deal?
I am completely AGAINST government meddling with economics and currency. Banks must not be bailed out and stimulated by government lending, they must survive on their own by providing customers with products that make it beneficial for the customers to lend their money to the banks!
When you put your money into a bank, you are not just giving it to them for safekeeping (or you can do that with a safety deposit box, or only holding cash in checking account,
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What IS basic income? If you have federal reserve print 10,000USD (federal reserve notes, IOUs, which in the past meant those were promises to give GOLD for the note), then you basically set the reference price on USD.
10,000 USD = 0.
Money does not come from thin air, it must be earned - products must be made, and then it can be either consumed or it can be saved (under-consumed) and it can be invested if it's not spent.
Government cannot create actual wealth - products that people want, so it can't legitimat
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Providing an electronic currency IS minting in the digital age.
- OK, it's a bit contrived.
Private currencies tend to run into trouble.
- currencies are not money. Currency is a coin or a note. Money is gold or maybe silver. If currencies are undermined by counterfeiting, they will run into trouble, private or not. That's what all currencies today are showing - they are all in trouble due to government counterfeiting.
I never claimed that government creates wealth, it creates money.
- government doesn't create wealth or money.
Government is supposed to MINT coins out of money that YOU own already. So you bring your gold nugget to mint, and they'll make a coin out of it for you.
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Fractional reseve banking *creates* money while the reserve requirements are being slackened (which happens during bubbles, as the regulators think everything is working), and *destroys* money while the reserve requirements are being tightened (during a crash, when they the regulators realized the *yet again* let the banks sail too close to the wind).
But the bankers don't mind, because they make outsized bonuses during the bubble, and still do OK in a crash, due the asymmetric reward profile of options and
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Fractional reserve banking ONLY creates debt.
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They should just have two quantum RAM blocks consisting of entangled qubits. When you set a bit at one end, the bit at the other end also flips. Literally instantaneous transmission, meaning that from a relativity point of view, the London exchange hears about events in NY before they actually happen.
It's sad to think that if this tech is ever invented, this will be among the first things it is used for....
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After which the market collapses and a new financial crisis ensues.
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The whole HFT thing is even more stupid, what is your point ?
Re:Gambling (Score:4, Informative)
Adding delay will actually make investors worse off, because quoting will become less competitive. Let me explain this with a contrived and simplified example.
Let's say I'm a market maker quoting a derivative, a call option on wheat futures for example. I decide what I think the option is worth based on the current price of the future and my guess at volatility, and we come up with a fair price. Let's say that the fair price is $50. The fair price for the option will move when the price of the underlying contract moves. The proportion by which it moves is called delta. Let's say this option has delta of +0.5, so if the price of the future changes by $1, the fair price of the option moves by $0.50.
In order to make some money quoting it, I need to quote a spread - i.e. buy options for less than I sell them for. Let's say I want to quote a spread of 2% of the fair price, or $1 in this case. I drop our bid in at $49.50 and our offer at $50.50. You, as a wheat farmer or exporter, want to hedge yourself against fluctuations in wheat prices, so you're interested in trading these options. When I'm quoting a 2% spread, you can buy or sell options with a transaction cost of 1% of the fair price of the option, or $0.50 on a $50 option. That's not too bad.
But remember that pesky concept of delta? If the price of the wheat futures moves around, I need to move my quotes on the option. For example if the price of the future increases by $2, I need to move by quotes up by $1 on the delta +0.5 option, So if that were to happen, I'd be quoting at $50.50 bid and $51.50 offer - note that I'm still only taking a premium of about 1% of the fair price.
Hopefully you can see that if the price of the future moves around, I need to be able to keep up with it or I'll be screwed over when I try to hedge my options position. If the price of the future moves faster than I can move my quotes, I need to factor a safety margin into the spread I quote to cater for this.
Suppose you introduce a random delay of up to one second. That means I have to consider the worst case scenario. Maybe I think the price of the future might change by up to $10 in one second. Since this is a delta +0.5 option, I need to factor in a risk of a half of $10, or $5, into the spread I'm quoting, because the price of the future could move by that much before I can move my quotes.
So factoring in the $5 base move risk as well as my 2% spread that I'm trying to make money off, I'd be quoting $44.50 bid and $45.50 offer. Now your transaction cost has increased to $5.50 over the fair price per trade on the option, or 11%. It's not looking so attractive now, is it?
Introducing delays won't hurt me as a market marker - I'll just increase my spreads to cover the risk, as will all the other market makers. It will definitely harm you as the person with a need to trade. Lower transaction latencies increases competition between market makers to quote tiny spreads, minimising the transaction costs for people who need to trade. Sure, the money is being distributed differently: instead of more market makers, each with a small slice of the pie, taking a big cut of each transaction, you now have fewer market makers taking a tiny cut of each transaction, competing to get a big enough slice of the pie to remain profitable.
Re: (Score:2)
You, sir, are absolutely correct. I must be too tired - good thing I'm not trading right now, or I'm be hitting myself or quoting below theo at this rate.
Re: (Score:3)
He screwed up. By the way, the abbreviation for the unit "seconds" is not capitalized.