I was a derivatives trader, and it occurred to me the world would hardly change at all if credit derivatives ceased to exist. Not so nurse practitioners.
Is this statement (from the article) true?
I'm under the impression that financial innovations throughout history have generally spurred capital investment. Innovations like fractional-reserve lending have made bankers&investors wealthy, but also spurred spending on infrastructure in a way that could be a win-win for society as a whole.
If today's financial wizards went away, would we feel a surprising amount of ripple impact, or would they really just not matter?
I'm under the impression that financial innovations throughout history have generally spurred capital investment. Innovations like fractional-reserve lending have made bankers&investors wealthy, but also spurred spending on infrastructure in a way that could be a win-win for society as a whole.
The point the author was trying to get at was not that finance geeks don't provide any social utility.
Just that in any rational category of needs, the value they provide would have to rank far below the value provide by nurse practitioners (and schoolteachers, police officers, lawyers even... a zillion other working categories, in fact).
If today's financial wizards went away,
It's not just a question of "if." To all intents and purposes, the financial services sector as we know it today (both in its technical prowess, and in sheer size and scope) did not exist 30 years go. True, we didn't have Facebook or iPads then. But people managed to live healthy lives, raise children, have careers, buy houses, fight wars, etc, just the same.
So from one point of view, yes the financial services sector can be seen to grease certain wheels (like IPOs, M&A). But in the larger picture, (in the view of many) it doesn't seem to provide all that much value, in proportion to the resources (and brainpower) devoted to it. It also seems to generate no end of collateral damage (the recent mortgage crisis being just one example).
>If today's financial wizards went away, would we feel a surprising amount of ripple impact, or would they really just not matter?
1. There would be a substantial impact... for the better. You and I would see the benefit as lower spread between cost of production and price of purchase of goods and services (the spread is where the "financial wizards" take must come from).
There is a huge benefit from proper distribution of resources - which used to be the job of financiers and brokers. But now, they work not on "proper distribution", but rather on "distribution which is the most profitable for themselves".
2. And if the "financial wizards" did not go "away", but instead into professions where their intellect could be used for good instead of for evil (e.g.: science), that would be even better.
In the context of a 2010 examination of the ICE Trust, an industry self-regulatory body, Gary Gensler, the chairman of the Commodity Futures Trading Commission which regulates most derivatives, was quoted saying that the derivatives marketplace as it functions now "adds up to higher costs to all Americans."
Best case, what is the societal function of derivatives?
As a relatively ignorant layperson, my guess is that derivatives allow productive businesses to hedge against uncontrollable risks.
A business with less risks requires less capital buffer, which encourages & allows for more capital investment and profit-taking.
In a nutshell, derivatives allow businesses to run and grow on less capital, by reducing the amount of capital-on-hand required to buffer against risk.
Is there some other way in which derivatives serve an ostensibly positive function in society? Am I missing something here?
Is there some other way in which derivatives serve an ostensibly positive function in society?
I think the largest benefit is for organizations like pension funds which are required to minimize risk. Being able to hedge against specific types of risk (e.g., via a "longevity swap") allows pension funds to allocate their limited "risk budget" in ways which yield higher returns (thereby allowing them to pay out higher pension values).
This is a good point and can be true. As long as the market isn't manipulated this sort of thing can happen. Or even if the manipulation is minimal and there isn't a crash caused by hidden information.
Don't you just transfer the risk to some other party this way? So that other party will now have to either have the bigger buffer or transfer it to someone else. At the end there will be no net effect on the larger scale. The cycle probably continues until somebody stupid enough to dismiss the risk buys into it at loss.
It's risk, not a certain loss. And you don't "transfer" it, you sell it to a party that wants higher risk (for a fee).
Derivatives are nice, in that sometimes its possible to separate the risk out from the asset. Consider a $50k loan at 5% with a 1% risk of default.
A pension fund and a hedge fund both have capital, but the pension fund have extremely conservative investors and the hedge fund have extremely risk hungry investors. That loan is not a good investment for either.
So a derivative is created: the hedge fund agrees to make the pension fund good if the loan-taker defaults for a one-time fee of $550 (the cash-value of the 1% risk + a $50 fee). The pension fund now has a $49,450 loan (actually, it will be booked as a $50k load both paying a bit less that 5% interest - the exact amount depends on the running time of the loan) and a $0 risk budget and the hedge fund just made $50 + a 99% chance of $500 more. All are happy, including the loan-taker who might have struggled to get someone to load him money.
(Numbers pulled from thin air for illustrative purposes and lots of details omitted)
That seems accurate, but it doesn't seem to account for the risk of the hedge fund going bust. It's a high risk fund so they either have the cash buffer we talked about or they transfer the risk to others. So the net effect is still null. The pension fund will be in much better position to take the 1% risk multiple times at sufficiently disconnected opportunities insuring each-other reducing the overall risk.
No, the risk costs $500 and the hedge fund has that. They can't book the $500 before the loan has been repaid in full. The problem is what happens if the default risk (1%) turns out to be 2% instead. See: The subprime crisis.
I'd say in general they allow different types of risk to be stripped out from investments and passed on to people who specifically want to take them. That makes it easier for businesses (and individuals) to make plans. For instance a company could invest in a foreign market but hedge out the FX risk. They could even find a company in the foreign market who operates in their country and do a currency swap, meaning both parties get rid of unwanted risk.
It's more general than that. You can buy and sell stock risks like any other commodity. An investor who's confident in a company, or who knows they're investing for the long term, can take on more risk, and get a higher rate of return (on average). A pension fund that's coming up to redemption time can stabilize its value, accepting a lower growth rate in return for reduced risk. It's not just the businesses themselves, it's anyone for whom the stock price matters.
As the above commenter stated. In the classical example (and a perfect world) derivatives can act as a sort of "insurance" or guidebook of risk. But we do not live in a perfect world. Greed is a real thing (and maybe one of the reasons Capitalism works so damn well), so it rarely works exactly that way. In the end it is often just a way to treat the little guy as a sucker while insulating the bigger fish. Or at least that is how history has shown it to play out so far.
When I was young, I got into a poker game with some local hoods, and they cleaned me out. I knew enough about the odds to know they were cheating, but not enough to know how they were doing it.
I resolved not to play poker again until I understood the game much better.
Ditto for derivatives. If you don't understand the game, you should invest in something else.
My poker experience is actually closely analogous to the reality of AIG meltdown: when I lost, my buddies collected, but when I won, "we were just playing for fun, not real money".
They had running water and other complex infrastructure in ancient Rome well before derivatives were invented I really doubt we'd be living in a barren wasteland w/o them.
There would certainly be an impact if all that stuff went away but it wouldn't be because of it's absence it would be because of the pain of unwinding it all.
Not in the sense we are talking about them as they relate to financial markets. From what I've read they came about in the 1600's with the rise of the famous tulip bulb bubble.
Yes, those innovations are critical, but those central concepts and the legal mechanisms that make them possible have very little to do with what much of Wall Street does, which is inventing financial devices and arbitraging the everloving crap out of them.
I think the point of "the world goes on without Wall Street" is that banks and stock markets will still provide speculative capital to expensive ventures whether or not high frequency trading is around, and agriculture will still grow and sell food whether or not hedge funds are buying and selling futures.
My understanding, which is tiny and very limited, is that you can think of the role of finance operators as "liquidity providers". They're the grease in the wheels of capitalism; by either providing access to capital (via loans, or investment) or by matching buyers with sellers.
A classical example is you're a farmer that wants to hedge the risk that your crop will fail due to random weather events or that there will be such a glut in the market that you won't be able to sell your crop profitably. So, you enter a contract to sell your crop at a fixed rate long before harvest comes along. That's a future contract, and it's a kind of derivative.
So, derivatives can be really socially useful instruments. They can act like certain kinds of insurance, or allow you to capture different dimensions of value on assets that you already own.
However, and here's where the argument comes in, it's not clear that all kinds of derivatives provide socially useful forms of gambling. The prime example here is that of the collateralized debt obligation in which huge portions of the US mortgage market got sunk into.
Mortgage backed securities are probably not in of themselves terrible ideas but the way CDOs were structured made it impossible to objectively value the risk behind the instrument. It's just not clear how a dip in the market might affect the value of your CDO tranche. It's actually an np-complete problem - https://freedom-to-tinker.com/blog/appel/intractability-fina...
Another example is high frequency trading - where you're a day trader on steroids and have computers exchanging massive quantities of stocks based on fluctuations of fractions of cents. HFT people will argue that they provide more liquidity in the market - it's easier to sell your stocks because HF traders increase the overall volume, etc. However, it's in effect launched an arms race between different trading firms and some people say that they're literally making money by skimming off everyone else who trades stocks. There's a very reasonable argument that we don't want markets to operate faster than human perception. If you have to make a decision about selling something, placing a ground foor and minimum transaction time of say half a second isn't going to harm anyone who needs that liquidity for their business, or anything else that touches the "real economy".
To summarize: certain kinds of financial instruments seem to provide no value above and beyond letting well-connected actors to place (potentially ridiculous) bets. Using your money, one way or another - whether it's your farm, the mortgage on your house, or your pension fund.
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If we accept the above as true, we can go further on a limb and ask questions about why is the wealth that passes through financial markets so liberally redistributed to people in the industry? Some people talk about it being a function of volume, but individuals are rarely if ever liable. When do they stop providing a service, and when do they start skimming off the top?
HFT people will argue that they provide more liquidity in
the market - it's easier to sell your stocks because HF
traders increase the overall volume, etc.
A problem with their argument, (one of many) is that HFTs are not regulated market makers.
HFTs provide liquidity when the market's good, but you always have plenty of liquidity when the market's good. You only really need liquidity during a price crash, which is precisely the moment all the HFTs head for the exits, and the exchange seizes up.
HFTs are essentially a tax on stock transactions, and if you actually wanted that, why not have a legislative tax, rather than giving 5% to whatever stock trader has the shortest fiber optic cable to the exchange?
Charlie Munger, vice chairman of Berkshire Hathaway, argues that high-frequency trading is "legalized front-running".
I think it is very stupid to allow a system to evolve where half the trading
is a bunch of short-term people trying to get information one-millionth of a
nano-second ahead of somebody else. It’s legalized front-running; I think
it’s basically evil and it should never have been able to reach the size
that it did ... why should all of us pay a little group of people to
engage in legalized front-running of our orders?
Charlie, as a guy who regularly buys and sells large volumes of stock, is just talking his book. It would be great for him if he could make large transactions without the stock price responding quickly to this new information. But it would be bad for everyone he transacted with.
To make this concrete:
Say Charlie & Warren wake up one day and decide Company X is undervalued and that they want to by 5% of it. They start buying stock. In the old pre HFT days it would take a while for the market to notice all this new demand so they could get a lower price. But now HFTs are really good at noticing this so the price rises faster.
But wait you say! This is the "front-running" that Charlie is complaining about and that's bad! He's getting screwed!
But what if you were one of the people selling to Charlie. Before HFTs made the price faster you were the one getting screwed! There was all this new demand and you didn't know about it yet so you weren't getting as good of a price as you otherwise could have.
HFTs aren't front running. They just move the stock to it's true price faster than the humans doing the job before could.
HFT front-running isn't about faster price discovery. It's about getting quote data in advance of the consolidated feed and executing trades a few microseconds ahead of the order flow.
If I'm buying, the HFT buys ahead of me and resells it to me at a higher price. If I'm selling, the HFT shorts ahead of me and buys from me at a lower price.
This isn't about liquidity or efficient markets, it's about gaming the system through preferential access to data and executions. It results in higher prices for buyers and lower prices for sellers.
It's simply not possible to "short ahead of you". If I place an order via ETrade an HFT doesn't know about it until it hits their FIX/ITCH/OUCH feed (i.e., after it's already on the order book and possibly after it executed).
They cannot jump ahead of you except by offering a better price.
chris, you're right in the context of HFT stuff, but of course different matching engines have different rules.
