Fake Charity Nerd Girl

All right, more really stupid finance questions for Tumblr.

Suppose you buy $1000 of oil futures leveraged 100x. If I understand this right, if oil goes up $10, you make $1000. If oil goes down $10, you lose $1000 (all your money). Fair.

But if oil goes up $50, you make $5000, and if oil goes down $50, you already lost all your money at the moment it went down $10 so you can’t lose any more.

So it seems like as you increase the amount you’re leveraged, the potential profits go up a lot, but the potential losses stay fixed at “all your investment”. That seems…unfairly good? Like, if there’s a 50-50 chance oil will go up vs. down today, and I’m leveraged an infinite amount, then if it goes up I make infinity money, and if it goes down I lose some finite amount like $1000. If you have $2000 and are willing to wait two-ish days, it sounds like you have a strong expectation of making infinite money.

I’m obviously misunderstanding this egregiously, so what am I getting wrong?

I think your example is sort of right to first order. But there are reasons this doesn’t quite work in practice. 

Whoever is providing you leverage is aware that you can do this and will still want the trade to be positive EV for them. So generally they will liquidate your account once you’ve lost some money but while it’s still worth more than zero; in your example, maybe once oil goes down $5 the exchange takes over your account and keeps the remaining $500 for themselves, so for a $5 move you make $500 on the upside but lose all $1000 on the downside.

A tricky part of running a crypto exchange is setting all the parameters so that you don’t lose on net from this. The biggest question is what the max leverage and liquidation thresholds are by coin (100x is basically the max anyone offers, and that’s generally just on the most liquid coins), but there are also other parameters you can try to tune (eg my exchange charges extra trading fees if you use 50-100x leverage, to make up for potential losses from this).

Exchanges definitely fuck this up sometimes; OKEx a couple years ago was notorious for this. Their risk parameters basically meant that under a lot of circumstances it was just positive EV to do what you suggested. They lost a bunch of money to this and “socialized” the losses (passed them on to other users) which was understandably unpopular.

(I’m not an expert on traditional finance but my impression is that it’s a lot more boring; largely brokers will just try and have margin requirements conservative enough that it’s very unlikely for you to actually lose all your money.)

If you abstract away the financial details there’s also a question of like, what your utility function is. Is it infinitely good to do double-or-nothing coin flips forever? Well, sort of, because your upside is unbounded and your downside is bounded at your entire net worth. But most people don’t do this, because their utility is more like a function of their log wealth or something and they really don’t want to lose all of their money. (Of course those people are lame and not EAs; this blog endorses double-or-nothing coin flips and high leverage.)

because I’m thinking about it now, some heuristics on market efficiency:

1) volume

the single best indicator for how efficient a market is is how much volume trades on it. the higher the volume, the higher the rewards are to trading against any mispricing, so the stronger your priors should be against there being easy-to-find mispricings. your uncle’s football betting pool can easily be inefficient because it’s not worth any professional’s time to trade on it, whereas anyone who can predict short-term price movements of the S&P 500 will be very heavily rewarded for doing so.

2) costs and barriers to entry

these can come in many forms:

• literal trading fees
• rules like low position limits or restrictions on short selling
• operational and technological barriers
• regulatory and other risks
• costs of capital (markets that require more collateral to trade or are harder to get capital in and out of will be less efficient)

if you are already a trading firm trading on the Nasdaq, the additional cost to trading another Nasdaq stock is very low, so even though a stock might be much lower volume than AAPL it might not be much less efficient. (at least in terms of things like incorporating information from overall market moves or sector news. it might be much less efficient in incorporating information from earnings or other fundamental news, since the costs there scale more linearly with the number of stocks you’re analyzing.)

on the other hand, a crypto exchange in Indonesia that only allows Indonesians and doesn’t have an API will probably be way less efficient than the most efficient crypto markets.

in an extreme example of regulatory risks, US stock markets (while generally fairly efficient) are very much not efficient in incorporating information about upcoming mergers, because the regulatory costs to trading on much of that information are very high.

