[Avodah] day trading

[Micha Berger]

On Wed, Oct 05, 2011 at 03:34:24PM -0700, Harvey Benton wrote:
: much of day trading is based on speculation (not on actual
: fundamentals of companies,  which, if interpreted as i under
: stand it, would ffall under the category possibly of  njot binyan
: olam

It is permissable to play dice for a living, although such a person
is disqualified from eidus. (It's not even clear to me that the
disqualification is a value judgment; it could simply be that professional
gamblers don't understand the value of money well enough to testify
in monetary cases.) So even if day trading were totally unproductive,
one could't say it was outright prohibited.

My current job is to write software for a hedge fund, trying to get
trades from the trader's algorithm to the exchange in as few microseconds
as possible.

Useful benefit 1: They're making profit for other people, the investors,
more than for themselves. This kind of trading is also used by people
who enable banks to pay out interest, who manage retirement money,
etc... Not just people who can afford to put money into hedge funds gain,
the "little guy" directly benefits as well.

But let's say we're talking about someone day trading or program trading
his own money...

I was brought into this industry because of my knowledge of the kind of
filtering used to remove hiss from recordings. He figured that if he could
do the same in stock prices, or in relative value between two different
stocks (eg Microsoft vs Intel), he would know what's the "noise" around
where the price ought to be, and what is more likely to be real shift.

This is a kind of arbitrage trading -- betting that a gap between trade
price and what the price ought to be will close. So, if Microsoft drifts
low compared to some expectation beased on related businesses, it might
be a good time to buy Microsoft. At least, more likely than not. Do that
tens of thousands of times a day, and you'll win enough more bets than
not so as to make real money.

And when more people see this gap, demand goes up, until the price
returns to where it ought to be.

So why do they need to put the computer in the same building as the
exchange and hire a team of people like me to get ever faster than
the competition? Because as more people look for these arbitrage
opportunities, the price is corrected faster and faster. Someone else
is more and more likely to pick up the bad pricing before it closes.

Useful benefit 2: Day traders keep stock pricing more meaningful, because
they, program and other arbitrage traders force gaps between price and
value to close up.

And a better stock market means more people buying the shares that fund
the companies to do real work.

Then of course there is useful benefit 3: I and the rest of the support
staff can get paychecks only because of their activity.


What may be more halachically problematic is futures trading, when you
do a trade against another Jew. Not very common, as most futures trades
are exchange traded, with no one specific counterparty assigned to you
until expiry. But if it were to come up, any increase in value from
the time you buy the future until expiry would be ribis. See QSA 65:11
<http://www.aishdas.org/asp/2009/09/qsa-65-11.shtml>

What would come up more commonly and is straightforward ribis is a
corporate bond on a Jewishly-owned coporation. In fact, the difference
between bond coupons and stock dividends parallels that between ribis
and heter isqa.

GCT!
-Micha

-- 
Micha Berger             The waste of time is the most extravagant
micha at aishdas.org        of all expense.
http://www.aishdas.org                           -Theophrastus
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