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A Question For You Economists Out There
August 10th 2007 Economy, General, Markets

Are those who make their money on, say, playing market volatility with complicated, computer-driven schemes “making money” in the same sense that, say, Henry Ford or Bill Gates did?

I’m agnostic on the answer, by the way. I don’t know enough to formulate an answer for myself, which is why I’m asking.

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-Bill Quick







Comments on this post:

  • triticale
    August 10th, 2007 | #1

    Seems to me Francisco D’Anconia answered that question for you some time back…

  • genes
    August 11th, 2007 | #2

    I’d say more on the order of P.T. Barnum, except they don’t even give you an egress.

  • Lorenzo
    August 11th, 2007 | #3

    I suspect there are more engineers than economists reading DP.

    To me, it seems obvious: Ford and Gates built a product and sold it. H&R Block built a service and sold it. Geeks with trading programs are gambling. It’s like counting cards at a casino, except the markets don’t throw you out when they catch you doing it.

  • Bill Quick
    August 11th, 2007 | #4

    OTOH, if I understand nemo correctly on some of the roles financial funds play in the system, at least some of the money they “make” is plowed back into the pockets of the “maker-builders” in the form of loans and such, which allows the “maker-builders” to do more of what they do.

    I’m probably oversimplifying or misunderstanding the process, though. I do like your analogy to sophisticated gambling, though, Lorenzo. I’ve often felt the same way about the entire “investment” game, whether by Aunt Minnie or Young Dr. Master of the Universe.

  • Tom Cohoe
    August 11th, 2007 | #5

    Say, now that nemo’s away, this would be a good time to talk about him behind his back, eh?

    Just kidding.

    LT is right about gambling, but entrepreneurs like Gates and Ford were too. The successes build a product or perform a needed service and get amply rewarded. The failures lose their money and are prevented thereby from wasting more.

    But are succesful traders, playing the markets ups and downs performing a service? Yes, they are.

    When the asset is plunging because of irrational fear, the succesful traders buy it and helps stop the asset’s plunge. Granny, about to convert her meagre portfolio into a fixed income asset, upon which she will live for the rest of her life, loses less than she would have had the opportunists not stopped the plunge. Selling high? Granny, in her naive faith, picking her stock incompetently, will lose less when the stock returns to Earth than she would have had the opportunist not stopped the unreasonable rise of the asset by selling.

    If you can make money by trading on volatility, you are performing a service, which is reducing the volatility, which hurts people just looking for a safe investment with the long term return of stock investment.

    Unsuccesful traders on volatitly? They lose their money and cease to be able to do damage with it, just like the unsuccesful entrepreneur.

  • Tom Cohoe
    August 11th, 2007 | #6

    LT? I mean Lorenzo. For some funny reason, I’m always reading Lorenzo and remembering LT. Sorry Lorenzo.

  • Barry
    August 11th, 2007 | #7

    Thanks Tom. I had a comment earlier that I threw away since I could not articulate the value of gamblers traders. I think you have it right.

  • Boris A.Kupershmidt
    August 11th, 2007 | #8

    Bill,
    They are no different from market-makers: they provide the liquidity and help the smooth functioning of the market.
    This is the usual Marxist crap still smoldering in the collective meme,
    that only the gadget-producers
    are the true movers and shakers.
    BTW, the worst Russian swear world (outside obscene ones) is
    SPECULATOR. Tells you all you need to know about that hopeless country.

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