upon looking at this I guess I’m positing a sort of meta-EMH: “markets are efficient to the extent that the rewards for correcting inefficiencies are greater than the costs to doing so”

which I think is a reasonable prior. but of course my whole job is trying to find cases where this doesn’t quite hold

tbh I think the feeling I get as a trader listening to non-traders engage in discourse about whether Markets are Efficient is roughly how a physicist would feel if people got into lots of arguments online about Do Particles Attract Each Other

“well, some are and some aren’t and there’s a huge spectrum in between, and it depends on the time and the context and what scale you’re talking about and …. look, figuring out the details of this is my entire job okay”

My company tries to hire the best person we can find for any given job. And it just so happens that a lot of the best people turn out to not be American. Add to that the fact that we’re running a global business marketing to customers all over the world where local expertise can be useful, and you end up with employees from all over: US, Canada, Australia, Europe, Japan, Hong Kong, mainland China, etc.

And all we want is a place in the world where we can all stay for an extended period of time and work together, and it seems crazy that it’s so hard! Immigration laws are weird.

Like things that have happened in the four months since I moved to Hong Kong:

• walking to work and passing smashed and burned-out storefronts from the previous night’s riots
• my coworkers getting tear gassed
• having to get my temperature checked every time I want to enter my apartment building
• apparently there’s a toilet paper shortage now

and yet Hong Kong is still just clearly a better place for us to be running a business than the US, on many dimensions. I’m impressed how badly the US has fucked this up, and surprised by what proportion of world-changing startups are nonetheless headquartered there.

a-bell-to-rise-and-die

can you talk more about how hong kong is a better place to run a business? is this mostly a regulatory environment thing or something else?

Yeah, the US just has so many regulations.

Some of them, like caps on H1B visas, I really disagree with but at least I kind of understand. I think laws against what is essentially a transaction between two consenting people are a priori likely to be bad, and this issue feels like something there should even be bipartisan agreement on–but also immigration is a hot-button issue, and I guess people have a lot of feelings about it.

But then there’s other areas where no one in the public is even paying attention to them, and it’s clear the process of creating regulations is not anything like “find problems, try to fix them” or even “punish things that public opinion thinks are bad.” It’s “I am a regulator in the Department of Regulating X, and so I am going to write some regulations on X.”

And that’s if you’re lucky; the more likely case is that they haven’t written any regulations on X at all yet, because X has only been around for five years, but they are studying X closely and in another year they will emerge with a case against a bunch of people doing X because obviously X falls under some definition of wire fraud or something. So if you want to do anything remotely innovative you have to hire a bunch of expensive lawyers who will patiently repeat to you that no, there is actually no law here you can just follow and be good, there’s a bunch of competing overlapping heuristics and there’s industry standards and there’s vaguely related historical precedents and at the end of the day you make a guess and hope for the best.

And of course, in addition to the federal government there’s fifty different states that all want to be special so they all make their own different regulations.

Sure, the Hong Kong government isn’t perfect, they might resort to authoritarian measures to quell protests or whatever. But at least that keeps them busy, you know? The US government clearly just has so much time on their hands.

most of the discourse on my dash rn seems to be not only assuming that investment banking is evil, but maybe assuming that everyone knows and agrees on this including investment bankers?

1) do people know what investment banking is? I sort of don’t but my impression is that most of it is like, helping companies issue securities and structure mergers and acquisitions. do you think that any existing publicly traded company is good for the world? guess how it raised money? with the help of investment bankers! (unless it’s Spotify or something idk)

2) honestly if a sector of the economy is large and profitable my prior is just that they’re providing value

3) I’m being kind of flippant but I do think most people are not operating from the premise that the basic functions of investment banking are crucial to the operation of an advanced economy

the cotton sector of the Southern economy was large and profitable

My issue was with #2 as well, though my pithy answer would have been “Well that or rent seeking.”

(Because it’s rent seeking.)

also it wasn’t the basic functions of investment banking that almost destroyed the global economy

Yeah, one of the ideas you get from people from Mark Blyth is that we need a return to “3 6 3 banking“ where bankers “payed 3 percent on deposits, lent money at 6 percent, and teed off at the golf course by 3 p.m.“

Well, I’m also not convinced that advanced derivatives are inherently evil. (Durr hburr technology is bad, fire is scary, Black–Scholes were a witch.) I think the same complaints could have been made about all financial instruments at  some point.

