Ahem…

by  Tyler Cowen in

The price of Bitcoin continues to drop by about a dollar every week to ten days, currently settling at about $2.80 USD, and Bitcoin enthusiasts are starting to get worried. “I am not trying to cause a panic here, but the value of Bitcoin has dropped very low today with huge spikes,” one user wrote on the Bitcoin forum on Reddit. “I do suspect it will hit 1 USD mark this week maybe even lower.We need to be discussing thoroughly on promoting Bitcoin and actively putting more effort to spread the message to newer users as I do suspect the popularity is dropping very steeply too.”

Here is more, thanks for the pointer to numerous folks on Twitter.

Ilya Somin on Israeli signaling (markets in everything)

by  Tyler Cowen in

Ilya writes:

Various commenters on this and my previous post on the same subject claim that the Israeli government had to do this in order to send its citizens a “message” about how much it valued their lives and was willing to pay a high price to save them. But if these deals lead to the deaths of far more innocent Israelis than they save, the real message sent will be exactly the opposite: that the government is willing to make a large net sacrifice of innocent life in order to gain short term public relations benefits or a short-term boost in national morale. It’s possible, of course, that Israeli public opinion is myopic enough that they will think that the government is saving life despite the fact that it is actually sacrificing a much larger enough of innocent lives. If so, there could be a more permanent and substantial boost in national morale. Even then, it will probably fade as public attention shifts to other issues. In any event, it’s not worth the sacrifice of numerous innocents and the creation of perverse incentives for terrorist groups.

Link here.  I don’t know whether this exchange is a good idea, but Ilya is possibly underrating the power of signaling models.  It is precisely the fact that that Israeli government will trade for this single life, even apart from whether it is instrumentally rational, that sends the relevant signal.  The less “rational” the act, the more potent the signal of concern, and in this case the possible irrationality is stochastic, not certain.  Perhaps one must take a stand for the single, identifiable life in question; Hollywood rescue movies accept this meme and they face market tests all the time.  Doesn’t the starship captain go back down to save the one life, even though it may place the entire ship in jeopardy?  “That’s what makes us human, Bones,” while Spock raises the eyebrow, etc.

One can also read the Israeli government as signaling (correctly or not) that it has the power to prevent or at least limit future kidnappings.  It is an expression of strength, or at least a belief in strength, and citizens seem to like that signal from their leaders.  It also may allow governments to perform other (efficient) acts which involve offsetting signals of weakness.

That said, Ilya’s comments indirectly raise an issue in signaling theory: where does salience come from?  Why is “one person” the relevant unit of concern for the Israeli citizenry here?  There are plenty of simple answers, but most of them beg the question and of course one person is often considered quite disposable in other contexts, especially military.  It also would not suffice to get just a month of freedom for him.  Yet neither is the deal insisting that more than this one soldier be delivered.

If you haven’t already, I recommend that you all read David Grossman’s splendid To The End of the Land.

More on High Frequency Trading and Liquidity

by  Alex Tabarrok in

Tyler is more optimistic about financial innovation than I am. Strange, but true. I recommend Andrew Haldane’s speech, The Race to Zero, on high frequency trading (HFT). Haldane is Executive Director for Financial Stability at the Bank of England and his speech is eminently quotable. First, some background from Haldane:

  • As recently as 2005, HFT accounted for less than a fifth of US equity market turnover by volume. Today, it accounts for between two-thirds and three-quarters.
  • HFT algorithms have to be highly adaptive, not least to keep pace with the evolution of new algorithms. The half-life of an HFT algorithm can often be measured in weeks.
  • As recently as a few years ago, trade execution times reached “blink speed” – as fast as the blink of an eye….As of today, the lower limit for trade execution appears to be around 10 micro-seconds. This means it would in principle be possible to execute around 40,000 back-to-back trades in the blink of an eye. If supermarkets ran HFT programmes, the average household could complete its shopping for a lifetime in under a second.
  • HFT has had three key effects on markets. First, it has meant ever-larger volumes of trading have been compressed into ever-smaller chunks of time. Second, it has meant strategic behaviour among traders is occurring at ever-higher frequencies. Third, it is not just that the speed of strategic interaction has changed but also its nature. Yesterday, interaction was human-to-human. Today, it is machine-to-machine, algorithm-to-algorithm. For algorithms with the lifespan of a ladybird, this makes for rapid evolutionary adaptation.

Consistent with the research cited by Tyler, Haldane notes that bid-ask spreads have fallen dramatically.

Bid-ask spreads have fallen by an order of magnitude since 2004, from around 0.023 to 0.002 percentage points. On this metric, market liquidity and efficiency appear to have improved. HFT has greased the wheels of modern finance.

But at the same time that bid-ask spread have decreased on average, volatility has sharply increased, as illustrated most clearly with the flash crash

Taken together, this evidence suggests something important. Far from solving the liquidity problem in situations of stress, HFT firms appear to have added to it. And far from mitigating market stress, HFT appears to have amplified it. HFT liquidity, evident in sharply lower peacetime bid-ask spreads, may be illusory. In wartime, it disappears.