There was a big trade for a while where people had different account types. the CBOT matching engine, for example, had customer orders prioritized over marketmaker or firm, so customers actually COULD jump the line.
Some companies had customer accounts specifically so they could insert orders in higher priority in the queue (the tradeoff is that customers pay for CXLs, but you can just do the math to see when you should be using which account)
to @panarky of the comment, its not on the order of microseconds -- the stuff people used to rip on were flash orders, which are exactly 30 milliseconds.
So @panarky has a bit of a point about knowing the order in advance, but its still damn hard to profit from it. The narrative of just front running trades by having order information in front is just not feasible because of the bid-ask spread (the flash orders are to try to help maintain some semblance of BBO consistency across exchanges)
So as yummyfajitas says, it's not possible to sell ahead (saying "short ahead" in that way exposes you as not really knowing the trade, btw) or buy ahead in a way that necessarily affects price.
"But what if you were one of the people selling to Charlie. Before HFTs made the price faster you were the one getting screwed!"
The sellers sell at their ask price (or at my bid), it's their decision to sell. If you offer to sell something to me at $10, I haven't "screwed" you just because someone else was willing to pay $11.
It absolutely is front running. Moving the price of a stock to your advantage because you know my intentions is exactly what front running is.
Front running is when a broker trades in front of his client. The broker has a fiduciary duty to act in his client's best interests. If I trade ahead of you because I can guess your actions, that's just me kicking your ass.
Incidentally, if it's acceptable for Charlie Munger to sell in such a way that others will suffer the price impact of his trade, why is it not acceptable for HFTs to do the same thing? In both cases, it's just one trader playing short term games against other traders in order to make money.
You can have the price react quickly without needing to invest in microsecond response times by having auctions every 5 seconds or so as suggested by Larry Harris.
Anyone connected to Direct Edge can send an order flagged as HideNotSlide. Everyone is playing on an even field with respect to that order type.
HideNotSlide does not cause an order to "jump to the top of the order cue[sic]." It preserves your order entry time at a price that is contra the NBBO if there is not an order at Direct Edge at the NBBO (if there is an order at Direct Edge at the NBBO the incoming HideNotSlide order is filled).
I doubt "HFT" would be dramatically limited by a transaction tax. I believe that it would lower trading volume by some amount and widen the bid/ask by some amount. The number of "HFT" firms and their trading habits would look mostly the same though.
You don't have to be a member of the exchange to trade there. You can connect through many outlets, some of whom offer a FIX (Financial Information eXchange) API. You can submit HideNotSlide orders through FIX and perhaps through your brokers' GUIs.
The point is that no special license or membership is required, although you may have to do some work to implement this type of order.
> The large investment banks actually have a code they can append to their orders so they can jump to the top of the order cue.
Source? I believe you but I'd like to be able to quote an authority if I'm telling someone else about this. I've gotten into this HFT debate with colleagues, and I'm pretty sure none of us knew about this nifty trick.
HFTs are not any more a tax on stock transactions than previous market makers. In many settings they actually do lower transaction costs. Just ask other market participants such as L/S hedge funds, systematic traders, mutual funds etc. In particular, HFTs drove many of the old school manual market makers out of business, or at the very least reduced their margins significantly.
The non-populist argument these days seems to be less about fast, electronic market making and more about whether there should be a fixed, minimum trading time, e.g. by discretizing trading into intervals of a certain length.
Any stock trade where the buy vs. sell of a stock is under 3 months is not investment.. In under a day, even more so. It will not be felt by the company in question in any meaningful way, and is simply a newer form of gambling. By taxing any income made from trades where ownership is less than a month at 100% we can create a more honest trading environment, where sane investment becomes a norm.
The fact is that would never happen. I'm all for investment.. hell, I'm all for gambling, sex, drugs and rock and roll for that matter. I don't think most things should be illegal... but labeling the stock trade and wall street as investment companies is ludicrous.
It's not an investment, but it doesn't have to be an investment to be useful!
Instead of making money by choosing stocks, market makers make money by providing a concrete service to the market: they make it easier to buy and sell for people who are investing. They are more like the merchants or shipping companies of finance, rather than speculators. And there is nothing wrong with this!
In fact, calling it gambling is just wrong: most market makers actually take on very little risk! While their actions are not felt by the company directly, they are felt by people who own the stock and people who either want to buy or sell it. And knowing that it's easy to buy or sell a stock makes people more likely to participate in the markets, which is definitely a good thing.
Also, it's very important to note that even non-trivial investment strategies do not involve buying and holding on to large blobs of stock for months. Instead, you likely want to micro-manage your portfolio following some sort of mathematical model every day to minimize risk and exposure. Again, there is nothing wrong with this! But it does involve quite a bit of buying and selling stock, and the liquidity created by market makers really helps.
Viewing the stock market as solely a means to invest for long periods of time is really missing most of the picture. Your suggestion would actually increase most people's risk, leading to more gambling rather than less--or just significantly less investment over all!
It's not investment, but it may be legitimate market making. If the only people in the market are investors, it is significantly harder for me to liquidate my stock when I need to and significantly harder for me to buy stock when I want to.
Not really. If there aren't investors willing to buy your stock within a few minutes, there won't be any HFTs willing to buy either. HFTs just bridge that gap in time, for a fee.
You said 3 months. Bridging gaps in time is useful and worth a fee, even at amounts of time significantly shorter than 3 months. I made no claim about all HFT being this, I complained about the metric you were using.
For a sensible and mature owner-manager partnership to flourish, investor holding periods need to be aligned with business planning horizons. Many significant projects need between 6 months and 5 years to come to maturity, and holding periods should reflect this pattern (according to the needs and nature of the business).
I would argue that investors with a 3 month holding period are actually exerting a pretty corrosive influence on businesses: emphasising a focus on the next quarter's results at all costs.
A company isn't affected by who holds the stock. If I decide that I don't want to hold a stock in a company building a bridge across a river, and sell it to Jack, why does that change the company's desire to finish the bridge?
Is there evidence that's actually what's happening? I hear a lot of complaints on the internet about a quarterly results focus, but I've never heard of shareholders actually telling a company to change tack.
Over the past two or three decades it has become increasingly common for large and institutional investors to regularly hold meetings with the senior leadership (and investor relations) teams of the companies with which they have (or are looking to have) significant holdings.
After all, the investor needs to understand the business strategy, the operating conditions, and the particular risks and opportunities available to that business. The company and (particularly) it's management have an interest in increasing demand for the stock, so they normally oblige.
The conversation is not one-way. Stock options mean that the personal financial interests of the senior leadership team are normally well-aligned with that of the investors, so all the parties to these discussions have a mutual interest in the performance of the stock.
Investors have a mandate to maximise return and minimise risk. They have a limited ability to predict the future; an ability which drops precipitously the longer into the future they look. Investing client funds based on unreliable long-term predictions would be an irresponsible dereliction of duty on the part of the fund manager. In addition, measuring the performance of fund managers is also notoriously difficult, so there is a very human need to get as much feedback on performance as possible as quickly as possible. All of these factors combine to exert incredible pressure on the institutional investor to focus on gains in price over shorter time-spans (months rather than years).
This interest and short-term focus will naturally come across in discussions between the investor (=owner) and the senior management in the company. It takes an unusually self-aware, self-confident and self-assured management team to recognize (let alone resist) this inexorable pressure.
There are anecdotal evidence of this regularly happening, but usually those are fair decisions: both strategies discussed are generally sound, if radically opposed. One is generally a cash-out option and is favored by influential raiders who want the cash flow to invest elsewhere; the other is a growth option that might be more about serving management’s ambition that the stakeholders' interest. But those debate are public, rare and not entirely nefast.
What I have seen far more often is smart decisions delayed to please the investors, or costly decisions taken, at all stages: before or during Series A, B or further, before or during an IPO, etc. The most common ones are related to HR: contractors costing double and won't be here when what the set up breaks rather than employees to set-up a strategic asset because, otherwise, accounting practices would show increasing long-term duties to said employees. More generally, many companies suffer from a lack of investment because of the short-term focus — this I can describe in details in repeated cases, for the dozen of more companies that I’ve worked with. The single exception was when investors used the product themselves and behaved more like end-users.
You can be a de facto market maker without any government regulation. Economically, a market maker is someone who moves the bid and ask closer, so that more people are willing to do transactions. They do this by deducing the true price, and they might do this through fundamental or technical analysis.
Providing liquidity in all situations might be useful, but it is an added bonus. If you don't do this, you are still a market maker.
By getting in before you on the seller. HFT arbitrages the price differential by means of moving faster than you can. Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01. Rinse, wash, repeat a few million times a day, and those two cents add up. And it's cost you (and the seller) a penny a share each.
The numbers are made up here, but that's the principle.
A limit order only specifies your price. Nothing keeps the HFT from getting between you and another long-term trader in that case. Which can have a few effects.
One is that the seller loses on additional value. The other is that the HFT has bought from a seller who would have sold to you, but sees a higher buy price and sells to that instead, so you miss your trade.
For low-volume traders these aren't huge issues, but for institutionals or others looking to make or exit a large position the costs can mount. Again: HFT wouldn't be undertaken if there wasn't value to be extracted in doing it, and that value is coming directly from other buyers and sellers, just as when you introduce a middleman to any other transaction.
HFTs certainly are making money. But they're making money by making the market. And they're making a lot less money than they used to which you can see because spreads have shrunk dramatically. This is because computers can do this job much faster and cheaper than the humans who did it before could.
It's the same kind of automation we've seen in many other industries.
Broker-dealer internalization, queue jumping, flash trading. Regulators are years behind the traders on methods.
Trading center proximity is a big one. The Internet travels at the speed of light (actually, somewhat less than that). Which is finite and within the bounds of algorithmic trading. The HFTs get pricing data before the general public, even if it's just a few thousandths of a second (5000 km is about 0.01 light seconds, 500km is 0.001 ls).
With HFT operating at the 250 microsecond level, 75 km is significant.
You have no idea how to actually write an informational comment rather than hinting at some received wisdom and greater general understanding without actually revealing any of it, wrapped in condescension which actually lands far of the mark and fails to address the points raised here, do you?
"Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01."
So, 2 possibilities, you don't say, but you are sending a limit order to buy at $100 or a market (or marketable limit, or fill-and-kill) order to buy at $100. Apparently, you seem to be suggesting that there is a seller in the market, presumably offering at $100. Now, you seem to be suggesting that the HFT sees your order before it hits the matching engine (nonsense) and also that they can somehow re-negotiate with the seller and get him to lower his limit sell to 99.99 (I'm not sure how, do they send goons around to kneecap him if he doesn't? All in the 20 milliseconds your order is on the way to the market?).
" and offers you $100.01"
...but let's assume that somehow the magic omnipotent packet-sniffing HFT knows your order is enroute to the exchange, can force market participants to lower their offers, now you're claiming that it can force you to buy at $100.01. Why didn't you send a limit buy at $100, if that's the price you wanted, you saw, and were prepared to pay?
>wrapped in condescension
If you want to write entire paragraphs about something you know nothing about, you're not really adding to the conversation are you? So you'll open yourself up to a little condescension.
Thanks, that's better than your first pass, though I'm still not buying the story. My social engineering effort worked though.
I'll freely admit I find this confusing. And that's with having studied this shit in school and worked in the financial industry (in trading no less).
There are a number of methods of getting inside or around the order book, most of which involve breaking rules. But the regulators aren't even playing catch-up, they're so far behind.
HFT is very time sensitive, operating at or within the 250 microsecond window -- that's the time a light beam takes to travel 75 km. So one way of jumping in on the order is being, say, a few thousand km closer to the exchange than some other trader.
As to limit orders (and you really haven't explained how the order book avoids this), by beating others to the trade on both sides of the order, the HFT can get in and spin the equity, taking a cut, or stealing your trade (you look to buy at $100, seller is at $99.99, HFT buys at $99.99 but finds a buyer at $100.01).