Futures were invented in the 1630s—and then promptly caused the tulip mania.

Shares were invented in the late 1600s, to finance the India trading companies, and then promptly caused the South Sea Bubble. The government of England concluded that shares are more trouble than they’re worth, and outright banned them, until 1825.

In retrospect, both shares and futures are excellent ideas which greatly improved trading and investing, but it took several decades to figure out how to use them safely. Similarly, I think CDOs are quite clever, but as we learned lately, using a simplistic frequentist risk model clearly doesn’t work. My guess is that a more sophisticated version of the same idea can be made to work, and 100 years from now  some kind of CDO-like instruments will be considered as basic and obviously useful as futures is today.

Following your link led me to this great Adam Smith takedown of companies:

The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. It is upon this account, that joint-stock companies for foreign trade have seldom been able to maintain the competition against private adventurers.

I gotta say I’m glad we ignored him and I think companies have worked out pretty well

most of the discourse on my dash rn seems to be not only assuming that investment banking is evil, but maybe assuming that everyone knows and agrees on this including investment bankers?

1) do people know what investment banking is? I sort of don’t but my impression is that most of it is like, helping companies issue securities and structure mergers and acquisitions. do you think that any existing publicly traded company is good for the world? guess how it raised money? with the help of investment bankers! (unless it’s Spotify or something idk)

2) honestly if a sector of the economy is large and profitable my prior is just that they’re providing value

3) I’m being kind of flippant but I do think most people are not operating from the premise that the basic functions of investment banking are crucial to the operation of an advanced economy

the cotton sector of the Southern economy was large and profitable

My issue was with #2 as well, though my pithy answer would have been “Well that or rent seeking.”

(Because it’s rent seeking.)

also it wasn’t the basic functions of investment banking that almost destroyed the global economy

 Some points:

1) Goldman Sachs only comes up in the news when it does something bad. It does things all the time that I assume are pretty good, e.g. “underwrite the Microsoft IPO.” Sometimes it does bad things like “steal a ton of money from Malaysia.” Unsurprisingly, the evil and illegal thing gets a lot more press coverage.

But not only was stealing money from Malaysia illegal, it also seems like quite a bad business decision in retrospect! You have to think that they will train their next intern class to super extra please please don’t steal money from Malaysia. And this is the sort of thing you can avoid doing if you go to work in banking and are either non-evil or somewhat intelligent or both.

2) Okay, but wasn’t the global economy created by Goldman et al. in the first place?

I guess maybe you think something like:

finance, defined as the packaging up of time and risk and the intermediation between parties with different preferences w.r.t. these to facilitate trade, can be good; at its best, it enables mutually beneficial trades to allow investment and promote economic growth. however, packaging these up too cleverly leads to people taking on risks they don’t realize, making the financial system fragile and prone to blowups. individuals in the financial sector are incentivized to obfuscate their packaging and it’s hard to align these incentives correctly. therefore, the whole “finance” thing isn’t worth it.

(this is my guess/steelman, not an actual quote)

This argument makes sense to me, but seems pretty hard to evaluate. You weigh up all the good stuff finance has done over the past few decades against all the bad stuff?

(Not to say that this isn’t an important question. Just that I am super not an economist and I don’t feel qualified to evaluate it.

I scrolled through IGM to see if there was anything that seemed helpful. Not exactly; on whether we should break up the big banks, people seemed completely uncertain; on whether the general concept of finance is good people strongly agreed.)

3) I can see that the banking sector is problematic and has done some bad things! But it seems weird to think of working in banking as obviously evil and compare it to the SS and slavery when like, the economy is complicated and banking does a lot of good things as well. 

most of the discourse on my dash rn seems to be not only assuming that investment banking is evil, but maybe assuming that everyone knows and agrees on this including investment bankers?

1) do people know what investment banking is? I sort of don’t but my impression is that most of it is like, helping companies issue securities and structure mergers and acquisitions. do you think that any existing publicly traded company is good for the world? guess how it raised money? with the help of investment bankers! (unless it’s Spotify or something idk)

2) honestly if a sector of the economy is large and profitable my prior is just that they’re providing value

3) I’m being kind of flippant but I do think most people are not operating from the premise that the basic functions of investment banking are crucial to the operation of an advanced economy

Publicly traded companies (as an alternative to, i.e. “patriarchal companies”) are part of why recent capitalism is so stupidly short-sighted.

