69 lines
19 KiB
Plaintext
69 lines
19 KiB
Plaintext
<strong><span>Previous Post: </span><a href="https://open.substack.com/pub/mogawdat/p/teach-a-machine-to-gamble?r=4wrh2n&utm_campaign=post&utm_medium=web&showWelcomeOnShare=true">Teach A Machine To Gamble</a></strong>
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Real money isn't printed in government mints; it's created by bankers. As a result, all the physical cash from the mint accounts for only about 10.9% of the money in the U.S. economy today. Fact. (I will expand on this concept when we discuss the fourth original sin: selling.)
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This single fact exposes the biggest lie about the markets—a lie that only the poor believe: that if you invest a dollar, it becomes more than a dollar only when you choose to sell your stocks. How naive. The poor are the ones who sell, paying taxes just to keep a sliver of the profit.
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The rich, however, almost never sell a stock unless they get an insider’s tip that it’s about to tank. Why? Because for them, selling is a catastrophic event. It triggers a massive tax bill—often in the billions for the ultra-wealthy. Worse, the very act of unloading their huge blocks of shares onto the market drives down the value of the very asset they're trying to sell.
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Instead, the rich take their stock portfolio to a bank as collateral and borrow against its value. They call their friend, the banker, and walk out with cash, no questions asked. The bank then lock away the stock certificates, further reducing the supply of shares on the market and reinforcing a never-sell movement.
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If the stocks go higher, the rich refinance the loan for even more cash but if its value falls below what they owe, they can often just walk away, letting the bank seize the devalued shares and absorb the loss, often also keeping the stock unsold in hopes for a price recovery.
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What this means is that for the rich to get richer, all they (and their AI trading systems) need to do is keep asset prices high without ever needing to sell.
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How do they pull it off? How do they pull that off while keep the market vibrant? Well, the answer can be found in the market’s greatest slight of hand: the market makers.
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Think of a market maker as the ultimate hustler of the financial world. They are the person or, more commonly, the high-tech firm that's always ready to buy and sell. In doing so, they provide liquidity—that feeling of abundant money and interest in any given stock (or bond, or crypto, whatever).
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<span>Imagine you want to sell your shares in "Trixie, Ltd." Bad move by the way 🫣.</span><br/><span>You’re asking for $10.50, but at this exact moment, the nearest buyer is only offering $10.40. Without a market maker, you'd both be stuck. As the anticipation mounts, you’d have to lower your price to meet theirs. That 10-cent gap—the "spread"—is an instant loss for you but it also affects the market negatively.</span>
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If every trade required someone to give in like you did, the constant oscillation would make the market feel volatile and chaotic. This chaos reduces confidence and, most importantly, scares away the naive, inexperienced investors—those very people who so often pick up the bill at the end of the day. For the hungry sharks of the market, a sea with no smaller fish is very bad for business.
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Enter the market maker, always ready to take the other side of your trade. They instantly bridge that buyers gap by posting two prices at once: a bid to buy shares at $10.49 and an ask to sell shares at $10.51. By simply showing up, they create a stable, two-sided market.
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You lower your price by 1 cent, and a transaction is booked. Those buyers who originally wouldn’t move from $10.40 see shares trading between $10.49 and $10.51 and fear missing out. They increase their bids to meet the market and the trading continues. For the market maker, that tiny two-cent bid-ask spread is their profit. Multiply this by millions, even billions, of transactions per day using super-fast computers, and those fractions of a penny add up to a fortune.
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By bridging the market gap, market makers consistently mask the true liquidity of the market. This is evident through simple mathematics. For example…
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Let's say "Trixie, Ltd." has 1,000 shares in total. At its Initial Public Offering (IPO), the company sold each share for $1, raising $1,000. That money goes toward funding the business. Any further market action, as discussed above, is nothing more than the profit and loss of the gamblers in the casino.
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The early investors, seeing the company's potential, hold on tight to their shares for the long term—locking away, say, 900 of the 1,000 shares in their portfolios. With so few remaining shares available to trade, and with the word spreading about how magnificent Trixie’s business prospects are, any new interest in the stock would cause the price to creep up.