The point is that by inserting themselves between other traders, by virtue of speed, HFTs skim a proft. It's small (and was enabled largely by decimalization), but can be made up for in volume.
The saving grace is that the HFTs are up against one another (at least until they start colluding), so they're weaving complexity traps against one another that wear down the advantage. Though there's the risk of more flash crashes and other disasters resulting from processes they barely understand themselves.
You're still not getting it. You send your messages on a private link to the exchange. Then the exchange processes them (either puts an order in the order book) or matches a trade, and only then publishes that this has happened on the public market feed. At which point other participants can react.
This:
"So one way of jumping in on the order is being, say, a few thousand km closer to the exchange than some other trader."
...is silly. No one gets to jump in front of anyone. Being closer to the exchange allows you to react quicker to a public event, but not a private one (which you can't see). In fact, even if you could somehow see someone else's TCP packets departing, from point A to the exchange, and you were in co-location next to the exchange at point B, you'd still have to get the information in their packet from point A to point B, run decision logic on it, then dispatch your own orders to the exchange (point B to the exchange). Faster than their already in-flight packet could arrive. It would still be impossible. What you're talking about is a common public misconception, that somehow the HFT bogeyman sees your order before it arrives.
Relevant quote:
"He became convinced exchanges were providing such an edge after he says he was offered one himself when he ran a high-speed trading firm—a way to place orders that can be filled ahead of others placed earlier. The key: a kind of order called "Hide Not Slide."
Whether it is legal is highly questionable but it appears that exchanges indeed offer this feature to sophisticated traders.
Bodek is a failed trader, and one who apparently can't read exchange API manuals (here's BATS explaining it for him: https://www.batstrading.com/resources/features/bats_exchange...). Now he's trying to make money from sensationalism and poorly written books.
That aside, Hide not Slide orders are an interesting case. They exist only in US equity markets, and they're a great study in unintended consequences. US equities are quite fragmented (the same security can be traded on several different exchanges), so well intentioned US regulators introduced something called the NBBO (National Best Bid Offer), ostensibly to "protect investors" from getting a worse price on one exchange. What this meant is that different exchanges trading in the same product could never be "locked" - you could never have one exchange showing say 101 on the bid when another has 101 on the ask (because in theory then they are crossed and should trade). Pretend the tick size is 1 for following discussion...
This leads to a situation where every equity exchange in the US may be trading 100/102 (with an empty tick in the middle), but as long as one remaining exchange is trading 100/101, you aren't allowed to insert a bid at 101 on the other exchanges (since the interpretation of the rule is that this would be unfair on the resting 101 offer). But HFTs are all very keen to be the first to fill that 100/102 gap in the spread - to be the first on that new queue is an advantage since you get filled first. And obviously that one holdout exchange will soon get filled and the price will tick up. But the other exchanges legally can't accept a bid at 101 yet.
So exchanges started to either reject orders or "slide" them - you submit that 101 Buy and they slide it down to a 100 Buy. Which leads to this:
10 SUBMIT BUY@101
20 IF RESPONSE = "SLIDE TO 100" THEN DELETE, GOTO 10
All of a sudden the exchanges are being flooded with messages, as algos are pinging the exchange constantly wanting to put that 101 bid in. Which leads us to 'Hide not slide' - the exchanges promise to sit on your order until the NBBO ticks up and put it in the queue then. The problem is that these order types, while documented and available to all who are connected to the exchange directly, aren't usually going to be available to someone who is trading through an intermediary - a broker or some retail trading platform. So that's the story of how a well intentioned bit of regulation ended up disadvantaging US investors.
US equity markets are full of weird quirks like this, the NBBO needs to be done away with.
So ... the exchange processing the trade -- where's it getting its liquidity from? If it can't satisfy the trade internally, it's getting buy/sell orders from elsewhere, correct?
Or flip this around: instead of telling me how HFTs can't arbitrage their trades, tell me what's actually happening. Because HFT's like deepwater oil drilling: it's an awfully expensive hobby to be doing if there's no profit in it. Where's the profit? And who's that coming from? Because in the world of the financial market, it is a zero-sum game, where one set of traders extracting value means another set isn't getting it. It's not as if they're building widgets for a value-added proposition.
I've seen the HFT trade price-seeking patterns -- bandsaw and crop circle visualizations from NANEX (this is now a few years old, so ancient history, but):
The point is that by being able to generate thousands or millions of buy/sell orders, across a band of price points, the HFT is getting in on any movement faster than any slower trader.
You're also not addressing straight out fraud where book is open, which is what I understand queue jumping to be. It's one thing if everyone's playing by the rules. Something tells me that's not the case. Oh yeah. That's my former officemate doing time at Club Fed for insider trading.
In the simplest case, an order book is generated from all outstanding buy and sell limit orders, assuming none have crossed (if they have, the matching engine will immediately transact those orders). The price is discretized, so there is a minimum tick size, and each price has a FIFO queue of orders.
HFT provides liquidity to all other traders, including other HFT. They are paid in either the bid-ask spread (in the case that HFT is passive) or arbitrating bid-ask spreads between different exchanges, e.g. they aggress and take out an offer on exchange A which is below the bid on exchange B, providing liquidity to the standing offer on exchange A immediately instead of letting the prices disjoin.
The answer to the last two lines are the same -- there is no meaningful difference between a buy and a sell. The net effect is more liquidity than without any short term market making, for both market and limit orders (IMO market orders should simply not exist, but that's a small aside).
>Now, you seem to be suggesting that the HFT sees your order before it hits the matching engine
HFTs pay brokers for order flow so they get orders before they hit the exchange and decide to trade on them from their own book (at NBBO) or pass them on to the exchange. Besides jumping the order book at the exchange they get advance information on orders about to hit the market.
True enough, I was discussing direct market access. If you're going through a third party, it's up to you to vet them and make sure they are trustworthy. I agree almost word-for-word with Optiver's submission on payment for order flow:
> The prime example here is that of the collateralized debt obligation in which huge portions of the US mortgage market got sunk into.
The curious thing is that you can do the same thing with your "socially useful instrument" example. Suppose that instead of selling mortgages, Wall St. had used the same tactics to sell crop futures. They had gone to farmers who promised to provide more food than their land could produce in exchange for cash up front, then resold those contracts at a profit to "investors" and walked away.
What would happen? At first food prices would fall, as in the mortgage crisis loan interest rates fell, because the supply of food on paper has increased. This would cause consumption to increase: Lower price, higher demand. The demand would have to be met from current food stocks because you can't eat securities derivatives, so food reserves would begin to deplete. It would also cause future actual supply to be reduced: Lower price, fewer suppliers. The farmers who can't profit at the artificially lower price would go out of business and stop planting.
Then, next season, the contracts would come due. The farmers who promised more food than they could deliver would default on their obligations. Their inability deliver wouldn't be able to be met from food reserves, which had been depleted when the price was low, nor from other farmers, who declined to plant crops last season when they expected doing so to be unprofitable. Instead of the housing crash there would have been a famine.
...but the way CDOs were structured made it impossible to objectively value the risk behind the instrument.
The article you link to merely shows that under certain circumstances, a CDO market can become a market for lemons. Everyone already knows this, which is why the standard industry practice was for issuers/packagers to keep skin in the game - sell off the AAA tranches but keep the risky ones for themselves.
It was not impossible to objectively value them - they were simply valued incorrectly based on assigning low probabilities to the possibility that house prices go down.
Your claims about HFT are simply ignorant. No one has to pay the spread (which is lowered by HFT), you can always post orders at the bid/ask and use ALO orders if you want to avoid it. People choose not to because they don't want to accept execution risk.
> Using your money, one way or another - whether it's your farm, the mortgage on your house, or your pension fund.
When you borrow money in order to buy a house, it isn't your money that is being used by others. My mortgage got regularly sold to different entities, the only effect it had on me was I wrote the monthly payment check to someone else. The terms did not (and could not) change without my consent.
I'm a buy & hold stock investor. The machinations of HFT have no effect on me, they only really affect other HFT traders.
There is already regulation governing the minimum pricing increment ("tick size") for financial instruments.
It would not take to great a stretch of the imagination to imagine regulation covering the maximum frequency at which trades could occur.
We would have to decide what sort of delay we consider tolerable, then (perhaps) hold auctions at that frequency - perhaps once per millisecond, perhaps once per minute, maybe even once every 10 minutes?
I agree ... although chasing billionths-of-a-cent margins seems pretty pointless too. It is a good thing that there are lots of other options: Stochastic matching? Auction over order-book?
It's also a very broad question, kind of like asking "Is science good?". On the one hand, science has brought us all sorts of good things but it's also yielded weapons of mass destruction. (Ironically, Warren Buffet once famously - and presciently - described derivatives as "financial weapons of mass destruction"[1].)
> So, you enter a contract to sell your crop at a fixed rate long before harvest comes along. That's a future contract...
Technically (and pedantically), that's actually a forward contract, which is, admittedly, very similar in nature to a futures contract[2] (and, typically, a forward contract will often underpin a futures contract) and a perfectly excusable error to make. The reason I point it out is not to score a point but to highlight the distinction in order to illustrate how esoteric the financial markets can be.
Their esotericness/esotericity (clearly not real words but I think you get my point) means that the specialised knowledge and skills are highly valued. We generally accept that a ninja/rockstar engineers can be 10x as productive as an average engineer. The distinction is even more marked in finance - not only can a more knowledgable, better-skilled, more talented person make more money than someone who isn't as good, but the latter can end up actually losing large amounts of money (e.g. JP Morgan's London whale[3]). I learnt this the hard way just a few weeks into my (short) career as a trader when I made a very simple mistake and lost $16,000. Do that once or twice a week, and you'll easily end up down over a million dollars over the course of a year. To avoid "fat finger" errors, you need to be capable of being very focused for (in my case) up to 12 hours a day (or, at least, being able to switch from "relaxed, joking with your work colleagues" mode to "laser-focus" mode in a split second). Not everyone is capable of doing that. Some people can't handle the pressure. Others simply lack the brain configuration required to do it - they may well be smart, intelligent people - it's just that it's a very specialised job and some people's brains are going to instinctively better at it than others.
Add to that the fact that the financial markets are, by and large, a zero-sum game (which means that the best guys can actually take money off the not-so-good guys) and you have a situation where the top talent are able to demand (and end up feeling entitled to) the sort of pay packets mentioned in the original article.
It's a bit like Mayer hiring De Castro at Yahoo![4] - if he'd turned Yahoo!'s advertising business around, the company would have earned $600m more revenue over the past year, and a $60m pay package wouldn't have looked so crazy. If a bank hires a rockstar trader away from their competitor by offering a salary of $3m and he makes a $300m trading profit over the course of the year, it's a pretty good deal. On the other hand, of course, they could lose $300m and this was traditionally an asymmetric, one-way bet (i.e. if the trader made profit, he got a bonus but if he lost money, he didn't suffer any downside, which meant that he was implicitly incentivised to make big, dangerous bets) until new rules came in around claw-back provisions (so previous year's bonuses could be reclaimed if it turns out they were based on phantom profits) and paying bonuses partly in shares (thereby linking traders' fortunes more closely to their employers').
I still work in finance but back on the technology side of the fence (I'm basically a freelance product manager for an in-house piece of software that's used by a couple hundred people globally). I spend 25% less time at work than I did as a trader (i.e. 9 hours maximum instead of 12), the work's a lot less stressful and I find it interesting/challenging/fun. Whether I'm still doing it in six months time (as opposed to, say, working for a startup) is anyone's guess but the perceived social worth (or, more accurately, the lack thereof) of finance in general wouldn't be a factor in that decision.
If you only place limit/stop orders, and are willing to wait for a trading partner, you don't pay the HFT for liquidity. If you place a market order, you are buying liquidity. HFT is simply a private tax on the ignorant and stupid.
