# Is there a social benefit from complicated/risky financial schemes/products? **URL:** \ **Category:** Great Debates\ **Created:** [December 28, 2020, 6:33pm UTC](https://boards.straightdope.com/t/is-there-a-social-benefit-from-complicated-risky-financial-schemes-products/929117 "2020-12-28T18:33:01Z")\ **Posts on this page:** 11\ **Page:** 3
**Author:** ![RitterSport](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/rittersport/32/6326_2.png) [@RitterSport](https://boards.straightdope.com/u/RitterSport)\ **Post date:** [December 29, 2020, 6:22pm UTC](https://boards.straightdope.com/t/is-there-a-social-benefit-from-complicated-risky-financial-schemes-products/929117/41 "2020-12-29T18:22:40Z")
Thanks for the cite and I agree with you about HFT. They claim it adds liquidity, but it’s fake liquidity – if things are going south and liquidity is needed, they back away. ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [December 29, 2020, 6:25pm UTC](https://boards.straightdope.com/t/is-there-a-social-benefit-from-complicated-risky-financial-schemes-products/929117/42 "2020-12-29T18:25:52Z")
> [@Cervaise](#): > > Many asset management companies complain bitterly about how the required metrics are defined, saying that compliance is difficult and the results make their products unmarketable. The regulators listen and nod and pretend to care, because driving those products out of the market is precisely the aim. (Edit to add: This is why many American investment products cannot be offered for sale in Europe; their makers cannot comply with the disclosure regime.) For an idea of what the above would entail for a US derivative package, may I present to you the Eye of Satan: > [@](#): > > A depiction of a CDO-cubed deal created by Merrill Lynch in early 2007. 'The node at the center of the graph represents the CDO itself, whose investments in other CDOs are represented by the inner ring of nodes, which in turn invest in each other, and additional CDOs represented by the outemost ring of nodes. These CDOs also used default swaps to invest in hundreds of mortgage bonds, which have been left out of the diagram for reasons of simplicity. To fully document a transaction like this would require a prospectus hundreds of millions of pages long. (Bolding mine, JT) [![Google Photos](https://lh3.googleusercontent.com/pw/ABLVV85mcjraLN0OCcZzB0-VQohtnr-DvACBCRzpqhaWcO64vfqFtpx83eVjK_SNvw9jmaGX_sOFbEm_VwDuvmS3Ru_8_CaZIOo3fDdSb8evdTf3rWQa3_M=w600-h315-p-k "New item by John Thornton") ](https://photos.app.goo.gl/pwgCsMPoULTx2gtXA) ---
**Author:** ![Melbourne](https://avatars.discourse-cdn.com/v4/letter/m/b5e925/32.png) [@Melbourne](https://boards.straightdope.com/u/Melbourne)\ **Post date:** [December 30, 2020, 8:15am UTC](https://boards.straightdope.com/t/is-there-a-social-benefit-from-complicated-risky-financial-schemes-products/929117/43 "2020-12-30T08:15:53Z")
> [@Melbourne](#): > > Regarding the title question: when I was peripheral to the finance sector, before the crash, the general view was that complicated products had no general redeeming value, and were designed to separate suckers from their cash. Having read the other replies, I wanted to add that none of the “products” described are what I, or my contacts, would have described as “complicated” products. For example, collateralized mortgage products are not complicated. They aren’t even risky. They didn’t fail from being risky or complex: they failed from being dishonestly labeled and sold. Like buying A-grade beef and getting pork instead. And collateralized mortgage products weren’t bought by buyers that misunderstood the product: they were bought by buyers who didn’t realize that they were being lied to. edit: CDO cubed products meets my criteria for ‘complex’. I was referring to earlier posts ---
**Author:** ![Elmer\_J.Fudd](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/elmer_j.fudd/32/1211_2.png) [@Elmer\_J.Fudd](https://boards.straightdope.com/u/Elmer_J.Fudd)\ **Post date:** [December 30, 2020, 12:08pm UTC](https://boards.straightdope.com/t/is-there-a-social-benefit-from-complicated-risky-financial-schemes-products/929117/44 "2020-12-30T12:08:12Z")
> [@Dinsdale](#): > > This is not solely a US/Congress issue. The book I’m reading discusses Iceland, Greece, Ireland, and even Germany. It’s been a long time since I’ve read that book, but doesn’t Lewis use Germany as a counter example about how they avoided the pitfalls of the other countries because they are figuratively _and literally_ obsessed with closely examining their own shit? Other countries ignored their shit no matter how bad it smelled and didn’t notice the problem until the whole body started to fall apart. ---