In particular, what has happened is that stock prices have become less normal (Gaussian), more fat-tailed, over shorter periods of time.

Cramming ever-larger volumes of strategic, adaptive trading into ever-smaller time intervals would, following Mandelbrot, tend to increase abnormalities in prices when measured in clock time. It will make for fatter, more persistent tails at ever-higher frequencies. That is what we appear, increasingly, to find in financial market prices in practice, whether in volatility and correlation or in fat tails and persistence.

HFT strategies work across markets (e.g. derivatives), exchanges, and stocks and can have negative externality effects on low frequency traders. As a result, micro fat-tails can become macro fat-tails.

Taken together, these contagion channels suggest that fat-tailed persistence in individual stocks could quickly be magnified to wider classes of asset, exchange and market. The micro would transmute to the macro. This is very much in the spirit of Mandelbrot’s fractal story. Structures exhibiting self-similarity magnify micro behaviour to the macro level. Micro-level abnormalities manifest as system-wide instabilities.

For these reasons I am not enthusiastic about innovations in HFT. Earlier I compared high-tech swimming suits and high-frequency trading:

High-tech swimming suits and trading systems are primarily about distribution not efficiency.  A small increase in speed over one’s rivals has a large effect on who wins the race but no effect on whether the race is won and only a small effect on how quickly the race is won.  We get too much investment in innovations with big influences on distribution and small, or even negative, improvements in efficiency and not enough investment in innovations that improve efficiency without much influencing distribution, i.e. innovations in goods with big positive externalities.

Gulf States fact of the day

by  Tyler Cowen in

A dramatic fall in traffic accidents this week has been directly linked to the three-day disruption in BlackBerry services.

In Dubai, traffic accidents fell 20 per cent from average rates on the days BlackBerry users were unable to use its messaging service. In Abu Dhabi, the number of accidents this week fell 40 per cent and there were no fatal accidents.

On average there is a traffic accident every three minutes in Dubai, while in Abu Dhabi there is a fatal accident every two days.

There is more here, hat tip goes to @TomStandage.

From yesterday’s New York Times

by  Tyler Cowen in

They are experimenting with different models of human behavior, here is from Modern Love:

At first his behavior was endearing. He constantly gave me attention, lavishing me with compliments, calls and sometimes gifts. But one morning when I slid out of bed from next to him, things felt different. All his wooing suddenly repelled me.

I crawled back in and tried my best to pretend things were O.K. He showered and dressed. I clenched my teeth when it was time to kiss goodbye, then shut the door behind him, sighed and wondered if he had any idea.

We learn from this same column that butterflies can see with their genitals.  And from the NYT Sunday Magazine, here is a Death Row love story:

“I knew you were going to say your favorite color is blue,” he wrote. “It belongs to you. My favorite colors are black and crimson. I love deep, dark red things made of red velvet.”

Markets in everthing

by  Tyler Cowen

Mr. Weston says he is always on call; his Bluetooth earpiece comes off in public only when he goes to the barber for his weekly $16 trim. His cellphone, he says, holds the numbers of some 100 potential lineup fillers, mostly friends and acquaintances from the Mill Brook Houses, the public housing project in the South Bronx where he has lived most of his life.

He often complains about how people hound him for the chance to make a few dollars through lineup work.

“I can’t even play basketball on the courts or sit here and drink a beer,” Mr. Weston said on a recent afternoon. “People are always asking me if there is a lineup.”

And this:

Detectives often find fillers on their own, combing homeless shelters and street corners for willing participants. In a pinch, police officers can shed their uniforms and fill in. But in the Bronx, detectives often pay Mr. Weston $10 to find fillers for them.

…But Mr. Weston points out that he has never failed to produce lineups when asked, no matter what time of night.

“I never say no to money,” he said.

The article has several other interesting features, and for the pointer I thank Daniel Lippman.

Does algorithmic trading improve liquidity?

by  Tyler Cowen in

From Terrence Hendershott, Charles M. Jones, and Albert J. Menkveld, I am a little slow reporting on this paper:

Algorithmic trading (AT) has increased sharply over the past decade. Does it improve market quality, and should it be encouraged? We provide the first analysis of this question. The New York Stock Exchange automated quote dissemination in 2003, and we use this change in market structure that increases AT as an exogenous instrument to measure the causal effect of AT on liquidity. For large stocks in particular, AT narrows spreads, reduces adverse selection, and reduces trade-related price discovery. The findings indicate that AT improves liquidity and enhances the informativeness of quotes.

Here is also the Kirilenko paper, both are discussed here.  I have not had time to read and assess these, but since I’ve covered the topic before, this brings you more up to date.

The decline in gross job gains

by  Tyler Cowen in

This is from 2009, but I haven’t seen it receive a useful discussion:

These facts demonstrate that a relatively small number of establishments (41,000 to 50,000) changing their employment levels by 20 or more jobs has been sufficient to create or lose approximately as many jobs as the more than 1.5 million establishments that changed their employment levels by just a few jobs.

