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Friends don't let friends get into finance

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Re: Friends don't let friends get into finance

#101

Post by richardw »

fleitz wrote: post #65

Perhaps it's not a problem with finance but a problem with other industries that don't pay their people well. Who is to say that a CDO isn't a valuable economic activity? If creating a CDO creates more value to the economy than designing an automobile why shouldn't engineers focus on building those? People forget that prices and money are essentially information about the supply and demand of a good. As we progress i…

So give the YC futures market idea a couple years. What would the result be? My guess:

The biggest beneficiary would be banks. They would be trading it with a focus less on spotting good companies and rather on extracting profits from the activity of trading. Computers would be doing most of the trading. They'd have algos less focused on the quality of the applicants and their ideas, and more focused on how [black box X] can take money out of the system overall. The startup community would stop applying to YC because it's much more excellent to work at a bank, finding ways to manipulate the YC stock for fun and profit.

Re: Friends don't let friends get into finance

#102

Post by jbooth »

secretasiandan wrote: post #59
Jd wrote: post #29

I'm of the opinion this understates the problem. First, it is an ethical problem. The idea of producing things is not taught in elite colleges, nor is the idea that it is possible to make a positive contribution to society (e.g. rms) without becoming superrich (no offense to those for whom this is their primary motivation). Second, a lot of the products of which the GDP percentage is based upon simply involve repacka…

Not all ideas can or should be taught in (elite) colleges. The framework to analyze any idea should be and generally is taught at colleges. Repackaging and selling things is foundational to creating value. The insurance industry is perhaps the quintessential example. They create no direct expected value, and yet they create societal benefit by creating risk-adjusted expected value. What is manufacturing but repackagi…

Fair enough, but culture matters. When you're surrounded by a culture of people who glorify rent-seeking jobs like finance and lawyering, "building stuff" tends to be regarded as lower-status and as such gets less of the top talent, even though it's the most important thing.

Re: Friends don't let friends get into finance

#103

Post by secretasiandan »

yummyfajitas wrote: post #87
secretasiandan wrote: post #78

Earlier quoted context omitted.

Can you tell me more about these commitments and what makes them expensive? No one may explicitly choose to trade with HFT firms, but that doesn't mean they don't value their presence "Although Vanguard does not engage in "high frequency trading" and does not operate a "dark pool," we believe much of the public concern over "high frequency trading" is misplaced and believes such activity, appropriately examined, cont…

He is probably referring to NASDAQ market makers, who are obligated to have a quote at the NBBO at least 10-15% of the time. Of course, there is no obligation that their 10-15% include the 1 hour or so of the flash crash...

I really just wanted him to describe why he thought that obligation was "expensive"

Re: Friends don't let friends get into finance

#104

Post by richardw »

Dove wrote: post #54
rbarooah wrote: post #13

Earlier quoted context omitted.

It's a problem because unlike other activities finance produces benefits to society only when it well, finances people doing things other than finance. Other activities are valuable in themselves.

I still find it hard to parse that as a problem. I mean, power generation only provides a benefit to society when someone uses the electricity to do something. So what? Infrastructure isn't inherently parasitic. Lots and lots of infrastructure isn't even necessarily bad. I view finance as infrastructure. The machinery that hooks investors up with investees is fundamentally useful. The machinery that lets people and b…

Of course there are benefits to the finance industry as a whole, but that doesn't mean the world couldn't do with letting the air out of its tyres a bit.

This is an industry that has an increasing percentage of our smartest minds. Add to that its extreme proximity to all money anywhere. The result? It's obvious that this industry is going to drift towards increasingly smart ways of capturing as much of our money flow as possible.

The finance world seems to become increasingly centralized, where very few companies become better at leveraging their size to increase their share of smart minds, money and power. That is the opposite of what competition is meant to do. With all these advantages, it seems insane that the industry needed a bailout.

It's not a few companies being bad. It's a market structure that can only result in bigger banks needing to pay their staff bigger bonuses to compete with each other, getting more power, extracting more money from everybody else. How could it be otherwise?

Re: Friends don't let friends get into finance

#105

Post by yummyfajitas »

rbarooah wrote: post #94
yummyfajitas wrote: post #86

Earlier quoted context omitted.

Sorry, I didn't realize your comment was limited to a single year of our current recession. You are correct - for a short period, finance has grown while other sectors have shrank. That's not the general trend, however, that's just a blip caused by the recently ended recession.

Ended?

According to NBER, the recession ended in June 2009.

http://www.nber.org/cycles/cyclesmain.html

That's roughly the point where GDP growth became positive again.

http://research.stlouisfed.org/fred2/graph/?chart_type=line&...

[edit: can't respond to your post, but June 2009 is also the time period when industrial production and retail sales started growing, and when the stock market recovered.

http://research.stlouisfed.org/fred2/data/INDPRO.txt http://research.stlouisfed.org/fred2/series/RSAFS?cid=6 http://research.stlouisfed.org/fred2/series/SP500?cid=32255 http://research.stlouisfed.org/fred2/series/ALTSALES?cid=98 http://research.stlouisfed.org/fred2/series/DGORDER?cid=98

The period Jan 2009-Dec 2009 was bad, but Jun 2009-present was a period of growth for most sectors. ]

Re: Friends don't let friends get into finance

#106

Post by nhebb »

richcollins wrote: post #90
fleitz wrote: post #65

Perhaps it's not a problem with finance but a problem with other industries that don't pay their people well. Who is to say that a CDO isn't a valuable economic activity? If creating a CDO creates more value to the economy than designing an automobile why shouldn't engineers focus on building those? People forget that prices and money are essentially information about the supply and demand of a good. As we progress i…

The problem isn't the ability to create financial instruments. It's the fact that the people that created and purchased these ill-advised investments were given the resources of those that didn't make bad decisions (through inflation and taxes). It's easy afford outrageous salaries when your revenue comes from government assisted theft.

