"As I've written before, the function of the stock market in modern capitalism is to get money out of corporations, not put money into them. The social problem they are solving is not society's need to allocate scarce savings to the most promising investments, but wealth-owners desire to free their fortunes from particular firm or industry and keep them as claims on the social product as a whole."

"We propose a flexible framework for profit-seeking market making by combining cost function based automated market makers with bandit learning algorithms. The key idea is to consider each parametrisation of the cost function as a bandit arm, and the minimum expected profits from trades executed during a period as the rewards. This allows for the creation of market makers that can adjust liquidity and bid-asks spreads dynamically to maximise profits."

Cites Linqiao's thesis repeatedly, at least in the latest version.

This sounds remarkably like that Heinz Pagels book chapter from the early 1990s...

But surely the _scientific_ answer is that we all continue to have a much higher preference for leisure than we did in 2007!

Why indeed? "[O]ne of the most-pernicious but least-discussed trends of the past thirty years, the drive to replace defined-benefit pensions with subsidized savings/investment schemes like 401(k)s. ... average people have no real ability to invest money in an effective way. ... the flipside of small investors not being able to manage our own investments in a sound way is that having small investors participate in the market can only serve to undermine financial markets’ role in providing corporate governance and allocating capital. Now defined-benefit pensions have declined in the private sector for some pretty good reasons. It’s both personally liberating and economically efficient for there not to be an expectation that you’ll work at the same place for decades. But the substitutes we’ve dreamed up—tax subsidies for middle class stock ownership—are regressive and don’t really make sense."

bruces says it well.

" The important thing that financial markets do is they aggregate information and risk-tolerance in a way that helps guide real world economic decisions. The question to ask about financial innovation is how it might help achieve that goal.... f you look back to the late 19th century, America’s financial markets were so threadbare that interest rates on mortgages were much lower in New York and Boston than in California. .... the gap didn’t close rapidly because the financial markets of the time were highly inefficient. Thanks to financial innovation, markets have become much more efficient and that’s a good thing. But this is also subject to diminishing returns and in a big way. ... To draw an analogy, past innovation to decrease the real cost of potatoes has been a huge boon ... —potatoes are now really cheap and nobody needs to worry about starving to death—but future innovation in this regard is not going to help people much simply because we’ve come so far already."

Drum's summary and excerpts of the preceding Wall St. Journal article (in case that goes behind a paywall)

"Nobody is less surprised than me to see that interacting pieces of software can do weird emergent stuff, and act all buggy. This is not, like, some surprising discovery. It’s more like a law of computational physics.
For the stock market to go into a “tornado” of dark pool trading is not all that great, though. Especially when days tick by, and nobody knows what the hell actually happened. This is not a chaos-theory lab experiment: this is supposed to be the bedrock of global capitalism.
That is not a stable market, folks. That’s not a free market, either. Why would any sane person have any confidence in the behavior of a creation like that? It’s like a series of mechanized panics waiting to happen. Ivan the Terrible had more common sense than this rickety robot."

"After examining the careers of more than a thousand star analysts at Wall Street investment banks, and conducting more than two hundred frank interviews, Groysberg comes to a striking conclusion: star analysts who change firms suffer an immediate and lasting decline in performance. Their earlier excellence appears to have depended heavily on their former firms' general and proprietary resources, organizational cultures, networks, and colleagues. There are a few exceptions, such as stars who move with their teams and stars who switch to better firms. Female stars also perform better after changing jobs than their male counterparts do. But most stars who switch firms turn out to be meteors, quickly losing luster in their new settings." --- Favorable review in Nature.

J'accuse! "He allowed the illegal creation of Citigroup with a nod and a wink, knowing that Gramm-Leach-Bliley was just around the corner and would make Citigroup legal in retrospect. He then collected his just rewards in the form of $126 million in pay from Citi, for a job which even Weisberg admits involved no managerial responsibility." Plus, all the stuff about derivative regulation. May I add that if I am ever appointed treasury secretary, I would be willing to engage in comparable acts for a mere $20 million (in 2010 dollars)?

Huge PDF. Looks interesting.