**Author:** ![Dinsdale](https://avatars.discourse-cdn.com/v4/letter/d/97f17d/32.png) [@Dinsdale](https://boards.straightdope.com/u/Dinsdale)\ **Post date:** [December 30, 2020, 4:43pm UTC](https://boards.straightdope.com/t/is-there-a-social-benefit-from-complicated-risky-financial-schemes-products/929117/45 "2020-12-30T16:43:18Z")
> [@Elmer\_J.Fudd](#): > > It’s been a long time since I’ve read that book, but doesn’t Lewis use Germany as a counter example about how they avoided the pitfalls of the other countries because they are figuratively _and literally_ obsessed with closely examining their own shit? No - he pretty much says the German banks fucked up because they played by the rules and didn’t understand that other people would fail to and would lie. He cites various instances when institutions were marketing compete shit and wondering who would buy it - with the answer being the Germans. But a huge difference is the Germans’ motivations and responses. The German bankers did not get paid the millions that Wall Streeters received. And afterwards, were treated as criminals and pariahs. ---
**Author:** ![Cervaise](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cervaise/32/16693_2.png) [@Cervaise](https://boards.straightdope.com/u/Cervaise)\ **Post date:** [December 30, 2020, 6:01pm UTC](https://boards.straightdope.com/t/is-there-a-social-benefit-from-complicated-risky-financial-schemes-products/929117/46 "2020-12-30T18:01:43Z")
> [@Dinsdale](#): > > the German banks fucked up because they played by the rules and didn’t understand that other people would fail to and would lie To be fair, this is very much in keeping with the stereotypical German character, especially the sort of German who would choose to work in a conservative rule-based institution like a bank. Yeah, it’s a stereotype. But it doesn’t come from nowhere. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [December 30, 2020, 10:22pm UTC](https://boards.straightdope.com/t/is-there-a-social-benefit-from-complicated-risky-financial-schemes-products/929117/47 "2020-12-30T22:22:51Z")
> [@Strassia](#): > > The one that irritates me the most, even those it has a fairly low risk of destroying the economy, is [high frequency trading](https://www.investopedia.com/terms/h/high-frequency-trading.asp). There is absolutely no reason for it to exist. Its justification is to lower the bid ask spread, but it does that by putting a middle buy sell in between. It just lets already wealthy groups extract a little off the top from everyone else. An insurance retirement fund wants to purchase 100,000 shares of X company and are willing to buy at $92 a share? HFT computers see that before the rest of the market and can then find sellers who may be willing to sell for 91.98 a share. .2 seconds later they have made $2,000 dollars. If they could do that consistently, they make $31 million a year just by inserting themselves in as an unnecessary middle man. I like Michael Lewis books generally, but Flash Boys is an absolutely horrible book (which I assume is where you got this information). It is full of inaccuracies and half-truths. If you really want me to, I can get into the weeds of the mechanics of retail stock order routing and market making (including why your example isn’t realistic), but it should probably be a different thread. I recommend [this book](https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-Frequency-ebook/dp/B00P0QI2M2/ref=sr_1_1?crid=X5G5JBT4YK4E&dchild=1&keywords=flash+boys+not+so+fast&qid=1609366620&sprefix=flash+boys+not%2Caps%2C153&sr=8-1) if you want a detailed dissection of Lewis’ claims. > **[Amazon.com: Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency...](https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-Frequency-ebook/dp/B00P0QI2M2)** > > Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency Trading - Kindle edition by Kovac, Peter. Download it once and read it on your Kindle device, PC, phones or tablets. Use features like bookmarks, note taking and highlighting while... Do high-frequency market makers make money? Yes, but a tiny amount compared to the rest of the finance world. The amount of ire they draw is extremely disproportionate. Also, the old system used to be worse for investors - not better. There was never a “good ole days” when investors were treated better by professional market makers. The big Wall St. banks would love it if we nuked all algorithmic traders tomorrow and the banks could step in as the only market makers. > [@RitterSport](#): > > Thanks for the cite and I agree with you about HFT. They claim it adds liquidity, but it’s fake liquidity – if things are going south and liquidity is needed, they back away. Just like every other market maker - human or computer. ---