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Eventually, someone holding just a few of the remaining 100 shares decides to sell one single share to you for $10, making a killing of 1000% on their original investment. Good for them.
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Based on that single transaction, every one of the 1,000 shares of Trixie, Ltd. is now valued at $10, not the original $1. The initial $1,000 invested in the company has become a paper valuation of $10,000. So where did the incremental $9,000 come from?
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The answer reveals a massive piece of financial trickery, best illustrated by a simple analogy.
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Imagine a neighborhood of 100 identical houses. One day, a single owner sells their house for $1 million. The moment that price is registered, the entire neighborhood is theoretically worth $100 million. Every other owner can now walk into a bank and borrow against their home's new, higher “value." But, in reality, that $100 million valuation is a fragile illusion. If everyone tried to sell their "million-dollar" house at once, the prices would instantly collapse under the weight of so much supply. The money isn't real; it's just a temporary perception created by a single, isolated transaction.
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This same analogy exposes the phantom math of the financial markets. The new $10,000 market cap for Trixie, Ltd. didn't come from $10,000 of investment. It was created from the original $1,000 raised at the IPO, which was then multiplied tenfold by a single person paying $9 more for just one share.
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That's it. The total cash ever taken out of anyone’s pocket to pay for shared in the company is $1,009. The rest of the perceived value is vapor.
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This illusion of value created by one person's willingness to pay a higher price for a tiny fraction of the company sets a new benchmark that the rich can borrow against.
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Genius!
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<span>So, just how much ‘vapor’ does this financial trickery actually create? I had Trixie run the numbers. Here’s what she found: </span><em>"The total market capitalization of the U.S. stock market is currently around $58 trillion. This number is a theoretical valuation—it's what you'd get if you multiplied every company's share price by its total number of shares in circulation. It represents the market's perceived worth. The average daily trading volume on U.S. exchanges, however, is about $500 to $600 billion. This is the actual cash value of all the shares that change hands on a typical day."</em>
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<em>In other words, the market's total perceived "value" is roughly 100 times larger than the actual cash that moves around on any given day. That’s a staggering amount of vapor.</em>
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“So what's the issue with this magic math if everyone seems happy?" you might ask. The problem is that the market's entire perceived valuation could be wiped out in an instant. It wouldn't just fall to the 1% of actual cash in the system, but to whatever fraction was left after panicking investors fled to safety. This happened way too often in the past. When humans panic and distrust the other traders, they cash out, the vapor is blown off and the market collapses. Which brings me back to AI. Would this happen to a market fully run by AIs? I don’t think so.
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These super-intelligent AIs will be designed with one goal: to maximize the wealth of their masters. And what's the easiest, smartest way to do that? Grow the vapor, of course. Take the emotions of fear and distrust out the market and … never “really” sell.
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<span>The smartest solution to grow this imaginary money is for the AI players to run a show—a simulation of transactions where a tiny fraction of stocks exchange artificial hands, ensuring that prices only rise. In a human world, this would be an illegal price-fixing cartel. But in a world of machines, with this ‘understanding’ never written in human language, it will be nearly impossible to detect. And even if it could be proven, how could you hold the human masters accountable for something they never </span><em>explicitly</em><span> instructed the machines to do?</span>
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The perceived net worth of the masters will continue to grow, and their ability to borrow from their banker friends will explode into the trillions as a result. While I have no way of proving that this will be our future, I believe this is where the logic leads:
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<em><strong>AI automated trading will turn the biggest casino on earth into a cartel, staging a theatrical play for the sole purpose of enabling the wealthy to siphon money from banks against an artificial valuation set by their subservient machines.</strong></em>
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Pure evil genius!
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Perhaps this doesn’t shock you. But the dawning realization of how the machines would run the financial markets certainly shocked me. In fact, it continues to shock me, not because of what the machines would do, but because it draws back the curtain on what powerful humans have been doing for decades …
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<em><strong>Market oligarchs have been manipulating market prices long before the introduction of the machines. </strong></em>
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<strong>Previous Post: <a href=\\\"https://open.substack.com/pub/mogawdat/p/teach-a-machine-to-gamble?r=4wrh2n&utm_campaign=post&utm_medium=web&showWelcomeOnShare=true\\\">Teach A Machine To Gamble</a></strong>
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Real money isn't printed in government mints; it's created by bankers. As a result, all the physical cash from the mint accounts for only about 10.9% of the money in the U.S. economy today. Fact. (I will expand on this concept when we discuss the fourth original sin: selling.)
