The Speed of Light is Too Slow
We Need More Liquidity
Working in water and sanitation, I'm often reminded how god is the sewer into which all contradictions flow (and vice versa). In my youth, I also flowed into a sewer, London, and spent a year and a bit at the bottom of the universe beside Buckingham Palace.
Fresh out of university, a friend invited me to a job interview at a hedge fund (not much to do with gardening). At the interview, they asked me what I know about hedge funds (nothing) and finance (very little).
"Well, what *do* you know?"
"A bit about computers and German Idealism."
"Hmm ok, I want to give you a revolver with two bullets in it; they are placed side by side. Spin the chamber and put the gun to your head, and fire twice - do you want to pull the trigger and spin the chamber again, or just go for it? I trust you want to live." (The top traders of the fund were all Russian.)
"Yeehaw, squeeze, squeeze baby!"
"That's the spirit - you got the job!"
The next day, I was sitting on top of two billion dollars of assets under management as an operations analyst and treasurer. At that time, the company had three operational funds: A futures fund researching market trends and attempting to predict things above index rates, a rather unsuccessful insider trading engine (alpha capture), and a rather incredibly successful high-frequency foreign exchange trading fund taking advantage of statistical arbitrage opportunities between various currency exchanges.
The atmosphere in the organization was nerdy and monastic, with nothing of the testosterone overdrive of Wall Street movies. After an office move a bit closer to the palace, the beating heart of the enterprise was beautifully laid out in a glass-walled room, black cubes glowing blue, circled by pious mathematicians on their way to the office's endless supply of coke. (Hedge funds in London cluster around Mayfair because transatlantic cables surface there, and being a metre closer to the signal can mean the difference between profit and loss.)
The various automated trading models of the company (secret black boxes with names such as Spider, Outlaw, and Cabbage) would execute even millions of trades every day, in the case of the quants making a penny or two on each trade. The more volatile the market, the better. When the US budget was deadlocked in Congress, and markets experienced some panic, champagne bottles would pop. More trade, more liquidity, more profit.
Our role was to clean up and do some detective work after the fact. Were there discrepancies in the trades? Did our counterparty investment banks see our positions the same we did? Then, we'd slosh around the requisite millions of dollars from one bank to another to ensure there was an appropriate amount of collateral in each. Sometimes, the stocks we ended up holding turned out to be having some corporate event like a stock split, and we'd need to make some decisions on those and, in that way, perhaps even, shockingly, touch the real economy in some small way.
The vast majority of the world's money movements are tied up in derivatives (virtual playmarkers created and maintained by investment banks) that allow financial players (who are often leaps and bounds ahead of regulators) to play their games on instruments that have no direct impact in the real economy. The ratio is perhaps $8-8.5 trillion to $600 billion per day. The ever-hungry, mindless circulation of capital wants to ever expand and do so ever faster. Even the speed of light is not fast enough. Due to quant hedge fund requirements, ravines are blasted through mountains to let signals flow some milliseconds faster instead of going around. Whether or not money and resources get allocated to ventures that help humanity and the world flourish is strictly irrelevant as long as the markets live and breathe and circulate - the faster, the better.
A quant might primarily justify their existence by insisting that better liquidity (the ease with which a given asset can be bought or sold) keeps markets flowing better, helps manage risk, and creates more efficient pricing.
Those with a more raised eyebrow might point at things like the zero-sum game nature of quant trading, the acceleration of wealth concentration, and flash crashes (less likely with FX trading than automated investment in financial instruments). Quants worship liquidity, but whether all that liquidity will turn out to be a pure illusion when normal market conditions give way to some crisis is not resolved - if multiple quant systems withdraw from the market at the same time, we might experience a sudden liquidity vacuum. Finally, one might baulk at the overall inefficient resource allocation into things like quant trading in the first place.
The social allocation of our best physicists and mathematicians into work that makes the rich richer, and themselves in the process, might, in particular, be considered suboptimal. (NB whilst, in the aggregate, hedge funds do not beat index funds on average over time; they are remarkably good at making hedge fund people wealthy). I personally saw top CVs fly in from people subsidised by states to the tune of hundreds of thousands and who were working on things such as improving lenses for medical lasers, etc. How many Terence Taos are deep at work making a trade execute 5 nanoseconds faster?
Nonetheless, those on their holy mission remain committed. (The chief headhunter for the company told me over drinks that he felt he'd been chosen by God for this work of tracking top mathematical talent and luring it in for the mission of the organization.) As for myself, I headed for entirely other pastures from this aberration in my career after about a year. The head of the FX trading desk eventually formed a new company and, through mathematical superiority and the pedigree of Moscow State University, is currently the largest taxpayer in the UK, with a personal net worth north of $10 billion.