Author Archives: Arnold Kling

Brokers and dealers

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In the WSJ, Alexander Osipovich writes,

The practice, in which high-speed trading firms pay brokerages for the right to execute orders submitted by individual investors, has long been controversial. Some say it warps the incentives of brokers and encourages them to maximize their revenue at the expense of customers. Supporters, including many brokers and trading firms, say it is misunderstood and helps ensure that investors get seamless executions and good prices on their trades.

In theory, there are two types of market-makers in securities markets: brokers and dealers. A broker connects a buyer and a seller. A dealer buys some securities from a seller, holds them in inventory (maybe for just a few seconds), and then sells them to a buyer.

Most real estate transactions are intermediated by brokers. The broker finds a buyer for your house, and then you pay a hefty commission to the broker.

From time to time, an entrepreneur will try to operate in the real estate market as a dealer. The company offers to buy your house, with the intention of turning around and selling it. Instead of charging a commission, the firm tries to buy your house at a price somewhat below the price at which the firm expects to sell it. You save the commission, but chances are you do not get full price for your house.

It sounds to me as though the “payment for order flow” model is one in which brokers hand off customer orders to dealers. The dealers pay for the order flow because they are efficient at doing what they do, so they make more profit if they have more business. The dealers supply liquidity in the market. This enables the brokers to allow customers to trade without commissions.

Some retail investors also supply liquidity. If you target a stock at a particular price, but you don’t care when you get it, then you place a limit order. You supply liquidity, and you make it easier for brokers and dealers to do their job.

On the other hand, if you want the stock right now and you don’t care what price you pay, you are a demander of liquidity. If I am trying to arbitrage the options market by writing a call option and buying the stock, then I am going to demand liquidity. I don’t want those trades to take place at different times.

My guess is that the action in GameStop involved a lot of traders who were demanding liquidity. Amateurs buying call options and bidding up those option prices, leading arbitrageurs to want to write calls and buy the stock with rapid execution in order to arbitrage and discrepancy between call option prices and the price of the underlying stock.

The cost of operating as a dealer rises when prices become volatile, because your risk of keeping an inventory of shares goes up. This increased cost has to be passed on to traders in volatile stocks. The zero-commission model may not necessarily be sustainable in those cases. Shutting down trade for the retail investors seems like a bad solution, though. Charging a commission would be better.

When someone proposes something like “Ban short-selling!” or “Ban paying for order flow” I suspect that they are either are shilling for a trade group that stands to benefit from such a regulation or that they are just posturing without any sense of what sort of Chesterton fence they may be tearing down.

Virus update

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1. Ynetnews said,

Researchers at Tel Aviv’s Ichilov Hospital on Thursday announced it has seen positive results in preliminary trials for a cure for COVID-19.

Meanwhile, Joseph A. Ladapo wrote,

while scientists argue that widespread vaccination will prevent variants from taking hold, lessons from the past year should make it abundantly clear that our ability to stop the spread of variants is extraordinarily limited.

So there is still a low-probability scenario in which We will quietly give up on a vaccine. But keep in mind that neither the Ynetnews piece nor Lapado’s op-ed should be treated as reliable.

2. I am pretty close to declaring Mr. Biden a failure as a virus-war President. To succeed, he needs to fight the bureaucracy much harder.

–declare the vaccine distribution system a failure, and put a military person in charge.

–take the vaccine approval process out of the hands of the FDA. In addition to FDA input, get input from a scientific advisory panel, consisting of folks like Michael Kremer, Scott Alexander, Bret Weinstein, and Balaji Srinivasan.

–create a treatment-protocol study group to evaluate current knowledge, disseminate best practices on an ongoing basis, and see that trials are conducted as rapidly and reliably as possible.

3. Our county’s vaccine appointment systems are ridiculous. Pointer from Tyler Cowen. But my wife got her first shot Friday, and I got mine Monday.

–Even though some occupations under age 65 are eligible, I don’t see how anyone with a job could possibly get an appointment. Trying to navigate/game the appointment systems is a full-time job, involving checking multiple web sites, learning what time is best to check a particular web site, hitting the “refresh” on your computer continually, and so on.
–Because it takes so much social capital to work the system (local list-servs are buzzing with tips on how to get an appointment), I was not surprised when a white person told me of getting an appointment at a grocery store in a mostly-black neighborhood and finding that all the other people with appointments were white. So on top of everything else, it exemplifies systemic racism.
–If a private firm operated like this, no one would put up with it.

4. You can’t die now–it’s the Super Bowl! Total COVID deaths for February 7-8 were under 3000, the lowest two-day total this year. Doctors do have a lot of discretion to keep someone alive for a day or two longer if that is more convenient for the family. I’m expecting a bounceback today.

Concerning decentralization

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1. Zvi Mowshowitz and I are going back and forth about decentralization on Pairagraph. In progress. Self-recommending.

2. Tyler Cowen Bloomberg) does a one-person back-and-forth,

Why not, for example, put social media on blockchains and have efficient cryptocurrency micropayments to reward those who help maintain such mechanisms? Censoring postings on such a service would be as difficult as trying to overwrite a blockchain ledger, which is to say very difficult. (Indeed such postings would be a blockchain ledger, albeit in a more digestible form.) And instead of having to deal with the content rules of Twitter or WhatsApp, perhaps you could customize and build your own rules.

