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Founding a startup with zero revenue is better than working for Goldman Sachs

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Re: Founding a startup with zero revenue is better than working for Goldman Sachs

#101
post #68

Earlier quoted context omitted.

I think the point of his comment is to see that viewing trade as zero-sum leads to absurdity.

Certainly, but assuming it can't be zero-sum leads to absurdity as well. What about high frequency trading? Most of it is zero sum, first one to arb the difference wins. The economy doesn't derive any higher value from it if the difference would've been corrected within a couple seconds (or a few minutes) anyways. It's not the same as buying a burger.

The value investor gets an abstraction over the ocean of algos and traders trying to out-game each other. The abstraction is that there's a market price and a book depth. The deeper the book, the more stock the value investor can move around without being gimped by increasingly undesirable prices. The more traders, the deeper the book.

Finance pundits worry about the implications of traders gaming each other. Let them game each other. The value investor sees a market price backed by millions of dollars of offers within pennies of each other. Should his trades move the market, much more liquidity will spring to life. The value investor feels fine.

Re: Founding a startup with zero revenue is better than working for Goldman Sachs

#102

Earlier quoted context omitted.

I've had a number of people tell me this system is why GS won the financial crisis. During the financial crisis, GS knew their positions and their risks. They could also calculate the side effects of proposed trades as quickly as their computers could calculate it. This meant the people at the top could actively plan what to do next during the day. In contrast, MS and JPM can only get information like this a few hour…

Another issue the other banks (and maybe GS, who knows) have is "internal arbitrage". This is what happens when each desk has their own pricing system; they go out of sync, a trader notices, and then sells from his desk to another desk with an out of date price. The bank loses money, but his desk makes some. For that reason, creating a system like SecDB is a high priority these days.

There's a tag in most exchange's trading servers that you could include in your orders to not execute if it's a self-trade.

Re: Founding a startup with zero revenue is better than working for Goldman Sachs

#103
post #95
post #72

Earlier quoted context omitted.

Oh, if you by a burger and sum the benefit over, say, Burger King and McDonald's it's probably constant. If you sum the benefits of arbitrage over the high frequency traders, it's possible (close to) constant, too. But the rest of the world can still benefit (or perhaps suffer in the case of a burger).

Hm, I think we're talking past each other although I'd like to hear more exposition on your comment because it doesn't really make sense to me. I was talking more from the perspective of someone who's generating cash. Burger King pays suppliers for meat and whatever (or raises cows in their own operation) and you pay them for a burger. You get a burger, they get cash, pay people, value creation all around. In Wall St…

Yes, the difference between theory and practice can be startling in finance. But I am more wary about fleecing the customer than about counter parties in a high frequency trade. [1] And of course there's also always making money by rent-seeking behaviour. E.g. the implicit subsidy banks get in lower borrowing costs on the market once they are to big to fail.

[1] Mutual fund managers or hedge funds who take a lot of fees are probably quite a drain on your their clients returns.

Re: Founding a startup with zero revenue is better than working for Goldman Sachs

#104

Earlier quoted context omitted.

Another issue the other banks (and maybe GS, who knows) have is "internal arbitrage". This is what happens when each desk has their own pricing system; they go out of sync, a trader notices, and then sells from his desk to another desk with an out of date price. The bank loses money, but his desk makes some. For that reason, creating a system like SecDB is a high priority these days.

There's a tag in most exchange's trading servers that you could include in your orders to not execute if it's a self-trade.

There are a lot of trades that don't happen on exchanges.

Re: Founding a startup with zero revenue is better than working for Goldman Sachs

#105
post #69

Earlier quoted context omitted.

I've had a number of people tell me this system is why GS won the financial crisis. During the financial crisis, GS knew their positions and their risks. They could also calculate the side effects of proposed trades as quickly as their computers could calculate it. This meant the people at the top could actively plan what to do next during the day. In contrast, MS and JPM can only get information like this a few hour…

If you know and can speak about enough to do a blog post on this, could you consider it? I'd love to hear more about the different systems capabilities and how that affected the different big houses' ability to trade effectively in a storm.

The issue with real-time P/L and risk calculation is not necessarily IT but your math models valuing your positions in very hard to value securities.

For instance, a liquid stock such as MSFT is easy to value; just look at the last traded price. Chances are, if you are liquidate your entire holding of MSFT (even if you are a big fund or bank), it'll fall roughly in the range of couple of cents of last traded price.

A fairly illiquid stock such as a penny stock or a stock with relative low shares float; if you were to close your position as a bank, you are probably unloading/covering so many shares that it'll affect the price of that stock significantly. So you need to model that into your P/L model.

Things get even messier with a derivative, because let's say you are trying to sell an option position. Whoever your counterparty you sold your option contracts too, probably has some counter-strategy in which they might hedge their option transaction with an underlying equity or with another option spread at a different price whose counterparty might choose to hedge with an underlying equity position. All of which would in term affect the underlying equity pricing and how the options call/put parity is re-adjusted and then in terms, the pricing of the option contracts you just traded. So you need to model that.