I'm tempted to create a 1000 fake accounts just so I could upvote you more.

Re: Friends don't let friends get into finance

#107

Post by yummyfajitas »

prodigal_erik wrote: post #96
yummyfajitas wrote: post #74

Earlier quoted context omitted.

...they're exploiting flaws in the way trades clear to front-run them and become unwanted middlemen. Could you explain the mechanics of how this works? Near as I can tell, the only way to become a "middleman" is to offer a better price than your competitors or to offer the same price at an earlier time. Is there a "front-run my competitors" FIX command I'm not aware of?

http://blog.themistrading.com/wp-content/uploads/2009/01/tox... describes a predatory algorithm deliberately making inconsequential trades solely to discover a buyer's limit, then selling short at that limit only to cover after the dip they themselves caused. This is basically scalping, a strategy designed to steal the surplus value from both the buyer and seller. Such abuses were even more egregious back when most e…

Huh. So basically, before HFT, the clever institutional trader could use HFT techniques to buy a bunch of shares from less sophisticated retail investors at $20.00 in spite of high demand.

On net, the institutional trader is gaining $0.01 at the expense of retail investors.

Now, in a world with professional HFTs, the institutional investor can't do this as easily and must pay the retail investors $20.01. How horrible!

It's hard to see why you are calling the HFT an "unwanted middleman". I mean sure - the institutional investor would love to keep taking money from the retail investors. But the retail investors want to keep their pennies - they certainly want the HFT to be present.

As I said, the only way to become a middleman is to offer a better price than your competitors.

Re: Friends don't let friends get into finance

#108

Post by richardw »

secretasiandan wrote: post #3

the quant finance that takes the best and the brightest (as opposed to the bankers and sales traders), uses informational and computational advantage to make money. How are internet startups any different? Also, even the bankers and sales traders are providing a service that apparently people want. If you can judge them as not creating societal value, why can't I say that the Nth photo sharing website is not creating…

Well, we don't transfer our pensions, salaries and every bit of capital and risk through startups. If we did, I'd say we need to watch startups a lot more carefully.

The equivalent to today's finance world was the .com boom and crash. When that crashed, the world continued and the S&P500 recovered just fine after a brief hiccup. The .com universe deleveraged and stayed so, but it just didn't affect the rest of the world that much.

During the latest crash, the rest of the world went into a huge recession. House prices and new-house sales have just hit multi-year lows again, two years after the event. The job market only looks better because so many have left it so aren't counted as job-seekers anymore! The non-finance world is still paying the bill for the latest recession, even though the big banks have forgotten about it and are paying bigger bonuses than ever.

New home sales:

http://cr4re.com/charts/charts.html?New-Home#category=New-Ho...

Unofficial problem bank list is still at or near a record. Good to be a big bank that gets government money:

http://www.calculatedriskblog.com/2011/03/unofficial-problem...

"The Labor Force Participation Rate declined to 64.3% in December (blue line). This is the lowest level since the early '80s."

http://www.calculatedriskblog.com/2011/01/december-employmen...

Re: Friends don't let friends get into finance

#109

Post by asanwal »

rbarooah wrote: post #93
asanwal wrote: post #79

Earlier quoted context omitted.

Not justifying it, but when people think the whole system could break down, crazya$$ isht happens. The rightness or wrongness of what was done is not what I was getting into. Merely commenting on your point as to why the "finance sector is protected by the government whereas startups are not".

Right - but the finance sector wasn't chosen at random to receive a bailout because of 'craziness'. It was bailed out because it's dysfunctional. And now, people in the financial industry expect it to get bailed out when it screws up, since that's what's happened time after time. Whereas people joining startups have no such expectation. If you don't seriously expect Facebook to get bailed out it's not a particularly…

I am guessing (and apologies if I'm wrong) that you've not worked in finance else I don't think you wouldn't paint the entire industry with such a broad brush. I don't disagree with you that a lot of stupid, ignorant and misguided things happen in the industry, but in general, I find that the "Wall St is bad" rhetoric is easy to get wrapped up into because it is fashionable and easy to do.

But nevertheless, I'll go back to my original point. If the gov't thought that Facebook (or any startup) presented systemic risk, it'd likely get bailed out. I'll leave it at that.

Re: Friends don't let friends get into finance

#110

Post by hammock »

Jd wrote: post #29

I'm of the opinion this understates the problem. First, it is an ethical problem. The idea of producing things is not taught in elite colleges, nor is the idea that it is possible to make a positive contribution to society (e.g. rms) without becoming superrich (no offense to those for whom this is their primary motivation). Second, a lot of the products of which the GDP percentage is based upon simply involve repacka…

Repackaging debt is not an "accounting trick," it's creating liquidity. Which in turn allows more more "real" transactions to take place, more trade, more production, more manufacturing, more jobs, etc.
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