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This single fact exposes the biggest lie about the markets\u2014a lie that only the poor believe: that if you invest a dollar, it becomes more than a dollar only when you choose to sell your stocks. How naive. The poor are the ones who sell, paying taxes just to keep a sliver of the profit.
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The rich, however, almost never sell a stock unless they get an insider\u2019s tip that it\u2019s about to tank. Why? Because for them, selling is a catastrophic event. It triggers a massive tax bill\u2014often in the billions for the ultra-wealthy. Worse, the very act of unloading their huge blocks of shares onto the market drives down the value of the very asset they're trying to sell.
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Instead, the rich take their stock portfolio to a bank as collateral and borrow against its value. They call their friend, the banker, and walk out with cash, no questions asked. The bank then lock away the stock certificates, further reducing the supply of shares on the market and reinforcing a never-sell movement.
|
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If the stocks go higher, the rich refinance the loan for even more cash but if its value falls below what they owe, they can often just walk away, letting the bank seize the devalued shares and absorb the loss, often also keeping the stock unsold in hopes for a price recovery.
|
||
What this means is that for the rich to get richer, all they (and their AI trading systems) need to do is keep asset prices high without ever needing to sell.
|
||
How do they pull it off? How do they pull that off while keep the market vibrant? Well, the answer can be found in the market\u2019s greatest slight of hand: the market makers.
|
||
Think of a market maker as the ultimate hustler of the financial world. They are the person or, more commonly, the high-tech firm that's always ready to buy and sell. In doing so, they provide liquidity\u2014that feeling of abundant money and interest in any given stock (or bond, or crypto, whatever).
|
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Imagine you want to sell your shares in \\\"Trixie, Ltd.\\\" Bad move by the way \uD83E\uDEE3.<br>You\u2019re asking for $10.50, but at this exact moment, the nearest buyer is only offering $10.40. Without a market maker, you'd both be stuck. As the anticipation mounts, you\u2019d have to lower your price to meet theirs. That 10-cent gap\u2014the \\\"spread\\\"\u2014is an instant loss for you but it also affects the market negatively.
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If every trade required someone to give in like you did, the constant oscillation would make the market feel volatile and chaotic. This chaos reduces confidence and, most importantly, scares away the naive, inexperienced investors\u2014those very people who so often pick up the bill at the end of the day. For the hungry sharks of the market, a sea with no smaller fish is very bad for business.
|
||
Enter the market maker, always ready to take the other side of your trade. They instantly bridge that buyers gap by posting two prices at once: a bid to buy shares at $10.49 and an ask to sell shares at $10.51. By simply showing up, they create a stable, two-sided market.
|
||
You lower your price by 1 cent, and a transaction is booked. Those buyers who originally wouldn\u2019t move from $10.40 see shares trading between $10.49 and $10.51 and fear missing out. They increase their bids to meet the market and the trading continues. For the market maker, that tiny two-cent bid-ask spread is their profit. Multiply this by millions, even billions, of transactions per day using super-fast computers, and those fractions of a penny add up to a fortune.
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By bridging the market gap, market makers consistently mask the true liquidity of the market. This is evident through simple mathematics. For example\u2026
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Let's say \\\"Trixie, Ltd.\\\" has 1,000 shares in total. At its Initial Public Offering (IPO), the company sold each share for $1, raising $1,000. That money goes toward funding the business. Any further market action, as discussed above, is nothing more than the profit and loss of the gamblers in the casino.
|
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The early investors, seeing the company's potential, hold on tight to their shares for the long term\u2014locking away, say, 900 of the 1,000 shares in their portfolios. With so few remaining shares available to trade, and with the word spreading about how magnificent Trixie\u2019s business prospects are, any new interest in the stock would cause the price to creep up.
|
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Eventually, someone holding just a few of the remaining 100 shares decides to sell one single share to you for $10, making a killing of 1000% on their original investment. Good for them.
|
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Based on that single transaction, every one of the 1,000 shares of Trixie, Ltd. is now valued at $10, not the original $1. The initial $1,000 invested in the company has become a paper valuation of $10,000. So where did the incremental $9,000 come from?