Google and read up about "adverse selection". You are wrong, a retail investor/trader should never (ever) place a limit order. You have negative expectation on those orders, since you are (on the whole), slower and more naive than the other participants in the order book, who are either machines with response times measured in micros or humans who are more devoted to watching the market than you (since it is, after all, their job).
To give an extreme example, let's say you stick a buy order for some equity at the best bid, and a large event happens shortly afterwards (say the employment numbers, the non-farm-payrolls are released). Consider two scenarios. a) Number is good, market takes off, you didn't get filled and you've missed out on profit you could have made had you just crossed the spread. b) Number really bad, everyone else is already out of the market, or fast enough to get out of the market, but your limit order is sitting there like a duck in a shooting gallery, gets filled instantly but the stock tanks well past that level, and you're already showing a loss.
Your expectation on a limit order is negative. It is more likely to get filled when you don't want it to get filled - this is adverse selection. Unless you really do have the tools to compete.
Even this assumes that you are directly accessing the market, it is even worse if you go through a broker. They get up to all sorts of shenanigans, including what they call "price improvement", where they'll jump in front of your limit order by some tiny increment.
Again, yes "liquidity providing" might have some value, maybe. But it's just really hard to see it having anywhere near the social (or simply wealth + capital-generating) power, of say, nurses/medtechs, schoolteachers, effective policing, sane environmental management etc.
That was the original author's point (give or take a few work categories, which I'm taking the liberty of throwing in for the sake of illustration).
Wallstreet has so much diverged from the real world that their financial innovations benefit world as much as invention of new casino game. On the other hand their inventions can hurt economy a lot because they invite to their casino people who apart from gambling use their money for developing economy. They lure them with high and fairly sure profits, but since investing in financial instruments is nothing more than gambling, probable high profits are offset by fairly rare but absolutely devastating crashes that damages players that haven't completely parted with real world economy yet. And that's really harmful.
The statement from the article is basically true. Credit derivatives can be useful to transfer risk from one party to another and may make the financial system slightly more efficient but if they ceased to exist the world would continue pretty much the same. You could argue that the net real effect of derivatives is to transfer money from the real economy to the pockets of bankers and derivative traders and so the overall effect of being rid of them would increase global wealth as some of the former traders would spend time trying to form tech startups instead of trying to get money from your pension fund into their pockets by selling said funds derivative contracts.
It might be true that credit derivatives add some value to the system, but derivative traders making $8 million a year is not representative of the value they are adding. It is merely caused by the market inefficiencies due to obtaining the required skills and banking licenses and such. And banks are happy to keep it that way, all these extra regulations mostly serve to enshrine their positions.
Wow. Fractional reserve lending is "innovative"? That is hilarious, absurd, and unnerving at the same time. An entity literally creates money out of thin air, and then loans that made up nothing at interest? That is "innovative"? More like criminal.
Oh right, and then said entity can't actually allow 10% of all withdraws on itself else it is called a "run" on the banks and they close their doors.
What sort of innovation do you see here other than a banking cartel that completely controls the money supply?
Comments like yours make me sick because it shows the brainwashing the banking cartel has implemented is complete from the bottom up and unifying; you now have people like you strutting around calling criminal activity innovative.
When banks create money it is innovative, when the little guy creates money, it is counterfeiting. Pull your head out of the banking cartels ass for a second, and take a breath of fresh air.
If a high-powered lawyer who makes $1,000 an hour chooses to take an hour off to help clean up litter on the beach, he's wasted the opportunity to work overtime that day, make $1,000, donate to a charity that will hire a hundred poor people for $10/hour to clean up litter, and end up with a hundred times more litter removed. If he went to the beach because he wanted the sunlight and the fresh air and the warm feeling of personally contributing to something, that's fine. If he actually wanted to help people by beautifying the beach, he's chosen an objectively wrong way to go about it. And if he wanted to help people, period, he's chosen a very wrong way to go about it, since that $1,000 could save two people from malaria. Unless the litter he removed is really worth more than two people's lives to him, he's erring even according to his own value system.
If he feels it's unfair that he makes so much more many than others, he should make even more and give out what he think is enough to make it fair.
Statement fails to take into account all factors by using a contrived example. It isn't just about cleaning the beach. It's about cleaning the beach in the same way as everyone else. It's about a long-term sustainable solution. What happens when the lawyer is gone? Should you find another funding lawyer or is it better to have everyone get into the habit of cleaning the beach? Then once it becomes a community activity, it doesn't matter if the lawyer exists or not. It becomes a thing that people do.
To address your second comment, we must consider the possibility that people are interested in long-term solutions to problems. What happens when the person who thinks that his profession makes too much money has given away all his money? Is the problem fixed?
The world isn't binary. When someone says "I want to help the poor", there's a world of meaning you can gather from context. We aren't AliceBot, we're humans. And humans are fairly good at understanding statements like that. After all, one way to help people is to kill oneself in a manner that preserves organs for donation, but you'd dismiss this kind of meaning even coming from a down and out guy who makes nothing and has no family. Why? What's he implying when he says he wants to help people?
That sounds completely logical, but misses the human element.
Your story only works if the people making all the money actually spend it on helping others. Most of the time, they do not. One of the things that will trigger people to charity and generosity is going out and doing some charitable work on their own. It lets them see the results, show them the personal satisfaction that can be gained by it, and sets them up to have the desire to contribute in other ways.
I've long since grown tired of these sensationalist, populist, polemical, self-flaggellating, attention-seeking, pseudo-confessionals by ex-bankers (usually failed ones, although they'll rarely admit that, preferring to portray themselves as having quit for moral reasons, rather than having been unceremoniously fired), getting all angsty about their previous life as an evil, greedy, detached-from-reality monster. Geraint Anderson, Polly Courtney, Tetsuya Ishikawa, John Rolfe and Peter Troob - they're all just pale imitations of Michael Lewis's "Liar's Poker" (Frank Partnoy's "FIASCO" is a notably less-pale imitation), feeding the media's seemingly-endless appetite for new scandalous revelations about the behaviour of people who get paid lots of money.
Seriously. Enough already!
Disclaimer: I was an evil, greedy, detached-from-reality monster in a previous life.
So I guess everyone marketing a book is a phony? You never learned anything valuable written by someone who marketed it and believed in it?
I though I was cynical ... you Sir are the King.
Yay, more villifying "Wall Street" and fueling the "Wall Street vs. Main Street" fire, and suggesting that it's somehow noble or good to not want to be rich.
I think everybody should want to be rich.
I've tried poverty and in my opinion - it sucks. It sucks big, steaming donkey balls.
The desire to make more money, to improve one's "lot in life" and to succeed, this is a Good Thing. Because a few assholes go too far in some ways, or do bad things along the path, does not change the fundamentals.
You can be rich and unhappy, or poor and unhappy. Given a choice, if I'm going to be unhappy, I'd rather at least be rich.
No one should feel any need to apologize or feel guilty about wanting to make money, even lots of money. If you want to be a fucking billionaire, go become a billionaire. Just feel guilty if you lie, or cheat or steal, or otherwise do unethical things to get there. And remember that having more money doesn't make you a better person, or intrinsically more valuable.
As has been stated... The derivatives trading business was a prime culprit for the crash of 2008 so I think it is fair to say that some lying, cheating, stealing went on and the subsection of finance the author was involved in was complacent in it.
Also being rich vs poor, and Wall St vs Main Street, are not the same thing by any stretch of the imagination. You can become rich without working in finance. And you can hate Wall St's culture and also be rich.
I don't think that all the people who are pissed about the financial crisis are poor or that they think being poor is noble. That seems like a pretty false dichotomy. Being poor does truly suck!
I think the main issue the author is pointing out is how ignoble it is to be unhappy with a 2mil bonus for a job that really isn't that important in the big scheme of things. 2mil is a lot of money for the vast majority of people and bitching about it just makes you out to be an asshole. If that is a cultural issue with that section of finance then that seems like a legitimate concern.
As has been stated... The derivatives trading business was a prime culprit for the crash of 2008 so I think it is fair to say that some lying, cheating, stealing went on and the subsection of finance the author was involved in was complacent in it.
Yes that's been stated, but I wouldn't say that it's been proven. There are a LOT of theories about what did and didn't happen as part of the 2008 financial crisis and in the run-up to it. For a take (from an insider) that may be a bit different from some of what has been said elsewhere, read John A. Allison's The Financial Crisis And The Free-Market Cure. Not saying Allison's take is 100% correct, but I just want to point out there are are certainly different points of view on that crisis.
I don't think that all the people who are pissed about the financial crisis are poor or that they think being poor is noble.
Fair enough. I didn't read TFA as being mainly about the 2008 crisis specifically, but that could be a mistake on my part. I do tend to generalize a bit as well.
I think the main issue the author is pointing out is how ignoble it is to be unhappy with a 2mil bonus for a job that really isn't that important in the big scheme of things. 2mil is a lot of money for the vast majority of people and bitching about it just makes you out to be an asshole.
I can (and do) agree that complaining about a $2MM bonus makes you something of an asshole, especially from some points-of-view. I think what bothers me about these articles is the implicit suggestion that "something ought to be done", which leads to the idea of more regulations, more laws, more rules, more restrictions, etc., which I believe - by and large - are counter-productive.
Again, see the John Allison book... if one buys his angle (and I mostly do), there's a strong argument there that it was government policy and the behaviour of government regulators, things dating back to the LBJ era, if not earlier, that ultimately led to the 2008 crisis. Anything that reads as an argument for more government involvement evokes something of a visceral reaction from me, since I am a proponent of laissez-faire.
It also frustrates me when I see people seemingly painting a picture of "wall street VS main street". I don't think that's accurate at all, and I think it's an unhealthy attitude. "Wall Street" and "Main Street" are just different views of the same system. The people of "main street" can certainly leverage capital markets to build wealth... you don't have to be a bigshot wall-street insider to do that. And, in fact, many pension funds, university endowments, etc., are heavily invested in "Wall Street" which means that many people ultimately do benefit from growth in the markets, even if they aren't day-trading or investing as individuals.
Of coure I'm not saying that everybody on Wall Street is perfect, or faultless or anything. I just think it would be better if everybody saw Wall Street as something they can take part in and benefit from, not as some mythical enemy.
There are lots of insiders who think that the issues with derivatives market were the cause... In fact the commodity futures trading commission more or less said that their evaluation was that there was a concerted effort to use derivatives to obfuscate risks and for the most part caused the issue.
That is fine that one guy wrote a book about the crisis. And it is very nice that he decided to pass the buck on who was at fault by using the stale "Big Government Is Bad!" and "Any Regulation Is Big Government!" lines. But when the group in charge of looking after derivatives (ICE Trust, an industry self-regulatory body), that is independent of the government, comes out and says that after looking into the issue there was a fault with the actual system... I tend to give them a bit more credit... Perhaps everyone should just believe John Allison and his incredibly strong (Ayn) Randian ideological bent though?
Also you seem to be missing the point on the Wall St. vs Main St. thing... The bigger issue to most is that somehow Wall St. firms are 'too big to fail' and the little guy (read: everyone else) had to give them a huge bailout because they gambled and lost. In the eyes of most, its as if they had to pay for someone's trip to the casino, out of their own taxes. It's not about being able to leverage capital markets... It's about having to pay for your losses yourself, rather than having everyone else bail your ass out to the tune of billions of dollars. Taking all of the risk out of the system for the big boys, while it still exists for everyone else seems pretty BS (especially if you're part of 'everyone else').
Edit: Wall St. isn't 'bad' but the way it shook out this time was utterly bullshit and people have the right to be angry and adversarial about it.
There are lots of insiders who think that the issues with derivatives market were the cause... In fact the commodity futures trading commission more or less said that their evaluation was that there was a concerted effort to use derivatives to obfuscate risks and for the most part caused the issue.