So in your derivative pricing model, you might have to consider underlying pricing/volatility/liquidity, options pricing/time-decay/liquidity, futures pricing, currency exchange rates (for an ADR security) and how all of them all interact and influence one another.

And even with the math aside, constructing and consolidating all exchange/quote systems that trade all of these products is a system integration nightmare.

Re: Founding a startup with zero revenue is better than working for Goldman Sachs

#106

So. This is funny. I actually work at Goldman, work in the system he talks about, and have been doing so for 5 years. You can get numbed by the experience of working here, but you don't have to be. I've become friendly with some of the best hackers I know, and for us, finance always takes a backseat to writing amazing code. Sometimes we succeed. Sometimes we fail, but we try to never say, "Meh. Good enough." Wall Str…

That's cool. I'm surprised you say that finance always takes a backseat to writing amazing code, though. In my experience, traders don't want cool new snazzy Google Wave. They want Excel. They don't want cool new Web 2.0 streaming quotes/risk calculations/portfolio calculations, they want VBA macros in Excel. Even if you are working in actual trading/strategy area and write up your backtester with Python. They want y…

Don't confuse "amazing code" with "snazzy technology" (although we do some pretty snazzy stuff).

Also not sure about other places, but Excel usage is frowned upon here, at least on the trading desks that I support.

Re: Founding a startup with zero revenue is better than working for Goldman Sachs

#107

So. This is funny. I actually work at Goldman, work in the system he talks about, and have been doing so for 5 years. You can get numbed by the experience of working here, but you don't have to be. I've become friendly with some of the best hackers I know, and for us, finance always takes a backseat to writing amazing code. Sometimes we succeed. Sometimes we fail, but we try to never say, "Meh. Good enough." Wall Str…

That's cool. I'm surprised you say that finance always takes a backseat to writing amazing code, though. In my experience, traders don't want cool new snazzy Google Wave. They want Excel. They don't want cool new Web 2.0 streaming quotes/risk calculations/portfolio calculations, they want VBA macros in Excel. Even if you are working in actual trading/strategy area and write up your backtester with Python. They want y…

Yes. Old = good. New = bad. Tech in finance is about efficiency. Everything else does not matter. The GUIs are usually atrocious. Traders don't care, as long as they make money. Excel is abused beyond belief and there is a whole cottage industry around Excel plug-ins. A good VBA programmer can command a salary as large as a C++ hot-shot. Sad.

Re: Founding a startup with zero revenue is better than working for Goldman Sachs

#108
post #78

Earlier quoted context omitted.

Do you mind enlightening me? I've only read a few of his works but don't recognize it.

Breakfast of Champions. Just open the first pages and you'll see it all over.

Which part is BoC? I recognize "so it goes" from Slaughterhouse Five.

Re: Founding a startup with zero revenue is better than working for Goldman Sachs

#109
post #54
post #28

Just to provide a balanced viewpoint: I've worked in corporate America (Fortune 5 company), dealt with banality and bureaucracy, banged my head against the wall over and over again, left, started my own company, grew it to millions, sold it, semi-retired. I love startups and the details of this blog, however, when you want to see your kids, sleep in the same bed as your wife, and have a paycheck deposited in your ban…

Off-topic: Is it common to get paid every fortnight in America?

Twice monthly (1st and 15th) is also fairly common. Once monthly is not unheard of but a lot of people can't manage their cash flow that long so they prefer more frequent intervals.

Re: Founding a startup with zero revenue is better than working for Goldman Sachs

#110

Earlier quoted context omitted.

I've had a number of people tell me this system is why GS won the financial crisis. During the financial crisis, GS knew their positions and their risks. They could also calculate the side effects of proposed trades as quickly as their computers could calculate it. This meant the people at the top could actively plan what to do next during the day. In contrast, MS and JPM can only get information like this a few hour…

Another issue the other banks (and maybe GS, who knows) have is "internal arbitrage". This is what happens when each desk has their own pricing system; they go out of sync, a trader notices, and then sells from his desk to another desk with an out of date price. The bank loses money, but his desk makes some. For that reason, creating a system like SecDB is a high priority these days.

@jrockway: I'm curious about this, do you have any links to texts you've read about this or is this from personal experience?

In my experience there are all sorts of reasons why different desks WANT to price things differently. When 2 internal desks cross markets, they trade with each other instead of the broad market. Its advantageous for both internal desks because if the order is crossed internally, they don't have to print on an exchange, they save transaction costs, and they can be incentivized to give internal desks better prices. Its important for them to be able to shift risk from desk to desk so they can properly attribute PnL to the right agent.

edit: jrockway, just read further down that you said you work at a bank, where I'm assuming you had that experience. Ultimately the question is whether it is or should be the case that security XYZ should be considered to have the same price firm wide.

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