I worked in finance (as a trader). And I left. But I loved it. Most people didn't, but I did; I found the history and the mission captivating and I was not shy about showing that passion.
I left because they fired my charismatic manager and the firm's culture grew neurotic as the scandals and random terminations piled on. I saw the over-worked, sociopathic, misanthropic archetypes. But I saw the same personalities in Silicon Valley.
The capital markets are a critical piece of our modern world. We're still figuring out how these fascinatingly complicated machines work - they act differently in different cultures, in different sentiments, and under different geopolitical constraints. When they work...it's magical. The philosophical dimension of a weighted democracy doing better what kings and emperors through antiquity failed to do is a powerfully individualist statement. And there is so much more that has to be done. There are literally not enough hours in a lifetime of lifetimes to see all the implications and interactions and human potential waiting to be unlocked.
Do I sound like a crackhead? Probably. But I love the idea of taking what is not understood, considered "random" or "exogenous", and building something to bring it from the unknown to the known. I understand the historical struggle these resource allocation machines (how I think of them) have faced and why we need people to carry the flag, even if it means being hated and misunderstood by the public.
A lot of people go into finance for the wrong reasons. I feel sorry for them. A lot of them are held there by a fear, not of losing the cash flow, but of losing the prestige or business card. These people need help, not derision. But concluding the entire industry is corrupt is like looking at JustFabulous and a handful of overworked founders and concluding Silicon Valley a blight on humanity.
P.S. I don't expect a huge salary just for working at a bank. But if I'm coming up with original ideas, I will do the calculation of what I could earn if I went out on my own, and if the bank figure doesn't line up with that figure (it didn't) it makes sense to arbitrage. This is classic entrepreneurship and there is nothing more sinister about JPMorgan having to compete with a star player launching their own fund than there is Google having to pay out to top performers who may otherwise do well launching a start-up.
Trading can be great because there is no BS of politics and you can measure what you've contributed every single day. You're out playing games for money, sometimes you're grinding, sometimes going on a raid...
To me the best side of finance is when you can go out and see something real and know you made it happen. When I worked for a major energy company as a side of the desk project I designed a very long term refinery margin lockin trade to enable a 100,000 barrel plus expansion of a refinery. It wasn't just going to the markets and doing some buy sell orders, but rather we went to a major Opec member and got them to sell us crude oil via a formula and then went to multiple fuel end users and got the to agree to buy fuel on a formula of crude oil + X. The difference between what we'd buy and sell less operating expenses was far greater than the cost to expand the refinery and we only had to lock up 10 years of the expected min 30 year lifespan of the equipment to do it.
All that being said, WAY too many people are going into whiteshirt wall street finance that should be out in the world making stuff happen. There is another world of steel toed boots on the ground working with engineers to figure out how to build stuff.
"Trading can be great because there is no BS of politics and you can measure what you've contributed every single day. You're out playing games for money, sometimes you're grinding, sometimes going on a raid..."
Proprietary trading is a pain, especially if you have no investors. You take on all kinds of unimaginable liabilities if you set up a self-clearing BD. Life is very stressful, because even problems with external agencies can cause problems. For example, suppose you were spread trading (buying one thing and selling the other, expecting the prices to converge) and one trade was broken. You could wake up the next morning with millions or billions of dollars in liabilities (this happened to many people in 2010).
The real problem is that, for most people, finance is interesting because they don't share in the downside. If you have a job as a trader for a bank or hedge fund, and you blow up (assuming, of course, you were not doing anything illegal) you merely lose your job. You aren't in the hole for the liability.
Most of finance operates in that mode, dealing with OPM (other people's money).
A broker-dealer (B-D) is a person authorised to trade securities on its own account (dealer capacity) or on behalf of fiduciaries (broker capacity).
Clearing refers to everything that takes a trade from transaction, e.g. a voice confirmation over the phone, to settlement, i.e. securities and cash having changed hands. Clearing involves such processes as making sure you (and your customers) remain within margin constraints, mailing tax documents, dealing with counter-parties messing up and sending you wrong securities/amounts of cash or forgetting to send you anything at all (a failed trade), etc.
A self-clearing B-D, instead of outsourcing this function to a bank's "prime brokerage" function or a dedicated clearing outsourcing firm, has its own operations department that takes care of these functions.
This was a great a comment. I normally rail against Wall Street precisely because I've been around some of the people who go into the business and seen some shitty attitudes about life, but the call out to a higher calling of doing humanity a necessary and useful service really strikes a chord.
In your opinion, are there any trading firms that you feel embody that idea that they should be working to create systems to better allocate capital (instead of, say, gaining all of the capital for themselves)? I'm attracted to the problems that banks have to solve and deal with, but the culture around the current solutions is incredibly off putting.