Again, I'm not arguing that it hasn't been stated, or suggested, or argued that "derivatives were one of the big causes of the crisis". I'm arguing that it hasn't been proven, and that there are other, credible, competing views. And even to the extent that derivatives might have been a significant part of what happened, one can question if they were the cause - or whether there might have been "upstream" causes which pulled the derivatives trading along for the ride.
That is fine that one guy wrote a book about the crisis. And it is very nice that he decided to pass the buck on who was at fault by using the stale "Big Government Is Bad!" and "Any Regulation Is Big Government!" lines.
A lot of people wrote books about the crisis. But from your discussion here it seems to me that your mind is made up regarding what did or didn't happen, so this discussion is probably pointless.
Perhaps everyone should just believe John Allison and his incredibly strong (Ayn) Randian ideological bent though?
Are you suggesting that? Because I'm not. And what, exactly, does Rand have to do with this? Ideology is irrelevant, an argument is sound (or not) regardless of the ideological orientation of the initiator of that argument.
8Also you seem to be missing the point on the Wall St. vs Main St. thing... The bigger issue to most is that somehow Wall St. firms are 'too big to fail' and the little guy (read: everyone else) had to give them a huge bailout because they gambled and lost. In the eyes of most, its as if they had to pay for someone's trip to the casino, out of their own taxes.*
Oh, whoah, whoah, whoah... you seem to be assuming that I approved of the bailouts. Absolutely not. I was as angry as anybody you're going to meet about that bullshit. And yes, that particular aspect of the whole situation, the "why should I bail you out because you made bad choices" line of thinking, I mostly support.
* It's about having to pay for your losses yourself, rather than having everyone else bail your ass out to the tune of billions of dollars. Taking all of the risk out of the system for the big boys, while it still exists for everyone else seems pretty BS (especially if you're part of 'everyone else').*
Absolutely. But I see that as an indictment of the corruption in our government, and the "crony capitalism" we have going on, not as an indictment of just "Wall Street" in and of itself.
> The desire to make more money, to improve one's "lot in life" and to succeed, this is a Good Thing.
One of the key points of this essay is that making more money doesn't necessarily improve one's quality of life. The author clearly talks about at age 25 being financially secure and wealthy, so his pursuit of additional wealth wasn't really about an increase in quality of life.
> You can be rich and unhappy, or poor and unhappy. Given a choice, if I'm going to be unhappy, I'd rather at least be rich.
Wealth and class aren't about binary choices. There are levels of income that are wholly satisfactory for an individual's life that still classify that person as not rich.
> No one should feel any need to apologize or feel guilty about wanting to make money, even lots of money. If you want to be a fucking billionaire, go become a billionaire. Just feel guilty if you lie, or cheat or steal, or otherwise do unethical things to get there.
Is it even possible to be a billionaire without exploiting others? Even if so, is it right that you can be a billionaire while there are more empty homes each night in the US than the homeless population? Is it right that you can safely eat anything you like while others have to make sacrifices and choices because of political cuts to SNAP? The answer is clearly no. In this way, pursuing money for wealth's sake is unethical.
Is it even possible to be a billionaire without exploiting others?
Why wouldn't it be? Wealth is created, and if you can create a billion dollars in wealth, then so be it.
Even if so, is it right that you can be a billionaire while there are more empty homes each night in the US than the homeless population?
Depends on what you mean by "right". Is that a troubling, even disturbing situation? Yes, I would find it to be so. But is any particular billionaire (or any other particular individual at all) somehow obligated to fix the homelessness problem? No.
Is it right that you can safely eat anything you like while others have to make sacrifices and choices because of political cuts to SNAP? The answer is clearly no.
I would disagree, again with the caveat that it depends on what you mean by "right". I think I would rank that situation as "unfortunate", and I think we all wish the rich would do more to help the less fortunate. I know when I was dirt-poor, living below the poverty line, I resented the rich a bit, so I get this mindset. But as I've moved through life and seen what hard-work and determination can accomplish, and become more comfortable in my own skin, I find that I no longer cherish the idea of handouts greatly, except for the real edge cases: People who literally cannot fend for themselves - the elderly, children, people who are physically or mentally disabled, etc.
In this way, pursuing money for wealth's sake is unethical.
I guess this also depends on how you define unethical. Is a really rich person who does nothing to help the less fortunate a huge asshole? Arguably, yes. But is that the same thing as behaving unethically? I wouldn't say so. But I expect we have fundamentally differing worldviews on some basic issues, so I'm betting we'll always disagree on this.
You can't just "create wealth" like magic. You have to do something to build wealth. and for billions of dollars you either have to do a great deal of something or do it to an incredible degree more successfully than someone else. The question is are you going to screw over someone else (or even a large group of people) to make that happen in a society where the next biggest fish probably has little compunction about doing so.
Its a rhetorical and philosophical question really, but your answer that you can create wealth so you don't have to exploit anyone, isn't even a thoughtful attempt at an answer. The ideas don't even touch each other.
>>>"But is any particular billionaire (or any other particular individual at all) somehow obligated to fix the homelessness problem? No."
As you get wealthier, your ability to affect society expands. I'd argue that, in the same way one can feel responsible for members of your family, society is your larger family. Humanity, an even larger one. Perhaps a wealthier individual should feel as though more of society is their 'family' as he/she gets wealthier — and treat them as kin.
Instead, what you often find is self-involved individuals becoming more and more distant from their society as they get wealthier (large households with gigantic yards, vacation homes, remote travel).
>>One of the key points of this essay is that making more money doesn't necessarily improve one's quality of life.
No, actually the article says addictive preference towards money doesn't improve quality of life. Not having lots of money. Having lots of money nearly undoubtedly increases your quality of life.
>>There are levels of income that are wholly satisfactory for an individual's life that still classify that person as not rich.
By QOL here we're talking about happiness. After a certain point (once you have the things you want & don't have to worry about things) more money doesn't bring more happiness. Hedonistic adaptation crushes this down further.
That is an interesting question about being a billionaire without exploiting anyone. I'm genuinely curious about that.
Not that I think being a Billionaire automatically makes you an asshole. I'm just curious if that is possible just from a logistical standpoint. Somewhere along the line someone gets screwed right?
>>That is an interesting question about being a billionaire without exploiting anyone.
That question actually has deep philosophical implications. I think the net content of evil and good has to be cancel out at a social level completely for the society to go in total social harmony.
So there has to be in some way a balance of evil and good in any society for it even to survive.
There are various ways to be a billionaire without exploiting. Maybe the cleanest is if you make something that people think is worth that eg JK Rowling and the Potter stuff. Although she's given some to charity.
That is an interesting one I hadn't thought of. Artists creating art (or other creative works) and making it big. Good one! It doesn't all have to happen as a cut throat business transaction sort of thing.
Some social science guys would say that this is true for every business - since you're operating in an exploiting system(capitalism) ,someone is bound to get exploited.
There is more per-capita wealth today then there was 1000 years ago. This is despite there being far more people today than there was 1000 years ago. Therefore it is possible to increase the total wealth in the world.
Depends how you define "wealth". If by "wealth" you mean "money", then more money can be printed (not that you'd want to do this). If by "wealth" you mean goods or services, more of those can be produced. I'm not really sure there's any definition of "wealth" that's zero-sum, except maybe "land".
I don't really disagree, but: You write as if the only options are "rich" and "poor". It's possible for the following two things both to be true: (1) Being poor sucks big, steaming donkey balls. (2) Being rich (as opposed to not-poor) is, for one reason or another, not a wise thing to aim for.
As it happens, I think #2 isn't correct, because given the way the world is (a) being rich is the only way to be reasonably well assured of never being poor, and (b) there are a whole lot of people in the world who are desperately poor, and if you care at all about them then you have a use for an unlimited quantity of money, namely sending it their way.
But in a less messed-up world, I think it would be eminently reasonable not to have a strong preference for being rich over merely comfortably off, and if the former takes a lot more work or risk than the latter then it would be reasonable not to bother.
I don't really disagree, but: You write as if the only options are "rich" and "poor".
True... in the name of brevity, and perhaps out of haste, I did generalize a bit. And the two points I mean to emphasize are:
1. Being poor sucks (I think we can all agree on this)
and
2. There's nothing intrinsically wrong with wanting to be rich, even "dirty, rotten, filthy stinking rich".
In the case of (2), I posit that the desire itself is fine, but the actions you take to try and achieve that end, may or may not be noble, just, good, or ethical.
I'm uncertain about the strong form of your #2, for the following reason.
Suppose you desire to be a billionaire (and stay one -- it's not that you want to get $1B so that you can give most of it away to deserving recipients, or use it to lobby governments to improve the world).
In particular, you would prefer to have $1B than to have $0.5B in your hands and $0.5B transferred to the world's poorest people.
The thing is, half a billion dollars can do a lot of good. A typical estimate is that you can save a life (i.e., something like a life's worth of quality-adjusted life-years) for a few thousand dollars, if you're happy for it to be a life in what used to be called the "third world" and if you take care to put the money where it can be used most effectively. Let's be conservative and suppose it's $10k/life.
So our hypothetical would-be billionaire would rather have $1B than have $0.5B and (5e8/1e4) = 50,000 Africans' lives saved.
I'm sure it's very nice to be a billionaire, but damn.
Something like this sort of prioritization of one's own welfare applies to pretty much all of us, of course -- would you rather have a car or save a life? would you rather have a slightly larger house or save ten lives? etc. And maybe this means we're all monsters. But, so far as I can tell, the difference in personal well-being between having a billion dollars and having half that is really small, and the difference that money could make to the lives of others is really large, and it does seem extra-specially monstrous to prefer that really small difference to saving tens of thousands of lives.
So I really do think there's something morally iffy about a very strong desire to be dirty, rotten, filthy stinking rich, in a way that there isn't about a desire to be merely rich. Wanting to have, say, $10M seems to me morally quite a different sort of thing from wanting to have $1B.
Of course if you want to have $1B and then give most of it away then, please, go for it. As long as you select the recipients of your largesse with some care. Likewise if you have other plans for your billion that involve having beneficial billion-dollar-sized impacts on the world. Fund important scientific research, bribe politicians to do things you think are valuable, whatever. What strikes me as problematic is wanting to have and keep all that money. You don't need it that badly. Really, you don't.
("You" above, of course, doesn't mean you personally.)
[EDITED to add one more remark (because the above wasn't long enough already). I'm assuming that "want" means something like "seriously intend, to the best of your ability" rather than just "find yourself with some sort of desire". People want all kinds of things and that doesn't have much moral significance until they start actually trying to get them.]
I think the problem being addressed in the article is not about wanting to be rich, but rather the question "how much is enough?"
For example, in the movie "Wallstreet", Gordon Gecko gets asked this same question, but he can never truly answer it. If a man who gets to his position, makes millions of dollars, and has the mental capacity to make a ton of business decisions daily, can't answer this simple question- that's definitely a problem.
Surely, for the average person $1.5 million is considered "rich". To keep making money for the sake of making money, is clearly an addiction, which (as mentioned in the article) is supported by our culture of excess.
I agree with you, I just don't think it's fair that these assholes on wall street can make 4 million dollar bonuses at age 30 for getting lucky with gambling other people's money.
I think it's great for everyone to have the desire for wealth, as long as you are making your money in an honest, value-producing way. I don't think derivatives hedge fund gamblers are honestly earning their pay.
The only thing that can stop them is financial education of the public. The stats show, year after year, that the vast majority of hedge funds lag the market---and get paid massive fees to do so. Someone has to be paying for these bonuses, and that someone is you--if you buy mutual funds or other high-fee actively managed funds.
That's why I boycott even my 401k as there aren't any passive index funds for me to choose.
It's also strange that this kind of hate is specifically focused on Wall Street types, much less so than against the Elon Musks, Steve Jobs's and Bill Gates's of the world, which could also easily be described as fanatical and addicted to wealth and success.
I think you're missing one of the author's implicit underlying messages.
Wealth is awesome; no doubt about it. But, as you are accumulating wealth, are you simultaneously creating value? Personal wealth and value creation don't always go hand-in-hand.