Pardon my ignorance, but what’s a patriarchal company? Google is being kind of unhelpful.

But yeah if the people who think Goldman is evil think that the existence of publicly traded companies is evil then that is totally consistent! It’s also pretty radical and I’m guessing most anti-Goldman people don’t actually really want to destroy capitalism

little things that annoy me: articles about how a group of people should be put in jail that don’t actually name any specific people or any specific crimes committed by any of them

like. you can’t actually send someone to jail just because they are an asshole and you don’t like them. not even if they contributed to the devastation of the global economy. 

(note: I know this is an unpublished draft and that you may no longer endorse it; I am trying to discourse with the post and with the linked article, not with present!you)

Charitably, I think they are saying that contributing to the devastation of the global economy should have been/should be made illegal. If it becomes illegal now, that might prevent people from doing it again, or at least from doing it the time after next once it’s been proved that that law has teeth. The really difficult things would be 1) getting the law to have teeth, and 2) proving mens rea, since the bankers in question would try to claim they had no idea what they were doing was dangerous.

Hmm, I think I disagree even with your charitable version. I don’t really remember what happened in the financial crisis that well but I can’t think of anyone involved who makes me go “yes what that person did should be illegal and result in going to prison for a long period of time.” I think people’s first instinct is to react to these things with “a bunch of bad stuff happened, we should make all of it illegal so it can’t happen again” when like, the problem is really a complicated mess of slightly misaligned incentives and human error rather than evil people doing clearly bad things.

And when it comes to financial regulation, I don’t even think you can assume the charitable version, because the way a lot of financial regulation actually works is “bank does something bad, we decide after the fact that it’s bad and should probably be illegal, we fine them for something or another.” Which does get around the problem that writing good financial regulation is really hard. But I’m still not a fan.

(and thanks! I totally expected people to completely ignore my #unpublished drafts tag and am pleased to see that people are reading them somewhat differently from my normal posts)

Rideshare apps benefit hugely from network effects. All the drivers want to be on the app with the most passengers, and all the passengers want to be on the app with the most drivers. If Uber is the most popular, everyone will want to use Uber, and this will naturally lead to a monopoly. This is pretty bad–once Uber is a monopoly, it can take huge cuts of drivers’ revenue, let its app get slower and slower, fail to introduce new innovations, but the network effects will make it really hard for a new, better rideshare app to succeed. So this seems like a case in which government intervention in the rideshare market might be justified.

For instance, we could make a list of Official Government-Sponsored Rideshare Services, and pass a law saying that for any ride you want to take, you are required to use the rideshare service that gives you the lowest price for that ride. This kind of makes sense, right? It helps the smaller rideshare services and keeps any of them from becoming a monopoly. And price is really the main thing you care about when getting a ride. No one really cares if your car has a pink mustache on it. (Does Lyft even still do that?)

Imagine if that’s what we did. 

Rideshare services would proliferate, and in the name of fairness, the government would sanction them all. Let’s say there are 13. You’d need 13 apps on your phone, and you’d need to look at them all every time you wanted to go somewhere. Oh, of course you could use the official consolidated rideshare app, which shows you prices from all 13 companies. But unsurprisingly, it’s kind of slow and shitty, and none of the serious rideshare customers use it.

All the services start charging monthly subscription fees for their apps, and you pay the fees grudgingly, because hey, if you need a car right now you need to know what the prices on all 13 apps are. In some sense each of them is now its own monopoly: Uber is the only one (besides I guess the official consolidated app) you can get Uber prices from.

All the apps have different speeds: a lot of the time you’ll try to get a ride on whichever one looks like it has the best price, and after loading for a few seconds it will inform you that nope, that driver has already accepted a ride with someone else. 

To further incentivize competition, the government decides to pay rideshare services based on the percentage of time they have the best price for any given ride. Midwest, generally considered the sketchiest rideshare service and known for their dedication to making money without ever actually giving anyone a ride, loves this rule. They propose a change to their matching algorithm that allows drivers who offer rides on Midwest a last chance to decide, once someone accepts their ride, whether they actually want to give that person a ride or not. They say this rule will be good for drivers and protect them from unscrupulous customers. You suspect they just want drivers to offer prices that are too good to be true and cancel whenever anyone actually accepts a ride, in order to increase the amount of money they get from the government for having the best prices.

