Tyler Cowen's Blog, page 463

What are the social costs of high-frequency trading?

I’ve yet to see a good argument that they are high.  HFT is taken to mean many things, but let’s (for now) focus on high-speed arbitrage and near-arbitrage.

Let’s say the market for coconuts in Thailand reacts somewhat slowly, and the market for coconut derivatives in Singapore allows for quicker trading.  A storm comes to Thailand, the two coconut prices split, and a number of traders rush in to take advantage of the price discrepancy.  (Of course since the Thai market is slow and less liquid, this won’t be perfect arbitrage.)

If ten traders have more or less the same speed (and quality) of trading technology, the returns to rushing would appear to be pretty small.  At most, the $$ invested in speed will rise to equal the size of the available p x q discrepancy.  That’s basically the same result you get with slower trading technologies.  Call it waste, or not, but I don’t see that any new problem has arisen here.  There is some waste, bounded by the p x q discrepancy, whether people compete over speed at higher speeds or lower speeds.

If one trader has dominant speed, that seems to also limit the costs of running after the arbitrage profits.  Rent exhaustion will be far from complete.

Alternatively, imagine a leapfrog model.  The quickest firm gets to be clear leader for a year, but by the time that year is up they are leapfrogged by a new and speedier technology, and then there is a new leader.  It still seems to me that the investments in the new speed technologies are bounded by the p x q discrepancies, as they were in slower times.

Keep in mind, if HFT yields profits, there are also incentives to improve the trading technologies in the slower of the two coconut markets.  Those incentives will limit the profits from HFT and thus the resources invested in HFT.

I understand full well that this discussion considers only a few relevant factors.  Nonetheless I don’t see that the critics are imposing even this much structure on the problem.  I don’t see why “at higher speed” makes the rent exhaustion problem from price arbitrage more costly in social terms.  I don’t see a good theoretical or empirical argument on the table, much less a verified argument.

You also might think that more volatile intra-day asset prices are a cost of HFT.  Hold off on that for now, I’ll consider it in another post.

The rule of law? (talk about “money laundering”)

Wells Fargo Home Mortgage (WFC) has fired a Des Moines worker over a 1963 incident at a Laundromat involving a fake dime in the wake of new employment guidelines.

Richard Eggers, 68, was fired in July from his job as a customer service representative for putting a cardboard cutout of a dime in a washing machine nearly 50 years ago in Carlisle, the Des Moines Register reported Monday.

Warren County court records show Eggers was convicted of operating a coin-changing machine by false means. Eggers called it a “stupid stunt,” but questions his firing.

Big banks have been firing low-level employees like Eggers since new federal banking employment guidelines were enacted in May 2011 and new mortgage employment guidelines took hold in February, the newspaper said. The tougher standards are meant to clear out executives and mid-level bank employees guilty of transactional crimes — such as identity theft and money laundering — but are being applied across the board because of possible fines for noncompliance.

Here is more, courtesy of Tim Johnson.

Assorted links

1. Summary of the new Robert Gordon paper on stagnation, with good charts and graphs, and further coverage by Annie Lowrey here.  Paul Krugman also comments.

2. Groupon coupon for “The Anger Room,” markets in everything.

3. Andrew Gelman on different ways of plotting income data.

4. Michael Blowhard seems to be blogging again, here, under “Paleo Retiree.”

5. Sumner on Balding, Sumner on Wang, and Caplan responds to Dickens.

6. The Medicaid wars come to dentistry.

World Bank talk next Wednesday

I’ll be speaking at the World Bank next Wednesday, September 5, Poverty Reduction and Economic Management Network, room JB1-080, noon-1:30.  Alex will be there too.  The talk is not open to the public, but if you work for the World Bank please do try to come!

Economists who support the arts

Hi Tyler (we are Facebook friends),

I am working on a blog posting for my new blog (www.wormwood-and-honey.com) and I want to write about instances where economists supported the arts in some special way.  So far I have four cases:  Professor Norton T. Dodge and his support of the Russian avant grade artists; Professor Alexander Gershenkron for his great review of Nabokov’s abominable translation of” Eugene Onegin”, Professor Gregory Grossman at Berkeley for inviting and supporting the Polish poet Alexander Wat who dictated his great book “My Century” while visiting there; and lastly, John Maynard Keynes for his support of theater, ballet and dance.  Could you think of other cases?  Or articles/books on the subject?

Thanks,

Julian Berengaut

Richard Caves collects Picasso, Bill Landes collects Charles Burchfield, and William Baumol did a good deal of wood sculpture, but I do not know that any of them have served as patrons of living artists.  Assar Lindbeck also works as a painter.  Spencer MacCallum (not an economist but he has written on economic issues) has been an important patron and promoter of Mexican pottery, and my own patronage efforts in Mexico are discussed in my book on the economics of Mexican art.