Also, as the author (and commenters) pointed out, this isn't a reflection of all of Finance. Stocks, bonds, future, options and other derivatives are essential for growth. We will always need ways to finance investment and tools to manage the accompanying risk. The author was saying that he was getting rich by trading credit default swaps (and probably synthetic CDOs), which -ultimately- played the largest role in destroying massive amounts of value post-2008 because of the sheer volume at which they were being traded (and because the securities that the CDSs were insuring were backed by subprime loans).
Honestly though, you don't have to know much about the 2008 crash to recognize the weakness of your argument. Elon Musk, Steve Jobs and Bill Gates may be (or may have been) addicted to wealth and success. But they accumulated wealth by creating innovative products.
The same could not be said of the typical fixed-income trader circa 2007.
Yay, more villifying "Wall Street" and fueling the "Wall Street vs. Main Street" fire, and suggesting that it's somehow noble or good to not want to be rich.
It's somehow noble or good to not want to be rich after you've become so, is the cliché.
I am just wondering, are these Wall Street traders smarter than an average techie working in Silicon Valley ? Are they so irreplaceable that they are offered so much salary and bonuses ? It just doesn't seem right. I am afraid to even ask for 150k salary in SV for the same amount of cerebral work.
My impression is that traders mainly have a much easier time quantifying their value. When you can say "look, I literally made $10,000 today and $8,000 yesterday", it's easy to negotiate for a significant chunk of that in compensation. Your leaving would have a very direct effect on the bottom line.
As a software developer, the value you provide is not quantifiable like that. Everyone works on the product, sure, but everyone is insulated from the actual money being made. Who is to make how much? It's a difficult question, and it also lets companies get away with paying quite a lot less--especially to the top performers. This also makes salaries (and, more importantly, bonuses) far less variable in software.
So it seems you are better off working in a profession with a very clear quantifiable performance metrics. Software development is not one of them unless you work for your own company. I am curious about making a list of professions that have quantifiable performance metrics.
You can use software development to achieve very quantifiable results for companies. If you do, there are a variety of ways to turn that into what you want out of life. One avenue of many is hanging out your shingle as a consultant and charging what your empirical results suggest you can get away with. (I've been beating this drum on HN for a few years. The PG essay on wealth, linked in a sibling comment, is probably the single most instrumentally useful thing I've ever read on HN.)
Sales: the highest paid people at an enterprise software company, excluding people who joined really early and have stock grants to match, are the commissioned sales force. I met a gentleman who doesn't speak Japanese who nonetheless was I Can't Believe He's Not Tony Stark's #2 sales rep in Japan. Let me throw out a number for sales picked out of the ether: $50 million in a year. Let me throw out a second number, picked from the industry: 6% commission rate.
SEO: Most of the really good ones work for themselves rather than working at an agency or an in-house SEO team. I am friends with a couple of them. One once lamented his lack of programming skill, said that I was the most talented marketer among people with programming skill he knew, and made me this proposition: "You would be a very, very effective black hat. I'll stake you with a million. You pay me half of what you make." (I didn't take him up on it.)
Bloggers: The overwhelming majority make nothing. Then again, most are not running businesses. There are some businesses which have a blog as one portion of the business which are Quite Lucrative Indeed. One I'm aware of has revenue roughly equivalent to an enterprise software company with a few dozen employees. (Again, though, the blog is a small portion of that business, even though readers might not know that.)
>>You can use software development to achieve very quantifiable results for companies.
Can you direct me to books / resources to understand more in depth what you are talking about here. I have read what you are saying many times but never quite get it. I am struggling to understand why would someone want to pay me % of their profit when they can hire some programmer for $50/hour. Is it about how you present yourself to the client s or types of clients you go after ? I am working as a freelancer and all I am getting is very budget sensitive clients who doesn't want to pay more than their cleaning maid.
Far be it from me to speak for Patrick, but generally the sales pitch for this sort of arrangement does not sound like "Hi, I'm a programmer. I'll build anything you want if you pay me 2% of your company's profits this year." It's more like "Hi, I'm a business consultant. I possess a specific set of skills which involve using software to increase profits for businesses such as yours, often by as much as 5%. My services cost an amount which is comparable to 2% of your current annual profits." (The numbers in that example were picked at random, but obviously the return needs to be higher than the investment for things to work.)
In other words, it's pretty uncommon (and generally ill-advised, IMO) to ask for a "% of profit". What you are doing is anchoring your price tag against the value you can create, instead of the time you spend. (This is somewhat muddled by the fact that consulting engagements are generally billed by multiplying a dollar rate with the amount of time over which the engagement took place, but the only number that matters to the client is the one at the bottom of the invoice. It is the consultant's responsibility to find clients for which that last sentence is true, and to make sure that they are able to consistently generate positive ROIs for those clients most of the time.)
Like Napoleon mentions in a sibling comment, you're typically not asking for a percent of profit directly, but rather for a weekly rate which is at a substantial premium to $50 an hour. (I've billed at $30k for a week before and pitched successfully at $50k.) A $60k engagement for my typical client wouldn't represent 1% of their profits -- many of them spend more on sandwiches in any given year. (If lunch as a perk costs $3k per employee per year and you have 40 employees... yep.)
Yes, it is extremely important that you're pitching the right sort of clients and that you're proposing to do something which meaningfully impacts their business. My typical client towards the end of my career was a B2B SaaS company with $10 to $50 million in annual sales. Bringing me on was generally not their #1 activity in any given year -- after all, they all have dozens of full-time employees, so they can do lots of things in any given year -- but it was generally for an initiative with a fair amount of strategic importance on, typically, a product which everybody knew would make serious bank if the initiative worked out.
If you had come up to me and said "We're building an app and need an extra Rails programmer" I'd have said "Cool, I keep a list of folks I like. Let me hook you up with someone." rather than attempting to get that business. Like everybody else who is Good With Computers, I occasionally get pitched on "Hey my aunt has a catering business, maybe you should make her a website?" That will never, ever happen. By comparison, if you'd recently experimented with A/B testing a bit on your $X million a year SaaS product and had increased sales by 5%, I would be very, very interested in helping you find the next 5 to 15%.
If you're continuing to find very budget-sensitive clients, how are you prospecting for them? How are you qualifying them? How are you pitching them?
There are many ways to prospect for clients which will get you lots of crappy leads, like e.g. looking for gigs on Craigslist.
Qualifying clients is an art. You don't have to proceed directly to the "prying" questions like explicitly asking what the budget for a project is. Just ask basic getting-to-know-you questions like what their core line of business is and how many employees they have. If their core line of business is retailing Beanie Babies and they have two part-time employees it is unlikely they can afford professional services. If, on the other hand, they have two dozen engineers on staff, they probably can write any check you can currently envision asking for.
What are you selling them on? If you're selling them things that can get delivered by any other freelancer who speaks your language, stop doing that. Start only going after engagements which, assuming project success, meaningfully increase the revenues of their company. Get case studies about how you've done that previously. Make it mandatory that you build in metrics tracking into all your projects, so that your clients know the ROI you are getting (and so you can quote, in broad terms depending on the specifics of your relationship and legal commitments, the sort of ROI your projects have recently generated.)
This is gold. It will take me some time to digest it and actually turn into actionable items but Thank you for taking time and writing this. Much appreciated. I wish there was a training course for this :)
The trivial conclusion is that starting your own company is how to be accurately rewarded for your work. But that assumes there's no way to better measure employee performance. It seems like measuring it for engineers and programmers is an impossibly hard problem (At least, that's implied from all of the well-run organizations that have given up or failed miserably on quantizing performance over the years.). However, I would like to see some creative attempts at making teams better at this.
We're talking about risk/reward tradeoffs a lot in this thread. Doing a startup vs. working as an employee is one of these tradeoffs. If you do a startup you'll get paid closer to what you're actually worth, but maybe you don't generate any real wealth and go bust and get paid zero. If you're an employee, you get to hedge that risk against taking a small fraction of the wealth you generate.
It does if you trade your own money, and I'm sure that's more lucrative than working as a trader, but it's easier to measure a trader's output I imagine.
It's not a hard problem at all. We just need a way to measure code against the money it generates/loses. This should actually be a relatively trivial problem to solve. We have static analyzers, funneling metrics and code coverage tools; this just seems like an extension of that.
I am sure if there was profit to be made from these kind of performance metrics for Programming, you would see entire industry spring up to solve that problem.
>>Are they so irreplaceable that they are offered so much salary and bonuses ?
They are doing it to us, as we do to many professions. This whole thing of 'Some professions just can't benefit from economics of scale' come to my mind. Just like how the guy flipping burgers makes minimal economic impact compared to you and I, we make a minimal financial impact compared to these guys.
But there are a lot of areas where you could disrupt this theme of work. Profitable side projects, start up's, bootstrapping and stuff like that can help us out here. But the point is most geeks and nerds are to a great extent very naive when it comes to money matters. We are poor in negotiating skills and we buy into this loyalty thing too easily.
I don't know of one single VP/exec/CEO who wouldn't leave their job for a bigger bonus/paycheck/options, yet if an engineer did it- You would have see these people shouting 'greed' from top of the buildings.
I have a brother high up in a quant lab that accounts for up to 5% of the daily volume on the NYSE. The short answer, from our experience, is definitely a no. The biggest differentiator that we've seen is that "quants" often have PHDs in fields loosely related to finance. However, at the end of the day, it's just about finding useful abstractions over a large set of structured data -- a skill that many programmers have in spades.
It should be very clear from a cursory walk through life that peoples' compensation is on the whole not directly correlated with their cerebral work or their physical labor. Compensation is tied more to the generation of "value," which is vague, and which can be generated using different types and amounts of effort. There are many types of value that can be produced using automation and skill instead of hard labor. This does not diminish the value.
So, don't feel bad asking for $XXX,000, especially if that is the range for your profession, in your geolocale. That's that the market has decided this labor is worth, because of the type of value it creates. Do the research on the job market, and if you have valuable skills, exploit them, for fair compensation.
Traders are not necessarily smarter than the average software engineer. (There are many very smart people in both fields) However, they are fairly irreplaceable. This is because to be good at finance you need to be both smart and experienced. The only way to get experience is to work in finance for several years, and as a result, the supply of traders is fairly limited. (compared to the demand) Generally, someone who starts finance will not make their firm any money for the first year, but after five years they will be earning their firm a lot of money. The supply of good traders is a lot smaller than the supply of smart people.
A second reason why they are compensated so highly is that they are working in a highly leveraged job where the labor cannot be easily be divided between multiple people. This is similar to how CEO's make a lot of money, because being a good CEO produces a lot of value for the company and the position cannot be split between multiple people. (I'm not trying to imply that traders produce as much value to society as CEO's do) Being a marginally better trader will make your firm millions more per year. Good hedge funds have 100-1000 million of assets under management per front-office employee. (For example, D.E. Shaw or Bridgewater Associates)
In my mind it's not so much that they're smarter but rather the value they add is more easily measurable. If the trades they make for a hedge fund creates a 10 millions dollars a year profit then it's easy to demand a million dollar bonus. The value of a startup engineer is much harder to determine in a year by year basis.
I heard some estimate that each software engineer adds $1 million (not necessarily to a start up). But there should be a way to reward based on quantitative performance than evaluation by a manager who have no clue about software development.
Thats because most startups don't have revenues, so they use that as a heuristics instead of a revenue figure. But since revenues are yearly, the value of a developer is implied to be yearly.
Probably. Certainly my employer encourages us to run our own ads (up to a certain monthly budget) so that we're using the product and can see what needs to be improved.
No, they're not. But that's the culture since the floor trading days. Even when most things are automated, traders still rake in huge bonuses. (Worked at a prop firm for 4 years).
Is there too much competition to be a trader or anyone can become one ? If so, its seems much better idea to toil away to make millions than toil away at a remote chance to make a million in a startup.