All I’m saying is, US equity market structure is weird.

Is this an allegory for something?

Yeah, it’s an analogy for the US stock market. The apps correspond to stock exchanges, the “law saying that for any ride you want to take, you are required to use the rideshare service that gives you the lowest price” corresponds to the Reg NMS Order Protection Rule, the official consolidated rideshare app corresponds to the SIP, etc. 

(Normally I would try to provide helpful links in this sort of post, but everything I know about this stuff was passed down to me through oral tradition. You can try googling things if you want to know more, I guess.)

The other day I learned about the nominal share price puzzle. Like, since the Great Depression the price of pretty much everything has changed dramatically. Except stocks! Stocks cost exactly the same. The average share of stock cost $35 then and it costs $35 now.

And like, the stock market has gone up so much since then! If you bought a share of GE for $38 in 1935 it would be worth like $10,000 now. Except it wouldn’t, because GE has split their stock a ton of times so you would actually just own a whole lot of shares that are worth $30 each.

Why do they do this? It costs GE money in administrative costs. It costs shareholders money in trading costs. And it doesn’t have to be this way: Japan and the UK both have totally non-constant nominal share prices.

The authors of this paper suggest one reason could be to market to individual investors. But if that were the case why wouldn’t share prices at least keep up with inflation? And this hypothesis would also predict that as stocks have become mostly held by institutions rather than individuals, the effect would diminish, but it hasn’t.

Another fun theory is that when stock prices are low relative tick sizes are high, so companies keep their prices low to compensate market makers for providing liquidity in their stock. But that would predict that stock prices would change when tick size changed in 1997, and they didn’t. And do executives at GE really lie awake at night worrying that if their share price goes above $100 no one will provide liquidity in their stock anymore?

The authors end up concluding that there’s no good economic explanation and everyone does it because, uh, it’s what everyone does. It was kind of unsatisfying.

Update to this post: there is in fact a reasonable economic explanation!

Matt Levine:

If you bid $10 per share for 100 shares of a stock on a national stock exchange, then your bid is “protected”: Under the rules of the national market system, no one is supposed to sell shares to someone else at a lower price without selling to you at $10 first. But “odd lots” of fewer than 100 shares are not protected: If you bid $10 per share for 99 shares, and the highest bid for 100 shares is $9.99, then people can sell 100 shares – or 99 shares – at $9.99 and ignore your bid. (It seems like it would be irrational for them to do that, but in practice this means that a wholesaler can buy from a retail customer off the exchange at $9.99 instead of at your best-in-the-market $10 price.) Lower stock prices, the theory went, encourage more round lots, which means that more trades will take place at the “real” best bid or offer, and fewer will take place at worse prices that bypass odd-lot best bids or offers. 

And this recent paper (link) shows that there are plenty of cases where people trade through odd lots. It doesn’t really explain the whole since-the-Great-Depression thing, since Reg NMS has only been around since 2005, but it does give a good reason you might consider splitting your stock today.

So I was talking to someone about livestock futures yesterday and I was like “I know you can get cattle futures and pork futures, but what about chicken? why shouldn’t I be able to buy some chicken futures if I want to invest in chicken?”

And I looked it up and it turns out people have tried to start a chicken futures market three different times! This was in the 60s, 80s, and 90s, and every time it failed.

Apparently this is largely because in the cattle industry beef processors buy cattle from farmers, so there’s demand for futures from people who want to hedge against price volatility. But the chicken industry is more vertically integrated, so no one actually needs to hedge with futures.

Also I learned that in 1958 Congress passed a bill banning the sale of onion futures? It is still a misdemeanor that carries a fine of up to $5000, so be careful about that I guess.

(Of course there’s also the question of whether a vegetarian can even buy chicken futures. But my vegan friend bought cattle futures the other day so I think it’s generally considered acceptable.)

