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For the Love of Money

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Re: For the Love of Money

#181

Post by patio11 »

31reasons wrote: post #114
tikhonj wrote: post #109

Earlier quoted context omitted.

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…

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. 1.Sales and Marketing 2.SEO 3.Bloggers 4 ..

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.)

Re: For the Love of Money

#182

Post by infinii »

harryh wrote: post #167
panarky wrote: post #129

Earlier quoted context omitted.

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 t…

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 star…

"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.

Re: For the Love of Money

#183

Post by yummyfajitas »

phillmv wrote: post #23
tkiley wrote: post #16

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…

It's sorta up for debate. 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…

...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.

If you actually want to learn about CDOs, go read this paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1421837

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.

Re: For the Love of Money

#184

Post by yummyfajitas »

panarky wrote: post #174
harryh wrote: post #167

Earlier quoted context omitted.

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 star…

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…

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.

I wrote a blog post a while back that explains the mechanics of matching engines, you might find it helpful: http://www.chrisstucchio.com/blog/2012/hft_apology.html

Re: For the Love of Money

#185

Post by mseebach »

vladimirralev wrote: post #113
mseebach wrote: post #68

Earlier quoted context omitted.

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 hun…

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.

Re: For the Love of Money

#186

Post by hfttrader »

31reasons wrote: post #83

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.

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)

Re: For the Love of Money

#187

Post by venomsnake »

kamaal wrote: post #165
adaml_623 wrote: post #84

Earlier quoted context omitted.

A large number of hedge funds lost a lot of money in the crash. This is proof of a sort that their heads did in fact not understand the system well.

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.

Re: For the Love of Money

#188

Post by speleding »

tkiley wrote: post #16

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…

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.

Re: For the Love of Money

#190

Post by golergka »

panarky wrote: post #174
harryh wrote: post #167

Earlier quoted context omitted.

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 star…

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…

The only way they can do it ahead of you is if you decided to buy or sell in a series of several orders instead of one.

So, basically, you're paying for your own decision.

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