Bridgewater Associates catches my eye as a firm that has fun with economics - they pioneered risk parity in the 1990s and have invested so much in intelligence and analytics that Paul Volcker commented that they have "a bigger staff, and produce more relevant statistics and analyses, than the Federal Reserve" [1]. Another one, going off the academic papers coming out of the firm and conversations with people I know there, may be AQR.
Note that it's more fun to prance around the trading floor Gangnam Style than compose oneself as an extra-dimensional intelligence, a memo the tech industry has taken to heart. The loudest kid isn't driving the bus.
Side note: Ray Dalio (founder of Bridgewater Associates) is an incredibly interesting guy. He wrote a 100 page handbook entitled "Principles" that describes his life philosophy in detail and is required reading material for all new associates. If you've ever wanted to see inside the thought process of the founder of the world's largest hedge fund, this is the way to do it.
From the intro:
"Above all else, I want you to think for yourself—to decide 1) what you want, 2) what is true and 3) what to
do about it...If you can’t do these
things, you should reflect on why that is, because you probably have discovered one of your greatest
impediments to getting what you want out of life."
Bridgewater's founder, Ray Dalio, wrote an amazing internal document on his principles of work, business, and life is an amazing read... one of the top pieces of nonfiction I've ever read --
Thank you for the suggestions. I wonder how possible it is to find a position at either firms if you aren't explicitly in the finance industry. I have no idea how to apply there and would be interested in talking to somebody about what goes on there.
This was a great a comment. I normally rail against Wall Street precisely because I've been around some of the people who go into the business and seen some shitty attitudes about life
1. Quants and financial IT: decent, geeky, respectable people (for the most part; some exceptions exist.)
2. Startup engineers: decent, geeky, respectable people. More optimistic and less socially skilled than (1). Not a worse or better crowd, just different.
3. Soft-side bankers: a few decent ones, many giant douches, some outright slimeballs.
4. Soft-side VC-istanners (executives, founders): from my experience, most are horrid human beings attempting to exploit the idealism of (2). Most are far worse than (3). There's a small sample size here, but enough to notice a "type".
Founders and executives. My sample size is small, but a lot of the ones I've met are pretty rotten people. There are a lot of good people who want to become founders, and there seem to be some decent people in VC, so I'm not sure where the mismatch occurs. I think it's an artifact of the fact that it takes a certain kind of ego to tell a stranger to give you millions of dollars.
Those "horrid human beings" who start and fund companies are adding value to the real economy-- creating new technology, finding cures for diseases, etc. Can you say the same for those "decent, geeky, respectable people" who work in finance?
To me the contrast between silicon valley and NYC illustrates why modern finance is so useless. VCs know that they can't determine whether a company is worth funding without visiting it in person, getting to know the founders, figuring out what's going on in the industry.
In contrast, finance has become a black hole of computers trading with other computers, completely ignorant of what the companies behind the ticker symbols even do. If you tried to explain to a quant why he should fund one company or the other because of the fundamentals, he would probably just tell you that it's irrelevant. It's about the mathematical models, gaming the system, and staying "just windward of the law."
There is a lot of BS to go around in every industry. But when your industry produces something of value people tend to give you a break. My tax dollars are still paying for the mistake of the finance industry, from which I got no upside, so you'll forgive me if I don't give you a break.
Don't get me wrong. I like what entrepreneurs can do-- to use your words, "adding value to the real economy-- creating new technology, finding cures for diseases, etc." Two things, though.
1. I don't think a new social media platform deserves in the same category as cancer research. When I talk about VC-istan, I'm talking about the former category. I know absolutely nothing about biotech.
2. There's no question that what entrepreneurs are doing has the potential to make the world substantially better. I'm only saying that among the people I've seen get picked to be founders, I've seen few good ones and mostly bad.
I don't have a "[my] industry". I've worked in finance, and in startups, and I generally work whereever I think it will benefit my career. I don't think it's wise to rule anything out.
Anyway, certainly I agree with the spirit of what you are saying. VC-istan could be really great, but it needs a total reboot and that involves most of the current crop of "cool kids" being out on the curb.
There is a huge assumption that capital markets are efficient, but considering the existence of things like bubbles I don't think that's peculiarly true. The existence of 'brand' marking on the demand side demonstrates that the demand side of the equation is not efficient. And the distortions inherent in things like the home mortgage tax credit and farming subsidies demonstrate systemic distortions.
Further, people are far weather now than at any point in the past. So, even if capital markets where less efficient than ancient princes at distributing wealth, the inefficiency would be less obvious.
>"There is a huge assumption that capital markets are efficient, but considering the existence of things like bubbles I don't think that's peculiarly true"
Most bubbles are capital allocation errors made by humans.
There is a huge assumption that capital markets are efficient, but considering the existence of things like bubbles I don't think that's peculiarly true.