(Though now I am imagining animal rights groups campaigning for universities to be short livestock futures and it feels totally plausible. If you personally would like to be short livestock, there is a short livestock ETF that trades on the London Stock Exchange, but it does not seem very liquid and it might be hard to trade it if you are not British, idk. If you would like to be short chickens specifically, I recommend shorting the stock of poultry producers.)

oh man do you not know the onion futures story

okay, so, it’s the 1950s. there’s an onion farmer named Vincent Kosuga. he’s a pretty successful onion farmer, so he starts speculating in the commodities markets. after an initial disastrous flirtation with wheat futures, he finds a niche betting on onion prices – he is, after all, an onion farmer – and does pretty well for himself.

in 1955, Kosuga gets an idea. an awful idea. Kosuga gets a wonderful, awful idea. he starts building warehouses around the country, and places orders for all the onions he can get his hands on. in addition, he starts buying onion futures, guaranteeing him delivery of the onions that are still in the ground.

by that fall, he’s done what he’s set out to do. he owns 98% of the onions in the united states. he’s cornered the market, and he gets to control onion prices. of course, since he has all the onions, he jacks prices up really high and makes a ton of money.

but Kosuga isn’t done yet. he’s quietly been establishing a big short position in onion futures. then, all of a sudden, Kosuga starts flooding the market with all the onions he owns. onion prices go through the floor – literally selling for less than the cost of the bag they’re delivered in. since Kosuga is short onions, he makes another ton of money.

but everyone is super pissed at him. especially other onion farmers – when the price of onions got driven down to almost nothing, their crops, their hard work, became worthless. some of them went bankrupt, or even committed suicide. so of course they lobby congress. and congress, as always, legislates to prevent the previous crisis rather than the next one – and bans trading in onion futures.

of course, this is probably unnecessary and in fact harmful. it’s really rare for anyone to come close to cornering the market in a commodity, and it’s even harder today (you can’t really buy up all the onions in secret, without other traders noticing) than it was 60 years ago. nevertheless, trading in onion futures remains illegal in the US today.

this is an amazing story. but wait, wasn’t insider trading illegal by that time? why didn’t he get prosecuted on those grounds?

Probably insider trading didn’t apply to commodities markets (yet). I could see how making laws for that that wouldn’t hit normal farmers might be hard.

Yeah insider trading in commodities wasn’t illegal until 2011.

The concept of material nonpublic information is sketchier in commodities markets than in equities markets. Like, every farmer knows how his corn crop is doing this year. Is that material? What if you go on the Crop Tour and see a bunch of people’s corn? And the CFTC doesn’t have disclosure requirements like the SEC does, so I would imagine the markets are kind of how nonpublic information gets disseminated.

I could only find one guy who’s gotten in trouble for commodities insider trading so far, and he was already breaking a bunch of other CFTC rules anyway.

So I was talking to someone about livestock futures yesterday and I was like “I know you can get cattle futures and pork futures, but what about chicken? why shouldn’t I be able to buy some chicken futures if I want to invest in chicken?”

And I looked it up and it turns out people have tried to start a chicken futures market three different times! This was in the 60s, 80s, and 90s, and every time it failed.

Apparently this is largely because in the cattle industry beef processors buy cattle from farmers, so there’s demand for futures from people who want to hedge against price volatility. But the chicken industry is more vertically integrated, so no one actually needs to hedge with futures.

Also I learned that in 1958 Congress passed a bill banning the sale of onion futures? It is still a misdemeanor that carries a fine of up to $5000, so be careful about that I guess.

(Of course there’s also the question of whether a vegetarian can even buy chicken futures. But my vegan friend bought cattle futures the other day so I think it’s generally considered acceptable.)

(Though now I am imagining animal rights groups campaigning for universities to be short livestock futures and it feels totally plausible. If you personally would like to be short livestock, there is a short livestock ETF that trades on the London Stock Exchange, but it does not seem very liquid and it might be hard to trade it if you are not British, idk. If you would like to be short chickens specifically, I recommend shorting the stock of poultry producers.)