Ahhh, the unquestionable reliability of numbers!

Scott McLemee reviews an ethnography of Wall St.

What we have here, boy, is a failure to calibrate: " 'Around 74% of companies have beat forecasts, versus the long-term average of 61% (empahsis added) and the all-time record of 73%, reached in the first quarter of 2004.' Now I might be missing something here, but if the forecasters were good at their jobs, shouldn’t the long term average of companies beating forecasts be the same as the long term average of companies doing worse than the forecasts?" --- Actually, isn't this compatible with the forecasters minimizing squared error under an asymmetric (but mean zero) noise distribution? (A more plausible explanation, to my mind, has to do with corrupt practices, where the same firms solicit investment-banking business from companies and purport to advise investors on what those companies are worth. But that's my cynicism.)

Ehh. If the non-algo investors thought the stock was worth $26.40, and the algos forced the price up to $26.39, I really don't see what the former have to complain about, other that not being the ones to reap windfalls by being faster than others. Certainly the people who sold their shares to the algos seem to have been no worse off. Not displaying all offers equally to all parties in the market, and paying people simply to make trades, seem like bigger issues.

"Informationally efficient" prices are neither necessary nor sufficient for actually allocating capital efficiently.

Who are you, and what have you done to Martin Wolf? (And could you maybe see about replacing more business columnists with pod people?)

I think this is slightly unfair to the 17th century Jesuits. It is not at all unfair to the Chicago School; if anything it is still too kind.

David Warsh writes about John Geanakoplos's models of the credit cycle (especially the role of leverage). I am surprised, because when I heard John G. talk about this c. 2000 in Santa Fe, I got the impression that it was all well-published. But evidently people didn't want to listen...

"In 1997 former Federal Reserve Board Chairman Paul Volcker posed a question about the commercial banking system he said he could not answer. The industry was under more intense competitive pressure than at any time in living memory, Volcker noted, “yet at the same time the industry never has been so profitable.” .. the seemingly strange coexistence of intense competition and historically high profit rates in commercial banking [is] Volcker’s Paradox. He extends the paradox to all important financial institutions and discusses four developments that together help resolve it: rapid growth in the demand for financial products and services in the past quarter century; rising concentration in most major financial industries; increased risk-taking among all the major financial market actors that has raised average profit rates; and rapid financial innovation in over-the-counter derivatives that allows giant banks to create and trade complex products with high profit margins."

"use of credit derivatives by US bank holding companies from 1999 to 2003 with assets in excess of one billion dollars. ... we find that in 2003 only 19 large banks out of 345 use credit derivatives. Though few banks use credit derivatives, the assets of these banks [were] on average two thirds of the assets of bank holding companies [in the sample]. Few banks are net buyers of credit protection and disclose using credit derivatives to hedge loans. Banks are more likely to be [net] buyers if they engage in asset securitization, originate foreign loans, and have lower capital ratios. The likelihood of a bank being a net protection buyer is positively related to the percentage of commercial and industrial loans in a bank's loan portfolio and negatively or not related to other types of bank loans. The use of credit derivatives by banks is limited because adverse selection and moral hazard problems make the market for credit derivatives illiquid for the typical credit exposures of banks."

I have seen this technique before. :) (Though, on reflection, if you're going to do everything with the correlation matrix [rather than mutual information], why not just take the inverse correlation matrix and identify edges with non-zero entries there?)

Published version, via JSTOR. (The discussants seem clueless.)

"I think the logic of the financial sector has long been "We're smart and there are plenty of dumb investors out there. The rules should be designed to make it easy for us to separate them from their money." That is not a pleasant attitude, but, to our great misfortune, they were wrong. They managed to lose huge amounts of money making important institutions at least illiquid and probably insolvent."

I feel like this can be endorsed pretty wholeheartedly (though these criticisms do not apply with full force to the "saltwater" school, that's been pretty absent in shaping policy, especially as regards to finance).

MacKenzie explains LIBOR, and the social processes behind it.

Latin American sovereign debt premiums as a function of imperialist and neo-imperialist interventions. Cute.