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0 pointsjavert5y ago0 comments

Let's take an example. If I buy a stock at $20 from Arthur and sell it the next day for $60 to Bob, have I made $40 of value? Yes.

Without people like me, Arthur might have gotten a much worse deal (possibly $0). Again, without people like me, Bob might have gotten a much worse deal (possibly $100, or maybe he wouldn't be able to buy at any price).

That's the service that active traders provide to everyone else in the market.

It's not for you to judge whether the $40 is "worth" $40. It is.

The situation in the oil trading story is the same, in essence. It is "worth" $500M. Unless the traders intentionally manipulated the prices, which may nor or may be true. The same scenario could play out either way. So it could be that such a trade is worth $500M.

$500M may sound like rich compensation for this type of work, but everybody's compensation is determined by supply and demand, i.e., the rarity of people who can perform that work, and its utility. [1]

(There was also a lot of risk involved, and capital allocation is how a market economy coordinates its activities, but that feels too big to get into here.)

When you accuse honest people of theft, that's nasty. That's probably why you are being downvoted. Then again, people also get downvoted unfairly all the time, so who knows.

[1] Well, except when the government alters the curve. For instance, $500M can pay for 14,000 American teacher-years. But the government forcibly operates an education cartel and artificially holds down the salary of teachers. They are certainly worth far more than the $35K a year I used in that calculation.

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silasdavis5y ago

I am fine with your tautology:

> It's not for you to judge whether the $40 is "worth" $40. It is.

What other sensible quantative way of defining value is there?

The question is do we think the position leveraged to extract that value is fair. You seem to think that price manipulation (presumably of some explicitly prohibited forms) can be unfair. So I assume you amenable to some extrinsic definition of fair play.

In your example what might be the form of advantage you exploited? It could be informational or it could be based on capital. Perhaps your informational advantage is based on diligent study of a situation or perhaps it is based on cronyism. Similarly perhaps your ability to take on the risk is based on hard work or inherited wealth. I'm not saying any of these is inherently wrong but people can and do take moral/social positions on such advantages exploited for profit. Even though that discussion might be rather intractable.

So we can define the value of the trade by the spread but that says little about whether the information/capacity asymmetries were fair. If a well functioning market is meant to approximate fairness with sufficient diversity of participants then a market anomaly like this seems like more like an exception to that rule.

I do not think it is justified to call it theft.

javertOP5y ago

There are two kinds of fairness. Let's call them A and B.

Type A is when all the players in a basketball game are the same height.

Type B is when all the players in a basketball game play by the same agreed-upon rules (i.e. don't cheat).

Trying to eliminate Type A fairness from the world is not in anyone's self-interest, except (maybe) the people who are extremely low in the hierarchy of wealth/earning power. (But I think they would be better served by climbing the hierarchy than trying to make the world type-A fair.) This is quite a claim that I won't try to justify here; just think about it.

Type B fairness is in the interest of almost everybody. If you think you can cheat successfully, you may be against Type B fairness. But that's foolish. Creating a rigged system in one game opens up the doors for others to rig the systems in the games where I don't have an advantage (or cannot sustain the cheating advantage). For instance, Republicans in power now are undermining property rights, and that will hurt them more than it helped when they are out of power. Even if there are a few people who can get away with this (e.g. if you are an elderly Republican who is about to die maybe you don't care), the rest of us should reign these people in, as we are the majority.

If we want, we can call these two types egalitarian-fairness and rule-fairness.

Going back to oil trading: it may or may not be Type B fair. It probably is fair, though, because there aren't many rules in trading. The regulators try to create some rules, but few of those (if any) are actually recognized as real rules by the players; rather, they are obstacles. If you can get around them, you're just a better player of the game. (I'm not a professional trader, but that's my assumption about most of what goes on in trading; a professional trader may be less cynical about it.)

If you break a real type-B rule, you are cheating if it's a game and committing fraud if it's business. However we judge that, it's in the interest of the majority to punish that, to dis-incentivize rule-breaking.

asa4akj5y ago

but you are just adding possible unfair/unethical things that might have happen. What about good things? The 1st seller was aware there was a big chance for the stock to grow, but was in need of liquidity for other ventures or needs. And the second buyer, know that it was bought much cheaply, but he is bullish on that stock. If the trade happened that means it was the best possible trade on those moments, but there will always be external factors because we are all humans, we all have different reasons, different needs and different experience and knowledge.

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