More to the point, there is no good reason for a normal human to be short any stock, because the market will eat you alive with probability approaching one. Do not short poultry producer stock unless you are Warren Buffett (in which case you ain’t listening to me anyway, so…)

agreed, please don’t actually short the stock of poultry producers!

the last paragraph of the previous post was a joke it was not investment advice

So I was talking to someone about livestock futures yesterday and I was like “I know you can get cattle futures and pork futures, but what about chicken? why shouldn’t I be able to buy some chicken futures if I want to invest in chicken?”

And I looked it up and it turns out people have tried to start a chicken futures market three different times! This was in the 60s, 80s, and 90s, and every time it failed.

Apparently this is largely because in the cattle industry beef processors buy cattle from farmers, so there’s demand for futures from people who want to hedge against price volatility. But the chicken industry is more vertically integrated, so no one actually needs to hedge with futures.

Also I learned that in 1958 Congress passed a bill banning the sale of onion futures? It is still a misdemeanor that carries a fine of up to $5000, so be careful about that I guess.

(Of course there’s also the question of whether a vegetarian can even buy chicken futures. But my vegan friend bought cattle futures the other day so I think it’s generally considered acceptable.)

(Though now I am imagining animal rights groups campaigning for universities to be short livestock futures and it feels totally plausible. If you personally would like to be short livestock, there is a short livestock ETF that trades on the London Stock Exchange, but it does not seem very liquid and it might be hard to trade it if you are not British, idk. If you would like to be short chickens specifically, I recommend shorting the stock of poultry producers.)

Why would you short poultry stock? All you’re really doing is giving money to whatever traders are lucky enough to notice.

Will Macaskill has an article on this here. Holden Karnofsky has also written about it here. 

Yeah it was a joke ^_^ I agree with Holden and Will that divestment is kind of silly, so I am making fun of the logic of divestment by taking it even further: if it is virtuous to avoid being long the stock of companies in harmful industries, it must be even more virtuous to be as short as possible.

(Not to strawman divestment advocates–I think the okay argument for divestment is that it’s not about changing the share price or taking capital away from the bad companies, it’s about getting media attention and signaling disapproval of bad stuff. I still think it’s better to get media attention by doing things that actually have some effect–if you’re an environmentalist, you could campaign for your university to go carbon neutral or fund more geoengineering research; if you’re an animal rights activist, you could campaign for your university to buy only cage-free eggs or go meatless on Mondays. In any case, the media attention argument is obviously not relevant to your personal investment decisions.)

everyone writing abt the early august 2007 quant crisis is like “weeeellll, there were just too many shitty knockoffs of good quant funds, and the good ones didnt realize, so too many people did the same thing, and that was bad”

like

a) no shit

b) that is like, no information

c) that is not the interesting part holy shit the interesting part is the everything became magically fine on the tenth after the like sixth to ninth being terrible and What

is it that weird that everything became magically fine on the tenth?

like, given that the price movements in assets held by the quant funds were driven by a liquidity crisis rather than anything to do with fundamental value, you’d expect them to rebound right

One of the many issues (or maybe not?) with our prediction market is the fact that I often find myself deciding whether or not to make a trade based on the person I’ll likely be trading with. If I see that I’m trading with someone I think of as incompetent, I’ll become more aggressive in my bets against the market. If I see that it’s with someone whose perceptions of reality I respect, I tend to take a step back and reevaluate my thinking, possibly trying to generate reasons why that person in particular might disagree with me. This isn’t the sort of thing you’d likely see in a larger market where everyone is probably anonymous, but it doesn’t matter anyway because there are so many traders that you’re unlikely to know your opponents and/or run up against them repeatedly.

This is totally a thing even in larger markets! Everyone is anonymous, but you can still make guesses about the sort of person you’re trading against (small investor? large institutional investor? HFT firm?) based on the size of the order, the timing of the order, what exchange/dark pool you’re trading on, stuff like that. And you always want to trade with uninformed participants as much as possible, because if you’re trading with an informed participant there’s a good chance they want to trade because they know more than you.

One of the centerpieces of Sanders’ campaign is a new tax on financial transactions, meant to curb high-speed/speculative trading. Have any economists actually analyzed the probable effects of this? Would it create incentives to take stupid/inefficient actions in order to evade the tax? Would it lessen the liquidity of the market? Would it do none of these things, provide a valuable source of revenue, and create an incentive for smart, mathematically inclined people to do productive work instead of playing zero-sum games of oneupmanship?