I think it's quite hard now. Lots of prop firms have closed down, regulation has increased significantly and is only getting worse. There's less easy money to be made. The majority of new traders are farmed from ivy league or top private engineering schools.
I've seen some people join as devs and swap into trading. Ironically in these cases they were terrible devs, but increased their salary several times by becoming traders.
A friend of mine works in a trading company. He said all the traders want to become devs, because it is the only skill that they've seen up close that translates outside of the mad-house of trading, and they (the traders) all know eventually their number will be up.
Perhaps, lack of understanding on my side, but what does "their number will be up" mean?
From what I've heard, it's most often the case that developers want to move into trading.
I agree with the point that traders can easily quantify their value, but there is a more fundamental reason at play here. First, trading is a very scalable profession. The more you can bet, the more you can win (or lose). The fact is that how much a trader can bet has been increasing in leaps and bounds, especially during the last 30 years. That's owed partly to changing structure of the global economy and partly to changes in rules and regulation.
Consider, for example, the the repeal of Glass-Steagall act. Just by repeal of this one regulation, the bankers were able to bet many times more money, dramatically increasing short-term profits at the expense of making the system more fragile.
Exactly. I am not even a drug abuser, never even smoked in my life :)
and why the trader's job is not outsourced to someone in indian and china yet ? looks like a very "protected" profession to me.
TL;DR: He used to use drugs and booze to deal with his insecurities. Then he used money. Now he (apparently) uses the attention that comes from telling everyone how wise and honorable he has become.
This is a perfect example of the cynic snarkiness for the sake of snarkiness that plagues Hacker News; the guy of the article only has written one article besides this one[0] and that's it. He doesn't even have a profile pic or a clickable profile as most journalist in the NYT have. And he seems to spend his time as the director of something called groceryships not creating support groups for money addicts or selling self-help books. So much for an attention-seeker.
"Cynical: believing that people are motivated by self-interest." Call it a plague if you like, but I'm OK with it.
And I wasn't being sharply critical (snarky) for the sake of being sharply critical. Honest.
He's pretty actively promoting himself, his story, and his business (which is what it is) online, and he just successfully SEO-bombed his way to the top of the charts. You may think it's out of an abundance of goodness, but I think that's as naive a view as you think mine is cynically snarky. (Or snarkily cynical.)
Because his name is not clickeable it means 100% of the people that is interested in him had to google him. So it's pretty easy to measure it's impact.
So it's impact augmented by a factor of 20; if he was searched 10 times per month before it means now he is being searched 200. So not that much but even if it were your point still doesn't make sense to me because what difference would there be with anyone writing anything? I guess that your point is not that everyone should write anonymously right? So, what is it?
Well, you're partly right. I don't think he's using attention in the same way. Sure, it's a self reporting story but let's say that he has mostly handled the internal problems that made him an addict. He even admits he still buys lottey tickets. But in his case he's using his tendencies to help rather than hurt people.
I don't doubt that he's doing some real good; it's the self-aggrandizing style that opens him up to a whole host of issues.
It's a dilemma, for sure, but a guy who's so apt to talk specifics in terms of his income and bonuses doesn't present himself as operating from a place of humility. I know people who went through roughly the same evolution he claims to, but the ones who actually internalized the lesson aren't humble-bragging to the NYT under a byline, but are actually out trying to do good with as little self-aggrandizement as possible.
Like it or not, the way in which he chose to share his message completely undermines it, and it doesn't make his current situation seem too terribly different from his previous ones. Less destructive and more functional, sure, but the dynamic seems largely unchanged.
so? good for him.
I think it's an inescapable reality of the human condition:
we suffer an irresolvable emptiness. we make different choices about how to fill the unfillable hole. I think his choice to fill his by spreading hard-won wisdom and describing a path to honour is a smart solution to a problem we all face.
Gaining wisdom by way of being paid massive amounts of money is an odd definition of "hard-won". Many people find out that their career is largely unsatisfying without stockpiling a safety net that could last a lifetime in the process.
It's one rung up the ladder from the guys who make their money in ethically grey ways, find religion, preach their conversion, but keep the money. (But it's still a rung up, mind you, and that's a good thing.)
Good for him that he earned so much, and that he seems to have found meaning in things besides money, but the story is pretty clichéd.
And I'm not sure "irresolvable emptiness" and an "unfillable hole" is quite so universal as you seem to indicate, nor do I think all attempts at filling voids are of equal value. (I'm not saying you do, either, just trying to be clear.)
“I don’t have the brain capacity to think about the system as a whole. All I’m concerned with is how this affects our company.”
I wonder how many people really understand the system as whole. From the outside, it looks like a complex natural phenomenon that we don't really understand and don't control.
That's not to be taken literally, you can be pretty sure the head of a hedge fund understands the system very well. He was just stating his priorities.
There isn't much incentive or motivation to think of the larger system, when you are being paid $12 million an year bonus to think only of your own benefit.
And that is why businessmen make mediocre politicians and policymakers at best. You need to take all thing into account thinking decades into the future.
So next time a self made billionaire thinks he can enter politics on basis of his current success this should be taken into account.
Can this new idiom be stricken from our collective lexicon? I've heard this a lot lately in the tech community (although mostly from manager types) and it's a linguistic abomination. "...he ends by asking..."
It's a term of art in the marketing world. Legitimate jargon.
What's an equivalent... hmm, suppose I talk "a pull" in the context of a version control system. I'm talking about something with a specific meaning. It would be wrong to try to correct me and tell me I should talk about "a thing that is pulled".
Except that a pull in VCS is a separate thing. "An ask" seems to always mean "the thing that we are asking for," not some nuanced alternative or domain-specific concept.
My thought after reading this article: "Must be easy to feel good about walking away from making more money, and make a career of talking about it, when you've got that nice cushion of a few million in the bank already."
Same here, I was thinking of that anecdote about the catch 22 author being at some party. Some banker says "that 25 year old over there made more money last year than you have in your whole writing career"
and the author replies back "I have something he'll never have - enough"
Except when the banker wisens up and has the "epiphany" that his tens of millions are enough and lives a paradise of a life ever after.
Very true. [But] At least he did walk away and is doing something good, unlike thousands of other wall streeters who haven't, and who never will - that's something to keep in mind (I'm not defending him though).
I think the author has suffered from a lot of psychological pain stemming from his childhood, and I can sympathize a lot with that. I think he really did have a wealth addiction, like he describes.
However, that doesn't generalize to the entire industry. People (especially men) like money and power because of the benefits they brings. It doesn't have to be an addiction. Furthermore, the idea that it would take an addiction to wealth not to see how immoral the finance industry is, is reliant on having very specific (and wrong, in my opinion) political views.
Yes, I was sharp, good with numbers. I had marketable talents. But in the end I didn’t really do anything. I was a derivatives trader, and it occurred to me the world would hardly change at all if credit derivatives ceased to exist.
Hits the nail on the head for me. In the end these people make incredible amounts of money for doing what amounts to a job that is worthless to the society at large.
> Hits the nail on the head for me. In the end these people make incredible amounts of money for doing what amounts to a job that is worthless to the society at large.
As opposed to making incredibly amounts of money finding ways of getting Random Joe to click on ads? The only difference between him and most 20 something kids working their asses off in SV is a million dollars.
If it is "worthless to the society at large" then why do people pay for it? Are they insane? It's popular to beat up on the financial industry, but they do actually do something: finance loans. Without them, good luck getting a mortgage, car loan, or a loan to start a business.
Imagine a world where some magic firehose of money gives everyone $100k/year for free. And now suppose you have the skill of redirecting that firehose a bit, with the result that you can make one lucky person get $200k/year instead, while 11 other people get $90k/year instead of $100k/year.
Then your firehose-manipulation skills are worthless to society at large -- they reduce the net influx of money by $10k/year when you practise them -- but I bet you'd have no trouble finding someone sane and willing to pay you $50k/year to point the firehose their way.
(Of course in this exact scenario you would do better just to take the extra yourself; the real-world counterpart of the skill, though, produces gains roughly in proportion to the amount of money put in, and you can do better by persuading thousands of people to get you to point the firehose their way than by just working for yourself.)
I make no claim that the real-world finance industry is like that. But it illustrates schematically how something can be (1) of negative value to society as a whole and (2) something sane people are willing to pay for. And it's not unreasonable to conjecture that a lot of the things investment banks and hedge funds do have something like the same structure.
Oh, one other thing. Suppose that actually the firehose distributes money very unevenly. Then you might do this: manipulate the firehose to benefit one set of rich people at the expense of another, take their money, and give some of it to poor people. Doing that might be substantially net positive to society. So even taking this rather cynical view of the finance industry, some people in it might be doing a whole lot of good on balance. (It's called "earning to give" by the cool kids these days. But even if you don't explicitly give anything away, the magic of income tax -- if the government spends reasonably wisely -- may turn a slightly-negative-sum activity into something that benefits society on the whole.)
[EDITED to insert an accidentally omitted word and clarify slightly. No change in substance.]
Derivatives help determine prices, moves risk to those who want it, increase trade volume, control speculation, and create educated predictions for others to observe.
Exactly, they do not provide loans, or determine availability of said loans (beyond insulating risk allowing an institution to make more risky investments which as we've seen can be a catastrophic practice).
I would venture that none of these things benefit the 'average' person. Not saying its a bad thing, but the great amount of money dumped into this area of the economy, does not equate to their usefulness to society.
Edit: Actually the next section in the link you provided shows exactly how they can be a great detriment to economic stability including the recent AIG fiasco.
the use of derivatives to conceal credit risk from third parties while protecting derivative counterparties contributed to the financial crisis of 2008 in the United States.
If you're an average person who was going to lose your home, derivatives enabled the bank to give you a loan. Therefore, derivatives have provided value to average people.
However, the 2008 financial crisis showed that when tested, derivatives don't provide much of the value that they were supposed to (shifting risk to those who want it and will quietly suffer the consequences of failure without having spillover effects on the rest of the economy) which essentially retcons away much of that value.
I fully agree. With the exception that the derivatives market allowed them to make a more risky loan to you (IE one you may likely have not been able to pay off and they knew it). I would say the value to society at large is very observable as a negative. Getting a low percentage loan that is unstable or even totally illusory is not value. At least not in my opinion.
You're seriously attempting to imply that there is no value provided by a highly liquid and efficient derivatives market?
I'm not going to say these people are earning an amount commensurate to the value they provide to society, but pretending that they are just running a casino is equally naive.
I would say they provide little to no value to the average person no. Please clarify what they provide to society at large (meaning most people and not just large portfolios or predatory credit companies)?
Greater security and insulation against bad investments? (which to be clear the vast majority of people do not have enough money to make in the first place.)
Seems a lot like playing odds at a Casino, to use your example, to me.
And your edit is valid they do not provide the value (though there may be some, if little) that their millions of dollars in bonuses/salary would imply.
They make it so the interest on your mortgage is 3% instead of maybe 3.5%. That's a lot of money that you and many other normal people get to save because they do the work of connecting you to institutional investors via packaging your debt. They might take a cut and it may look big in nominal terms but barring fraud everyone is better off.
Actually that has shown not to be true over and over throughout the history of the derivatives trading market. Nominally and in a perfect world that would be true. But as we have seen that is not the functional reality. It keeps happening that derivatives are used to hide risk rather than actually predict or insulate against it. To quote a famous politician:
"There's an old saying in Tennessee—I know it's in Texas, probably in Tennessee—that says, 'Fool me once, shame on...shame on you. Fool me — you can't get fooled again.'"
And to quote a head of a self-regulatory body in charge of such things:
In the context of a 2010 examination of the ICE Trust, an industry self-regulatory body, Gary Gensler, the chairman of the Commodity Futures Trading Commission which regulates most derivatives, was quoted saying that the derivatives marketplace as it functions now "adds up to higher costs to all Americans."