On the other hand, (a possibly atavistic) part of me likes knowing that someone or something is in control, whether it’s a government, a bunch of people in Mountain View, or even just my dean.

I do recommend the David Brin essay referred to in my first Pairagraph post.

Cancellation bets

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Bryan Caplan writes,

I bet Todd Proebsting $50 at even odds that I will NOT be “clearly mistreated” by George Mason University before January 1, 2031.

I think that the chances that the Woke mob will come for Bryan are pretty low, because he is under their radar. So at even odds I think he has once again made a bet he is likely to win. And I don’t think that extending the date out to 2031 helps Proebsting’s chances very much.

The Woke Tyranny train is moving very rapidly. I think that within two or three years the Woke mob will either have trampled its opposition or started to fade away. Completely trampling the opposition means that it is able to inflict what Bryan would call clear mistreatment on Jonathan Haidt, Steven Pinker, Peter Thiel, and Ross Douthat. I would not bet on that at this point. A better bet would be that there will be clear mistreatment of at least one of the them or one of the following between now and January 1, 2023: Coleman Hughes, Tyler Cowen, Megan McArdle, Joseph Henrich, John Cochrane, Ezra Klein.

Dick Gregory’s Clubhouse

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I experienced an odd juxtaposition late last month. I started reading Shelby Steele’s White Guilt, and I used the hip new audio-only social media app Clubhouse for the first time.

Steele writes about going to hear Dick Gregory in 1967. The young Steele was totally captivated by Gregory’s hip, Marxist black power rhetoric. But years later Steele came to view as harmful what he saw as the exploitation of white guilt over slavery and segregation.

The first “room” I went into in Clubhouse had at least 100 listeners in it, mostly African-American. The speaker was a soft-spoken but supremely self-confident black woman, who resembled an updated version of Dick Gregory. Her theme was that after the Civil War, Reconstruction failed to transform the former Confederacy, and that after the election and the Capitol riot we must not make the same mistake again. I assume that the audience found her captivating, while I found her quite frightening. She showed no recognition of anyone’s humanity. Instead her world view seems to be that it is imperative for the Woke to stifle the un-Woke. Probably if she could have her way, everyone who is to the right of Ibram X. Kendi on race would be treated as a domestic terrorist.

I remember when Medium was the hip new platform a few years ago. I saw it degenerate into an echo chamber for narrow-minded, self-righteous young progressives. I get the sense that Clubhouse is starting out even more left-dominant than Medium or Twitter.

The timing for launching Clubhouse is perfect. With the pandemic, people need something to do. And young people are particularly restless and in need of social interaction. A lot of profile photos show generous cleavage.

The question for Zoom or Clubhouse is what happens to demand once the pandemic is behind us. In six months, even though there will be more people receptive to video conferencing than there were before the pandemic, a lot of folks will be happy if they never look at heads in squares again. Clubhouse will have less time to establish its value before we are back to meeting in person. It may have difficulty expanding beyond its current user base.

Is the resistance getting organized?

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1. Bryan Caplan quotes a proposal.

What is required is administrative reform, where attacks on academic freedom, free speech, and intellectual diversity are treated with at least the same degree of seriousness as other offenses at universities. Specifically, every university should have an “Office of Free Speech” where faculty can lodge complaints when their academic freedom or free speech rights are violated, or when policies are put in place to limit the possibilities for intellectual diversity. This office must have adequate funding to complete independent investigations of such allegations, and it should report directly to the highest authority governing the university, either the board of trustees or regents for most private universities or the regents or state legislature for public universities. These investigations must have teeth; attacking academic freedom (not simply criticizing speech with speech) cannot be allowed to stand as acceptable behavior for administrators, faculty, or students. The same sorts of consequences available for other offenses should be applied to those who use their position at the university to deprive others of their institutional or constitutional rights.

Read the whole thing. Let me argue against the idea: More college administrators are the problem, not the solution. And the Office of Free Speech will evolve very quickly into an office of censorship. Conquest’s Second Law and all that.

2. Helen Pluckrose and others have started Counterweight Support, to fight back against cancel culture.

3. The folks at Legal Insurrection have started a project to track Critical Race Theory on college campuses. I think we should be tracking it at elementary schools.

4. Maybe all the resistance needs is more John McWhorter. If you already saw this post, go ahead and read it again.

FITS update

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I have a spreadsheet with names, listed by position. Don’t worry about the positions so much at this point. When something is in parentheses after a someone’s name, it means they are also eligible at another position.

You should not be able to edit the spreadsheet. If you want some other names on it, suggest them with a comment.

This is not the final list. They are not listed in any sort of priority order. I am still working on the format for the game.

Tyler has some thoughts on how he would choose a team.

Actually, I do think the point is to pick “the best, per se.” If you Google “hundred leading intellectuals” you will get dreck. My guess is that if you polled academic departments you would get dreck.