I don’t think a financial transactions tax is necessarily a terrible idea. This guy defends a tax of 3-5 basis points on financial transactions, phased in by one bp a year. This seems reasonable and I’m a big fan of the incrementalism. 

Overall, the idea of an FTT has its good points and bad points. On the good side, it would be pretty progressive and raise a fair amount of revenue, like $50 billion a year. 

But there are downsides too. Right now, if you want to invest in some gold for your retirement fund, you can buy a gold ETF with a bid-ask spread a cent wide. Like maybe the fair price is around $104.005 and you can buy it for $104.01 (or sell it for $104.00), basically paying half a cent per share to invest in it. With a 10 bp tax, say, the spread would widen out to $103.89-$104.12, meaning you have to pay more like 12 cents a share to invest in it. This clearly discourages investment and hurts middle-class investors as well as the rich. It would also reduce liquidity and make price discovery less efficient. (Some people, including Bernie Sanders presumably, think markets are too liquid right now and reducing liquidity would be a benefit to this tax. I think that’s something smart people disagree on.) I’m not clear on what the long-term effects on GDP would be, like I don’t think they would be good but I don’t know how big they’d be and that’s probably a hard question.

Bernie Sanders has proposed a tax of 50 basis points on every financial transaction. I think this is a terrible idea. (The Tax Policy Center says that would actually raise less revenue than a lower tax.) When I found out about the 50 basis points thing I was a little concerned that no one else seemed to be talking about how it was kind of crazy so I asked an Actual Prominent Economist (who is p progressive, voted for Obama, etc.) “wouldn’t a tax that high like, end our financial system as we know it?” He was like “oh yeah, probably.”

And on the subject of productive work vs zero-sum games of one-upmanship, I think it’s not clear that HFT is zero-sum. (Reasons it might not be so bad, from Matt Levine who has written a lot more about this in a thoughtful and nuanced and frequently entertaining way.) There are reasons to be concerned about it, but for the most part I think Democratic candidates have decided to go after HFT because it just sounds kinda evil.

Idk, I sorta want to hear more people complaining about how all the smart mathematically inclined kids these days get jobs at Uber for kittens instead of doing actually productive work. Maybe this is just going to school in California but I feel like that’s way more common.

This is a really interesting paper, which is not something I ever expected to say about medieval finance. 

The basic thesis is this: usury was famously prohibited in medieval Catholic Europe. However, other financial contracts (that didn’t involve “barren money” bearing fruit) were not. In particular, in the northern Italian city-states, one could purchase equity by means of partnerships such as the “commenda” – this wasn’t usury, since it involved bearing some risk.

Another innovation, in 14th-century Genoa, was something like modern insurance, with “naked” policies unattached to loans or other contracts beginning to be written. This wasn’t usury, because no loans were made.

It didn’t take long for merchants to realize that they could offset equity risk by insuring themselves against losses. But the real innovation, sometime in the middle of the 15th century, was the ‘triple contract.” For a creditor, this consisted of a partnership; insurance of the principal against loss; and a third insurance-like contract selling an uncertain future profit for a small, certain profit. The genius of the triple contract is twofold: first, you can replicate the cash flows of a loan with interest, by combining non-usurious contracts. (This is, in all essential respects, just the statement of put-call parity: buying an asset, and buying a put option and selling a call option on the asset with the same strike price, gives you a constant payoff diagram. Hence the claim that parity was understood 500 years before it was officially recognized by academic finance.) Second, the creditor can make the individual contracts with different co-parties. A partner who did not want to borrow a loan could enter into a regular partnership, and the creditor could buy and sell insurance on the open market. This allowed triple contracts to become quite common – and made it difficult to argue that, since the payoffs replicated a loan, the triple contract was usury.

If that’s not enough for you, there’s also a brief (too-brief!) description of shady banking interests fighting to ensure that the triple contract was not declared usury by the Church. Plus ça change,

lifehack: if there’s a paper that looks interesting but you don’t feel like reading it, get prophecyformula to read it and give you the highlights

anyway, mostly reblogging this because inventing elaborate financial instruments to replicate loans with interest while avoiding breaking religious prohibitions on usury is so #the aesthetic