Sorry, I deleted my comment. I decided to explain here why because it's sort of funny! So I have been helping a friend of mine with all the math around his new adventure, buying his first flat. Usually he just gives me the numbers directly from the bank and I work with them without questioning much because, although I have worked in finance before, I know jack about mortgages. Still, I had the bank simulation with myself so I deeply believed 0.16%, the interest the bank put on his simulation, would be around the same for everybody else.
As you can guess, it's not even close. That's why I deleted my previous comment, sorry. So why did he have such a nice interest rate? Well, it seems like there's a bunch of discounts on the banking system in Europe for mortgages. For example, there's a really big discount for disabled people, they will only pay, on a variable rate, 65% of the 3m EURIBOR thus 0.16%. No spread whatsoever. Interesting, isn't it?
"large portfolios" include mutual funds and pension funds. Ie, where most peoples' retirement funds are. These funds benefit from derivatives to reduce volatility and risk.
Joe wins the Powerball lottery. Now he's set for life, with his 250 million dollars. Joe's contribution to society was purchasing a lottery ticket. There is a high demand for lottery tickets, so Joe believes that if it weren't for people just like him, the lottery wouldn't exist and that demand would be unfilled, and everyone would be unhappy. Joe concludes, therefore, that he deserves all the money he has, because after all, the system is just what people want and it has decided that he's worth 250 million dollars.
Prior to winning the lottery, Joe worked as a janitor, and provided a valuable and necessary function to society. He made $10 an hour.
Now, certainly there is some qualitative difference in the reasons society valued Joe at $10 an hour before he held the winning lottery ticket and $250 million afterward.
Certainly we can say that there exist a range of reasons that one might benefit from a system, and that "people will pay for it" can be used to justify just about anything.
And the financial industry that people are upset about is not really the banks that provide loans (although there is some blame in the instances when people loan money to others knowing they have no hope of paying the money back). The loans existed already; without the loans there's no CDO to buy and sell.
The reason the CDO's existed was that the traditional way to make a loan and get your money back over time with interest was just too damn slow, and people needed a way to pretend the risk of a group of such loans didn't really exist and that they'd make exponentially more money in perpetuity.
It's not worthless - derivates have an important function in reducing volatility. But the rewards for being a merely competent derivatives trader are wildly disproportionate to the rewards for being competent in some other challenging field (eg nursing, as mentioned int he article). It's a classic example of rent-seeking.
I think history (2008 in particular) has shown many times over that they do anything BUT reduce volatility... Shielding or obfuscating possibly, but reduction in the long term, has not been their strong point.
There was an article a while back that discussed how most people's perception of what is "enough" wealth is always ~30% more than what they currently have, be it thousands or millions of dollars. Unfortunately I can't find the article at the moment, but the point still stands that, to a certain extent, wealth addiction has become embedded in our culture and we are taught to seek it from a young age. So to say that the financial industry is somehow immune to something everyone else around them is suffering from seems to be pretty disingenuous.
I'm sure there are a lot of people in the finance industry who constantly think that "enough" is 30% more than they currently have (or maybe rather more than that -- someone well placed in finance can accumulate wealth pretty fast).
I wonder, though, how much of what's gone wrong with finance is because of that. The spectacular cockups and conspiracies that have become public seem to be more about seriously pathological greed than about ordinary garden-variety wanting-a-bit-more.
(Also, I offer myself as a counterexample to the strongest versions of the enough-is-30%-more theory: my current estimate of how much is "enough" is lower than it was 10 years ago, even though I have a lot more money now than I had then. However, I am not in the finance industry and I'm only one person :-).)
I agree. In fact, the article seemed disingenuous to me from the first sentence. As if he's trying too hard to hit a 'can you believe my lack of perspective' note. But I don't see it. Sure, if you have millions, your personal material needs are taken care of many times over, and you're very fortunate. But the difference between 5 and 100 million is very real. There are plenty of significant things you can do with 100 million that you cannot do with 5 million. And once you're at that altitude, that probably becomes that much clearer.
I think his overarching point is that these people (by and large) do NOT do anything 'significant' with their millions. They don't even participate in a part of society that is useful beyond making ridiculous amounts of money.
That was why I believe he highlights that he has started speaking to the less fortunate and trying to 'make a difference' towards the end of the article.
Edit: Not to say this guy still doesn't sound like a total twat. Look at how he ends with a sales pitch...
I personally find the comments here, written by so-called "hackers", truly depressing.
Instead of tinkering about how the system can be made more just, viable, etc., instead of "hacking", the only "idea" that comes to the minds of so-called "innovators" is: how can i become THAT rich ?, where do i have to sign ?.
Actually calling something "human nature" is lazy, inaccurate and harmful. It's giving up on the issue, it's simplifying psychology, it's encouraging inertia and the status quo. It's saying "Sorry, nothing can be done, it's biology".
This goes for many things, not just the desire to have lots of money.
This is the ugly underbelly of capitalism: that people aren't paid based upon their "importance". They are simply paid based upon their "value" to the market. Is it important for Clayton Kershaw to pitch for the Dodgers? No, but it is demanded.
While I understand the sentiment of wanting to help the poorest of the poor, if it's true that money isn't the be-all, end-all then does it really matter that a trader makes millions while a nurse practitioner only makes $100k? The money isn't what's important, right? And the poorest of the poor in this country are rich compared to the poor from previous generations.
I would say that in most cases, people need to redefine importance in a way that is hard to accept. There is no need for scare quotes. The value is real, and when a person earns a certain amount, it's because the produce that much value (finance is kind of exceptional, in that there is a mix of true value and rent-seeking).
Now how can it be that nurse practitioners don't produce that much value? It is because the relevant quantity is the marginal value of an additional nurse practitioner, not the average value. And why is it fair to pay people according to their marginal value, and not their average value? That is because it incentives the most efficient behavior. An additional software engineer is worth more to society than an additional nurse. The fact that getting rid of all nurses would be worse than getting rid of all software engineers (assuming this was true) is irrelevant, because as people quit the nursing profession, wages will rise.
So the problem is not capitalism, but people's inability to accept that the implications of economics theory: first, that there is no ethical reason to reward people for the average value of a person in their profession, as opposed to the marginal value, and second, that frivolous things like Twitter can be as valuable as medical services (if people are willing to pay as much for either).
"I recently got an email from a hedge-fund trader who said that though he was making millions every year, he felt trapped and empty, but couldn’t summon the courage to leave."
I don't find it surprising. Many people feel that way about their job. It must take a lot of courage to leave such a lucrative career.
Having spent a few years in the finance industry, in my experience most people in my area of work were not these type A money addicts described. That said, I am confident they added no value, and made millions of dollars taking management fees in exchange for lower returns to their clients than they could have gotten in an index ETF. That might be just as big a problem: that even honest members of the industry can convince themselves they're worth their exorbitant salaries, because someone's willing to pay it.
TL;DR - I was a douche. Then I was visited by the ghost of christmas past, stopped being a douche, and started giving away groceries. I'm still rich though.
The fundamental problem with HFT is not HFT itself, but rather that there is massive intellectual capital playing tug a war with itself while it could be working on huge problems in genetics, AI, software, physics, etc.
I find the finance world quite fascinating! Some of those guys are super wealthy even though they have what looks like regular technical office jobs. With the same skills in a different industry, they would have had "normal" salaries.
You might enjoy the book "Liars Poker" by Michael Lewis that the author references. I find the finance world interesting also, and read the Financial Times as much as possible. Most fascinating obituaries youll ever read.
yeah, that's pretty f'd up, but it's good that the guy's moving on with his life.
i wonder how much time it'll take until we get to a star-trek-like economic system where people do the things they want to do to the extent that their abilities allow and noone can make the excuse, "i'm not interested in money. i'm interested in what money lets me do."
i like that this guy just came out and said, "yeah, i was interested in the money for its own sake." it sounds a lot less noble, but it seems a lot more honest to me than any other justification for having far, far more cash than any one person really needs, except for, "i'm giving it to charity."
Bummer. I suppose what I should really be asking, though, is this: do programmers on Wall Street make enough to live comfortably in the city while still hitting normal savings goals, like retirement? For Manhattan, I'm thinking this would be a total comp. of $200k or above.
I probably over-estimated what I'd need. I was just basing the number on what I make currently and the difference in COL. It wouldn't be possible for me to maintain my current savings goals on $95k in Manhattan.
I've worked in finance. There are all types. Sure, there are asshole alpha traders who whine about $2 million bonuses. Those guys are pretty uncommon, they're disliked even in spite of their P&L, and no one helps them when they get unlucky. There are also people who don't think or live very differently from respectable professors-- except who have $12 million in their bank account instead of $12. There some pathological "wealth addicts" in finance, but not that many; and there are far more in the VC-funded startup world. (VC-istan is essentially Wall Street with a lower talent level and worse ethics.)
I used to think it was a negative that Europe doesn't have the same "class" mobility. If you're rich in Germany or England, you're still considered middle-class. Politicians don't worship you, your kids still have to work hard if they are to attend good schools, et cetera. (The "upper classes" are hereditary aristocracies that have lost 80-95% of their wealth, privilege, and relevance.) You can't become upper-class if you weren't born into it, but the flip side of that is that middle-class people can rise quite high. (There's less mobility in social class, but more in terms of things that actually matter-- economic well-being, access to education, etc.) The sickness of the US is that we unify wealth, power, privilege, fame, and social connections by creating an efficient market through which people can trade one for another. Instead of having a society where some people have more money and some have less, we have this toxic arrangement where some people are just implicitly held to be universally better.
The issue for the OP (who sounds like a self-indulgent twat, to be honest) is that he learned the hard way that making more money didn't make him a better person-- at all. It didn't make him smarter, happier, or anything else. He met his God and saw vapor.
The sad thing is that he's still better off than any of us. If he wants to start a hedge fund tomorrow, or raise a $5-million seed round for whatever project he wants to take on, he's got the credibility to do it. If he doesn't feel like working hard, he could probably use his VC connections as a cash cow by funding young startup kids on a shoestring while taking an unreasonable percentage in equity (although that's been done before).
Class in the UK is not solely about money. You can be upper class and living in a homeless hostel, doesn't happen much but possible. You can be working class and be a multi-millionaire. It's about heritage and social [inter]actions as much as it's about money.
Class doesn't really feature in how much "better" you're perceived to be either. Some Lords are highly benevolent, clued in and useful members of society that treat their privilege as a blessing rather than a right; others are completely obsessed with themselves or disregard those without similar means. Similar contrasts can be found at other points in the spectrum of class.
In the UK, you can be born middle-class and become rich, and that's easier than in the US, but you'll still be considered "middle class". Upper is something you're born into. But the flip side is that almost no one cares about "upper class".
My point is that the UK arrangement is better. The well-connected, the powerful, the wealthy and the hereditary upper class are different sets of people. In the US, they're the same set and it's a disaster.
>If he doesn't feel like working hard, he could probably use his VC connections as a cash cow...
Actually, if he doesn't feel like working hard, it sounds like he could retire on a comfortable 6-figure income for the rest of his life. Without interest, naively $6m will yield $100k a year for 60 years, which is more than enough to raise a large family in a nice neighborhood anywhere in the states - especially if the home and taxes are paid for.
Without interest, 100k/year now is a lot, but in 60 years will be very, very little. Have a look at average salaries now compared to 60 years ago - from memory it's a little over a factor of 10 difference.
This is silly. You'd be retired. You could go anywhere you want, unbound by the location of some office. You'd have almost no reason whatsoever to stay in Manhattan other than a desire to burn through all your money and raise your kids in an apartment rather than a house with a yard.
There are plenty of cities in the US where a $100k income would afford a very nice middle-class or even upper-middle-class lifestyle.
Is this statement (from the article) true?
I'm under the impression that financial innovations throughout history have generally spurred capital investment. Innovations like fractional-reserve lending have made bankers&investors wealthy, but also spurred spending on infrastructure in a way that could be a win-win for society as a whole.
If today's financial wizards went away, would we feel a surprising amount of ripple impact, or would they really just not matter?