The motivation for this project is the almost total lack of overlap between “famous intellectual” or “renowned intellectual” and someone I would regard as a great mentor for a college-age student. I won’t hold it against someone that he or she is famous. But I don’t think you could field a decent team if you restrict yourself to those who are famous.

What everyone is reading

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Lee Smith on China and the U.S. A few representative excerpts:

he [President Trump] failed to staff and prepare to win the war he asked Americans to elect him to fight.

. . .Talk about how Nike made its sneakers in Chinese slave labor camps was no longer fashionable. News that China was stealing American scientific and military secrets, running large spy rings in Silicon Valley and compromising congressmen like Eric Swalwell, paying large retainers to top Ivy League professors in a well-organized program of intellectual theft, or in any way posed a danger to its own people or to its neighbors, let alone to the American way of life, were muted and dismissed as pro-Trump propaganda.

. . .The leading members of a city, state, or nation do not imprison its own unless they mean to signal that they are imposing collective punishment on the population at large. It had never been used before as a public health measure because it is a widely recognized instrument of political repression.

File this one under: poses a dilemma for libertarians.

FITs update

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I already have a list of over 200 intellectuals for the Fantasy Intellectual Teams draft. Thanks for your suggestions. More are still welcome. You are not limited to any proposed team.

I should say that the way a fantasy draft works, owners take turns drafting players. You cannot just say “Tyler is on my team.” Somebody else could pick him first. So if there were 10 owners of these 18-intellectual teams, and there are 200 to choose from, then you can be sure to wind up in the last rounds drafting some folks that were put on the draft list by me or someone else but who you would not have intended to draft as of now.

One scoring issue that I am wrestling with is name recognition. The goal of FITs is to increase name recognition for intellectuals that deserve it. That might suggest downgrading anyone who has high name recognition among, say, Ivy League social science professors. So David Brooks, Jared Diamond, or Daniel Kahneman would not help your score, because they already have plenty of name recognition among Ivy League social science professors. Someone like Joe Rogan, who enjoys mass name recognition, does not lose points, because I guess he has low name recognition among Ivy League social science professors. And Rand Paul has name recognition among elites, but not as an intellectual, so he does not lose points for that. Note that I am not pushing Joe Rogan or Rand Paul for high draft choices.

But another possibility is to ignore that issue. I want my FITs to be people who are great role models as thinkers. I want my children to model their thought processes after my FITs team. If that means Steven Pinker or Joseph Henrich, so be it.

In fantasy sports, a “sleeper” is someone gets overlooked by other fantasy owners during the draft, so that you can pick the player up in a late round. As one commenter pointed out, in fantasy baseball you win the draft by picking good sleepers. In FITs, Jim Manzi is an outstanding sleeper.

But somebody who has a cult following in a particular realm is not necessarily a helpful sleeper. How to score Gary Taubes, for example? He gets credit for going against conventional wisdom in the field of diet, but otherwise I don’t think he has much value in the draft.

I am not inspired by FITs candidates that you like for “mood affiliation” reasons. I enjoy Victor Davis Hanson as a writer, but I know what one of his columns is going to say before I even read it. That is a bad sign. And he is too uncharitable to those with whom he disagrees.

One reason that my choices skew so far to the right is that I see those on the left relying much more heavily on mood affiliation. Few left intellectuals are charitable toward, or even aware of, important conservative arguments.

FITs who have influenced my view of the world are way up there in terms of draft choices. This can be true even though I reject important parts of their view of the world. Robin Hanson has never convinced me that uploading someone’s brain into a computer is going to be a big thing, but he has convinced me of all sorts of other important ideas.

Handle’s criteria are also on target.

Administrative data in economic research

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Timothy Taylor writes,

economic research often goes well beyond these extremely well-known data sources. One big shift has been to the use of “administrative” data, which is a catch-all term to describe data that was not collected for research purposes, but instead developed for administrative reasons. Examples would include tax data from the Internal Revenue Service, data on earnings from the Social Security Administration, data on details of health care spending from Medicare and Medicaid, and education data on teachers and students collected by school districts. There is also private-sector administrative data about issues from financial markets to cell-phone data, credit card data, and “scanner” data generated by cash registers when you, say, buy groceries.

Vilhuber writes: “In 1960, 76% of empirical AER [American Economic Review- articles used public-use data. By 2010, 60% used administrative data, presumably none of which is public use …”

The quote is from a paper by Lars Vilhuber.

My thoughts:

1. The Census Bureau has procedures in place for allowing researchers to use administrative data while making sure that no individual record can be identified. I know this because one of my daughters worked at Census in this area for a few years.

2. The private firms that collect data as part of their business are not going to waste resources making sure that the data is free from coding mistakes and other errors. Researchers who are used to assuming that they are working with clean data are going to be surprised.

3. The data surrounding COVID are particularly treacherous. I found this out first-hand back when I was trying to follow the virus crisis closely.

4. This course should be taught more widely. As a point of trivia, the professor, Robert McDonald, was an undergraduate roommate of Russ Roberts (now the host of EconTalk) and also shared an apartment with me our first year of graduate school.