Roderick Deane is a New Zealand businessman, economist, and a supporter of New Zealand artists.  Marie-Josée Kravis is an economist and also a patron of the arts, mostly for Canadian artists I believe.  Georges Menil, of the Menil family, is an economist in Paris.  Wayne Cox (not an economist) writes on tax issues and has been an important supporter and collector of Jamaican Intuitive art.  Henry Kaufman is an economist who has donated a good deal of money to the arts.  Henry Raeburn , but it was paid for by Horner’s brother rather than by Francis.  Maybe there was a Beckerian or Coasian bargain behind the scenes.

Richard D. Bodig was a singer, scholar of Renaissance music, and also an economist.  How about this headline?: “Jazz singer Olesya Yalunina on how jazz freed her from a career in economics.“  Stephen Dubner used to play in a rock band.

That is what comes to mind.  Who am I missing?

Reihan Salam summarizes Charles Blahous

Roughly 49% of the fiscal deterioration relative to the expectations of the CBO circa its 2001 projections can be attributed to increased spending, 27% to the failure to predict the less-than-smooth business cycle perturbations of the decade, and 24% to tax cuts.

Here is more.  I have not myself worked through this calculation, but if you know of any good rebuttal to it, I will be happy to take a closer look and report back.  I believe it also does not include increases in state and local spending, which ultimately do tie back into the consolidated fiscal position of all U.S. governments as a whole.

Assorted links

1. A new discussion of the world’s most walkable cities.

2. Drone University.

3. New and much longer list of economists for Romney.  (I am happy to run the same for Obama, by the way.)

4. The world’s longest bus.

5. The case for optimism about the Philippines.

The coming disruption in education

From a new article about on-line educational start-ups:

To drive home the point of just how cheap it is to be Quizlet, one of its executives asks me how much money the United States spends per year to educate a single student in K-12 education. About $15,000, I say. That’s more than what it costs us per month to host the entire site, serving millions, the executive responds. Quizlet has no sales force, a very small marketing department, and more than seven million monthly unique visitors. (There are about fifty million public school students in the United States.) Quizlet, in its busiest months, during the school year, is among the top 500 most visited sites on the entire Internet. Now they’ve expanded beyond flash cards. You can create study groups, convert your content into multiplayer games, and search for cards and games that other people have created. We think we can get to 40 million users, then 100 million, says the executive. The question that drives the company, he says, is this: How can we create amazing learning tools for one billion people? This is the way most of the people in the valley talk.

Matt Yglesias adds useful comment.

The Open Goldberg Variations, by Kimiko Ishizaka

Download it here, for free, superb listening, first-rate performance.  You can follow it with a free score as well.  It received three excellent reviews in Fanfare as well.

Imitation Ain’t Easy

On the Syfy tv show Alphas one of the characters is able to see something once and learn it perfectly. Thus, she can learn a martial art, or how to fix a car, or how to speak a language just by imitation. This ability is rightly considered a superpower. Yet, in economic models it’s assumed that everyone has this ability.

Imitation, however, is difficult even when knowledge is freely available. In Launching I give the example of The French Laundry Cookbook which promises that with “exact recipes” and “simple methods” that “you can now re-create at home the very experience the Wine Spectator described as ‘as close to dining perfection as it gets.’” Yet despite exact recipes and simple methods we don’t see imitations of the restaurant twice named the best in the world popping up in Muncie, Indiana (trust me on that one).

Similarly, in Apple v. Samsung the jury found that Samsung copied Apple and indeed they copied Apple well enough to survive but nowhere near well enough to eliminate Apple’s monopoly power as Eli Dourado points out:

According to a recent article at Fortune, Apple sells 8.8% of mobile phones, but it has 73% of profits in the market. Samsung sells 23.5% of phones and earns 26% of profits. Everyone else is barely breaking even or losing money.

This does not look like a market in which Apple’s competitors are successfully copying it. It looks like a market in which Apple’s competitors are trying to copy Apple, and failing.

The point of patents is to incentivize innovation through a grant of monopoly. But what Apple’s success, pre-verdict, clearly shows is that in many markets, mobile computing among them, it’s a lot harder to copy innovations than you think. Apple’s real innovation is putting designers in charge and building a corporate culture in which everything is subordinated to making elegant products that people want to use. I’d like to see Samsung try to copy that, but I think the difficulty of doing so gives Apple all the monopoly it needs.