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The answer reveals a massive piece of financial trickery, best illustrated by a simple analogy.
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Imagine a neighborhood of 100 identical houses. One day, a single owner sells their house for $1 million. The moment that price is registered, the entire neighborhood is theoretically worth $100 million. Every other owner can now walk into a bank and borrow against their home's new, higher \u201Cvalue.\\\" But, in reality, that $100 million valuation is a fragile illusion. If everyone tried to sell their \\\"million-dollar\\\" house at once, the prices would instantly collapse under the weight of so much supply. The money isn't real; it's just a temporary perception created by a single, isolated transaction.
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This same analogy exposes the phantom math of the financial markets. The new $10,000 market cap for Trixie, Ltd. didn't come from $10,000 of investment. It was created from the original $1,000 raised at the IPO, which was then multiplied tenfold by a single person paying $9 more for just one share.
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That's it. The total cash ever taken out of anyone\u2019s pocket to pay for shared in the company is $1,009. The rest of the perceived value is vapor.
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This illusion of value created by one person's willingness to pay a higher price for a tiny fraction of the company sets a new benchmark that the rich can borrow against.
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Genius!
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So, just how much \u2018vapor\u2019 does this financial trickery actually create? I had Trixie run the numbers. Here\u2019s what she found: <em>\\\"The total market capitalization of the U.S. stock market is currently around $58 trillion. This number is a theoretical valuation\u2014it's what you'd get if you multiplied every company's share price by its total number of shares in circulation. It represents the market's perceived worth. The average daily trading volume on U.S. exchanges, however, is about $500 to $600 billion. This is the actual cash value of all the shares that change hands on a typical day.\\\"</em>
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<em>In other words, the market's total perceived \\\"value\\\" is roughly 100 times larger than the actual cash that moves around on any given day. That\u2019s a staggering amount of vapor.</em>
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\u201CSo what's the issue with this magic math if everyone seems happy?\\\" you might ask. The problem is that the market's entire perceived valuation could be wiped out in an instant. It wouldn't just fall to the 1% of actual cash in the system, but to whatever fraction was left after panicking investors fled to safety. This happened way too often in the past. When humans panic and distrust the other traders, they cash out, the vapor is blown off and the market collapses. Which brings me back to AI. Would this happen to a market fully run by AIs? I don\u2019t think so.
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These super-intelligent AIs will be designed with one goal: to maximize the wealth of their masters. And what's the easiest, smartest way to do that? Grow the vapor, of course. Take the emotions of fear and distrust out the market and \u2026 never \u201Creally\u201D sell.
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The smartest solution to grow this imaginary money is for the AI players to run a show\u2014a simulation of transactions where a tiny fraction of stocks exchange artificial hands, ensuring that prices only rise. In a human world, this would be an illegal price-fixing cartel. But in a world of machines, with this \u2018understanding\u2019 never written in human language, it will be nearly impossible to detect. And even if it could be proven, how could you hold the human masters accountable for something they never <em>explicitly</em> instructed the machines to do?
|
||
The perceived net worth of the masters will continue to grow, and their ability to borrow from their banker friends will explode into the trillions as a result. While I have no way of proving that this will be our future, I believe this is where the logic leads:
|
||
<em><strong>AI automated trading will turn the biggest casino on earth into a cartel, staging a theatrical play for the sole purpose of enabling the wealthy to siphon money from banks against an artificial valuation set by their subservient machines.</strong></em>
|
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Pure evil genius!
|
||
Perhaps this doesn\u2019t shock you. But the dawning realization of how the machines would run the financial markets certainly shocked me. In fact, it continues to shock me, not because of what the machines would do, but because it draws back the curtain on what powerful humans have been doing for decades \u2026
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<em><strong>Market oligarchs have been manipulating market prices long before the introduction of the machines. </strong></em>
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