by From Dean Baker The New York Times reported that Jim Simons, the founder of Medallion hedge fund, died this week. As a result of his fund, according to the article, he accumulated more than billion over his lifetime. Simons was a math genius who had made many important breakthroughs in various areas of math. Back in the 1980s, he decided that he could make far more money on Wall Street than in doing math at a university. He thought that with sophisticated algorithms and cutting-edge computers, he could beat the market by finding patterns in trading. This meant literally making trades seconds or even fractions of a second before other traders became aware of a price shift. If a trade could make a margin on even a few fractions of a percentage point on trades, hundreds of times, that
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from Dean Baker
The New York Times reported that Jim Simons, the founder of Medallion hedge fund, died this week. As a result of his fund, according to the article, he accumulated more than $20 billion over his lifetime.
Simons was a math genius who had made many important breakthroughs in various areas of math. Back in the 1980s, he decided that he could make far more money on Wall Street than in doing math at a university. He thought that with sophisticated algorithms and cutting-edge computers, he could beat the market by finding patterns in trading.
This meant literally making trades seconds or even fractions of a second before other traders became aware of a price shift. If a trade could make a margin on even a few fractions of a percentage point on trades, hundreds of times, that can translate into big bucks.
According to the NYT, the Medallion fund averaged returns of 66 percent a year for several decades. This translates into some serious money.
It is worth reflecting on this one for a moment. There is an argument that a far-sighted person, looking at economic data, can provide information to the market and lead to desirable supply and demand adjustments through their speculation.
For example, if someone looked at oil supply trends, and decided that falling demand due to the explosion of electric vehicles meant lower future prices, they would be providing important information to the market by selling oil futures and depressing oil prices in the present. This would lead to less drilling and therefore fewer resources wasted developing a resource that would never be used. That would be good for the economy if this accurately described the reality.
However, beating the market by a few seconds provides zero useful information to the market. No one is going to change their investment decisions based on the price of oil or any other commodity rising or falling a fraction of a percent for a few seconds.
Mr. Simons’ wealth was pure rent. He was pulling money away from other actors in the market who would have earned more if Simons had not gotten there first. He wasn’t contributing to the economy. Since Simons and the other math whizzes he hired had skills that could have been put to productive uses in other fields, his fund was a net drain on the economy.
This is where a modest financial transactions tax (FTT), similar to the sales tax we pay when we buy clothes, food, and most other items, would have been enormously useful. If a stock trade was taxed at say a 0.1 percent rate, and we had comparable taxes on trades of bonds, options, and other derivatives, there would have been much less money for Mr. Simons to snap up with his sophisticated algorithms. He may have continued to do academic mathematics and the gains from his hedge fund would have gone to other investors.
Unfortunately, the Simons of the world are so politically powerful that it is difficult to even get FTTs discussed in the U.S. (Many other countries in the world already have them, including the UK, which has a 0.5 percent tax on stock trades.) An FTT is a great way to raise lots of money for the government while reducing waste in the financial sector.
But as we know that waste is income for a lot of rich and powerful people. That means, given the structure of American politics, it is not on the agenda.