**Author:** ![RitterSport](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/rittersport/32/6326_2.png) [@RitterSport](https://boards.straightdope.com/u/RitterSport)\ **Post date:** [December 30, 2020, 10:29pm UTC](https://boards.straightdope.com/t/is-there-a-social-benefit-from-complicated-risky-financial-schemes-products/929117/48 "2020-12-30T22:29:31Z")
I disagree. They purposely put in bids they never plan on executing on, and when someone tries to hit it, they change it. They spend the rest of their time front-running real investors, which they can do because of their physical proximity to the exchanges. They add zero value and constantly bleed the system of money. Actually, when the NYSE was an actual useful thing, there really were market makers who were their to make markets as a last resort. Of course, spreads were much higher back then, but they were there when needed. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [December 30, 2020, 10:35pm UTC](https://boards.straightdope.com/t/is-there-a-social-benefit-from-complicated-risky-financial-schemes-products/929117/49 "2020-12-30T22:35:46Z")
> [@RitterSport](#): > > They purposely put in bids they never plan on executing on, and when someone tries to hit it, they change it Nope. Doesn’t happen. If a firm were to be shown to “back away” from a firm quote they would absolutely be fined. The architecture of the modern stock market doesn’t even allow for such a thing to happen. > [@RitterSport](#): > > They spend the rest of their time front-running real investors, which they can do because of their physical proximity to the exchanges. Please explain this in detail. Exactly how do they do this? What order routing and by what mechanism? I’ve been a professional trader for 15 years and I don’t see this. > [@RitterSport](#): > > They add zero value and constantly bleed the system of money. Do you just not like market makers? How are human market makers any different besides making the spread slower? > [@RitterSport](#): > > Actually, when the NYSE was an actual useful thing, there really were market makers who were their to make markets as a last resort. Of course, spreads were much higher back then, but they were there when needed. Still there. I know some and deal with them daily. ---
**Author:** ![RitterSport](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/rittersport/32/6326_2.png) [@RitterSport](https://boards.straightdope.com/u/RitterSport)\ **Post date:** [December 30, 2020, 11:06pm UTC](https://boards.straightdope.com/t/is-there-a-social-benefit-from-complicated-risky-financial-schemes-products/929117/50 "2020-12-30T23:06:56Z")
I’m glad to hear they’re still around on the NYSE. I have nothing against market makers, but HFT firms are not that. Anyway, this is really off-topic for this thread. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [December 30, 2020, 11:22pm UTC](https://boards.straightdope.com/t/is-there-a-social-benefit-from-complicated-risky-financial-schemes-products/929117/51 "2020-12-30T23:22:59Z")
Yes, there still are humans on the floor that can manually step in. I’ve got to disagree that HFT firms aren’t market makers - that’s what almost all of them are. One of the largest of them, Virtu Financial, is a publicly traded company (ticker: VIRT) that has to provide the same audited financials and disclosures to the SEC that all public companies must. If people think they’re just drowning in free money, buy some stock and own them. Though, since their IPO in 2015 they’ve returned about 35% vs the S&P index return of nearly 95% (including dividends). Agreed, this is a hijack and we should drop it. [Previous page](https://boards.straightdope.com/t/is-there-a-social-benefit-from-complicated-risky-financial-schemes-products/929117.md?page=2)