See charts three and four for a vivid illustration of the effect, or here is another presentation of the idea, reflecting the diminishing rate of creative destruction in the American economy:

The levels of gross job gains and gross job losses prior to the 2001 recession are noticeably higher than the levels following the 2001 recession.

For the pointer I thank David Berger.

I’ve noticed this too

by  Tyler Cowen in

Perhaps you haven’t read Mrs. Molesworth’s “Uncanny Tales” or C. Schweigger’s “Schweigger on Squint.” Perhaps you missed “How to Be Happy Though Married” or the Farmers’ Bulletin devoted to “House Rats and Mice.” No worries. They are available in 24 digital formats, including versions to suit just about any e-book reader you own. These titles, and millions more, are all out of copyright and part of the accelerating effort to digitize the public domain contents of the world’s libraries.

Every e-book reader seems to come preloaded with a few canonical titles — “Pride and Prejudice” or “Alice in Wonderland,” for instance. But there has never been a better time to be a slightly faded writer just beyond the cusp of copyright, like Edgar Wallace or Hilaire Belloc. Their voluminous works — not easily found in your local library — are now copiously available to the digitally curious.

…How “My Unknown Chum” by Charles Bullard Fairbanks was selected for digitizing is unclear.

Here is a bit more.

CLASS Dismissed

by  Alex Tabarrok in

WP: The Obama administration cut a major planned benefit from the 2010 health-care law on Friday, announcing that a program to offer Americans insurance for long-term care was simply unworkable.

Last week, I wrote about the CLASS act. As you may recall, this long-term health insurance program was scored as a big 10-year deficit reducer because it combined early taxes with late expenditures. It was obvious that the late expenditures would quick overwhelm the early taxes but the CLASS act added some $80 billion to projected health-care savings which helped to pass the bill. Now the bill is passed, however, reality is setting in and the program has been scrapped. House Republicans are upset:

“Make no mistake,” Chairman Fred Upton (R-Mich.) said in announcing the hearing, “the CLASS program was tucked into the health care law to provide $86 billion in false savings, and this budget gimmick is a prime example of why Americans are losing faith in Washington. We plan to hold this hearing to get answers about why this sham was carried on for as long as it was, and what cancellation of the program means for the law’s growing price tag.”

*The Map and the Territory*

by  Tyler Cowen in

That is the new Michel Houellebecq book, available from UK Amazon, out January in the US.  It is worth the shipping costs.  Yet, while waiting for it to arrive, I saw a copy on sale in Rome, above a PPP price.  In my desire to read it sooner rather than later I bought it, that was worth it too.  It’s worth both prices put together, and then some, at pretty much any dollar/euro exchange rate or any dollar/pound sterling exchange rate, you can imagine.

I was relieved to see that Houllebecq understands the connection between his ideas and those of Charles Fourier (an underrated thinker).

Libraries destroy books carrying costs exceed liquidity premia no free disposal edition

by  Tyler Cowen in

The first and most obvious objection is, why not give the books to the poor? They need stuff to read. Or to prisoners? Or to sick kids? Or to struggling independent booksellers? It doesn’t cost a thing to give something away, right?

The problem is the situation for a library is more complicated than when you just take a bunch of old clothes and unwanted porn down to the Salvation Army. A library book is stamped and bugged and cataloged so that the library knows that it belongs to them. When a book is given away or sold, the library has to go through and remove all that crap, so whoever winds up with it can prove they didn’t just steal it off the shelf. I’m not kidding about that, either — some people who wind up with such books helpfully return them to the library.

And we’re talking about a lot of books here — these libraries are having to cut down their stock in a hurry. Imagine you’re the manager of a library, and some accountant tells you that you need to get rid of 100,000 books, and do it in a week. You really have two options. One, you can get a bunch of academics to scour your collection and painstakingly rate each book according to its value and importance. Then you can hire a bunch of people to take down the 100,000 least important books and painstakingly stamp and debug them, one by one. Your second option is to get the computer to spit out a list of the 100,000 least borrowed books, and hire a few people to walk down the aisles with their arms out, throwing those books in a shredding machine.

That second option is much quicker and much cheaper. Sometimes you can find a paper recycling centre that will pay you for the pulp, so destroying the books leads to a net profit. Nobody likes it, but for a librarian it’s like your best friend just got bitten by a zombie and you’re the only one with a gun.

Also, remember that the stuff worth saving is buried among a lot of other books that are basically garbage. Though everyone realizes that extremely valuable books are going to inevitably get caught in the same net, there’s not much that can be done about it. Nobody is going to order a first-edition Moby-Dick from a library warehouse if the 2011 reprint is sitting right there on the shelf. A computer list that ranks books by popularity can’t tell the difference.

Another downside to this option is that you have to ensure total destruction. You can’t just throw the books in a Dumpster for some asshole to come along and grab later. If you go the Dumpster option, you have to tear out chapters so that people won’t want them, or just fill the Dumpster with detergent. You don’t want people to get in the habit of treating your Dumpster like the clearance rack — it’s dangerous and messy for everyone involved.

There is much more at the link.