Bubbles don't invalidate Efficient Market Hypothesis (which is, in any case, only known to be approximately true). EMH, roughly speaking, says that prices correspond to expected values of future values. That doesn't specify a timeframe (which is one of the problems with EMH; it's demonstrably false over very short time frames in which arbitrage occurs, and also over very long timeframes) but it's not incompatible with bubbles. Over the course of a bubble with a short timeframe (which is a reasonable assumption for something highly liquid) the expected value of the price is actually increasing (even if the very long term expected value is lower; in the long run, we are all dead).
Markets favor availability over consistency. You can trade at a price. That price might be a couple percent higher or lower tomorrow. That's called "volatility", and we model it as Brownian motion (although it's more fat-tailed than a normal distribution). The inconsistency exists because no one really knows what the true fair value of equity is, but the market can deliver a price that usually represents the expected value of the thing in the future. Markets don't do a perfect job of pricing these things, but no one has ever been able to do a better job.
The best argument for financiers as "the good guys" is that, from about 1950 to 2007, financial markets have become riskier and more volatile while the real economy has become less so. There's an argument to be made that these markets have taken risk out of the economy and transfered it into markets that can crash without wiping people out. There's also an argument to be made that the ongoing collapse of the middle class has something to do with "activist" investors (PEtards) and that this evil more than cancels out the good. Not going to form a strong opinion on that one.
Then there was 2008. That one got blamed on the quants, but it's actually people on the business side, especially the ones involved in real estate (and industry that has about as much integrity as Hitler's scrotum). Yes, finance has scumbags like every other industry, and the 2008 crash was horrible and showed how disgusting a lot of powerful people are willing to be.
I don't know what to believe. I'll say this, though: the people I meet in finance are much better than people at the higher levels of VC-istan. I've met $1-million-per-year traders who are really great people, while most startup founders and executives I've met are pretty goddamn slimy. (I'm sure counterexamples exist, but in my VC-istan experience, fundraising ability and decency are correlated at about -1.0.) VC-istan is, after all, funded by private equity guys rather than quants, so what the fuck else would one expect?
I have no idea if it's true, but the argument can be (and has been) made.
Activist investors in the 1980s took over a lot of companies and laid people off. I don't think that was necessarily a bad thing, because corporate inefficiency was pretty extreme in that time.
What I think is killing the middle class is upper-class corruption, rampant inequality, generational malfeasance, and political chicanery. "Activist investors" probably don't belong on the top 10.
The argument you would have to make is that the influence of activist investors led to the cutthroat corporate cultures of the 1980s and onward, with "rank-and-yank" becoming normal. But I don't know if that's the case. I will say that the argument can be made.
The argument can also be made that, since what's killing the middle-class is back-scratching, self-dealing, and corruption among a well-connected and entrenched upper class, that investor activism has been fighting against the enemy. I have no idea whether that's true either.
>I understand the historical struggle these resource allocation machines (how I think of them)
That might have been the case in the past, but I feel the current HFT driven market has little to do with resource allocation (or even funding companies for that matter).
HFT doesn't drive the market. The market is driven by pension funds, mutual funds, sovereign wealth funds, banks, corporations investing on their own behalf, and private equity funds and hedge funds. HFT traders act as intermediaries when these big players make transactions, but they don't have much to do with market functions like resource allocation. They can't. They don't take positions.
I left because they fired my charismatic manager and the firm's culture grew neurotic as the scandals and random terminations piled on. I saw the over-worked, sociopathic, misanthropic archetypes. But I saw the same personalities in Silicon Valley.
The capital markets are a critical piece of our modern world. We're still figuring out how these fascinatingly complicated machines work - they act differently in different cultures, in different sentiments, and under different geopolitical constraints. When they work...it's magical. The philosophical dimension of a weighted democracy doing better what kings and emperors through antiquity failed to do is a powerfully individualist statement. And there is so much more that has to be done. There are literally not enough hours in a lifetime of lifetimes to see all the implications and interactions and human potential waiting to be unlocked.
Do I sound like a crackhead? Probably. But I love the idea of taking what is not understood, considered "random" or "exogenous", and building something to bring it from the unknown to the known. I understand the historical struggle these resource allocation machines (how I think of them) have faced and why we need people to carry the flag, even if it means being hated and misunderstood by the public.
A lot of people go into finance for the wrong reasons. I feel sorry for them. A lot of them are held there by a fear, not of losing the cash flow, but of losing the prestige or business card. These people need help, not derision. But concluding the entire industry is corrupt is like looking at JustFabulous and a handful of overworked founders and concluding Silicon Valley a blight on humanity.
P.S. I don't expect a huge salary just for working at a bank. But if I'm coming up with original ideas, I will do the calculation of what I could earn if I went out on my own, and if the bank figure doesn't line up with that figure (it didn't) it makes sense to arbitrage. This is classic entrepreneurship and there is nothing more sinister about JPMorgan having to compete with a star player launching their own fund than there is Google having to pay out to top performers who may otherwise do well launching a start-up.