Geeks trump alpha males on Wall Street

http://www.reuters.com/article/ousivMolt/idUSTRE5B114220091202

by cwan • 17 years ago

74 83 17 years ago

redcap4• 17 years ago

Sure they're making money particularly from being smart, but would someone be able to explain to me how making money from money contributes to something worthwhile to society?

Is it just that they're being that much quicker in smoothing out prices of stuff on the stock market?

I'm not being snarky, would just like to know.

Another slightly different topic: the trend during the Bush boom years is that the so-called 'smart people' graduated to the financial industries which is where all the money was. This is opposed to the people who I regard as smart and gutsy trying to do something new and of probably greater benefit to other people such as starting your own internet company.

Is it just that it's easier to make money from money as opposed to doing something that's probably more helpful but usually pays less?

pmorici• 17 years ago

I think that's a little high horse. Most "internet" companies don't bring us any new blow out technology or societal benefit. Twitter for example is basically just a way for narcissist to talk about themselves. Not that there is anything wrong with that but to claim an Internet company is a better way to contribute to the greater good than is stock trading is just silly.

chrischen• 17 years ago

He said "probably." And I for one agree that starting an internet company is "probably" better than what these people are doing.

redcap4• 17 years ago

While there is a lot of horseshit being fed into the twitter system, I do know that it's being used as an alternative communication mechanism (maybe just because it's a fad?) and quite sucessfully in some areas - wasn't it doing at least some good in Iran?

I don't have a beef against stock trading in general, just the uber hyped money generating system that it fuels and the fact that it seems to make the rich richer and drain the brain market who in my opinion should be doing something more productive - making stuff that could be helping people even if it's in often unremarkable or in a horseshit fashion like Twitter can.

leelin5• 17 years ago

I won't defend all of finance / trading, but maybe this analogy will satisfy you.

Think of sports tickets. There is massive inefficiency in the primary market, meaning tickets you buy directly from the arena or on TicketMaster. One inefficiency comes from all the season ticket holders who skip the majority of the games and only go to the ones they actually want to see.

We can fix this inefficiency on a secondary market (the scalpers, StubHub, etc). A scalper might make a decent take by finding season ticket holders and buying the unused tickets. Then, the scalper sells the tickets to fans who waited too late to buy (or won't pay full price).

Now we think the scalper is evil, because he just made money without "adding value." Except he did add value... the season ticket holder and the last-minute-fan wouldn't have found each other without great effort. Both ended up happier than if the scalper didn't exist. Also, the scalper takes on some risk... he guaranteed the price he paid to the season ticket holder, had to hold the ticket, and then determine the correct time to sell. If he held the ticket too late (or got too greedy), the game would begin and he'd have a worthless ticket!

We also need to somewhat regulate scalpers because if they have too much of an impact, they can seriously distort and manipulate prices (a very wealthy scalper can buy all the tickets to a popular game and sell them all at 10x the price).

This analogy isn't perfect for high-frequency trading or all market making, but I hope it shows why arbitragers both add value and reduce risk yet seem evil to all the participants.

dasil0032• 17 years ago

I don't think they're evil unless the taxpayers happen to be bankrolling their downside.

Tangurena• 17 years ago

If this were the only way that scalpers operated, then I would agree that they'd be a social good. Instead, there are a number of scalpers who wait in line, knowing full well that they're not going to the game/show and they'll sell the tickets to someone who wasn't fast enough to get in line. This sort of thing happened in Dubai, where some folks would buy shares in some real estate venture, and then flip it to someone further back in line.

dtby• 17 years ago

scalper can buy all the tickets to a popular game and sell them all at 10x the price

How is this a problem, especially one requiring regulation? Nothing has changed from your original formulation, except apparently that he's now making 'too much money.'

artsrc3• 17 years ago

It seems to me the value the scalper providers is an exchange not an arbitrage. Sellers probably don't care when they sell as long as they do. Buyers probably find the lack of transparency inconvenient.

If you setup a fair exchange where genuine buyers bid and genuine sellers offered and everything cleared at a specific time at one price for everyone, sellers and buyers would get better prices, which everyone would think was fairer, and all possible exchanges could occur.

pwnstigator4• 17 years ago

The trader self-justification spiel is that traders provide liquidity; they tighten the spread, so you get a better price if you trade on the market.

However, the actual effect of arbitrage is to make things that are already reasonably liquid much moreso, which means that the benefit to buy-and-hold investors is low. Illiquid stocks are avoided by arbitrageurs (too risky). So the net benefit to society is nonzero, but minuscule. Plus, rich people are the biggest beneficiaries, which makes it even less appealing.

Trading isn't something you do to make the world a better place. On the other hand, it's one of the few high-paying finance jobs that doesn't make the world a worse place.

cameldrv• 17 years ago

That depends. Their profit comes from somewhere, and it's everyone else's trades. The average investor is giving the HF traders a few pennies on each trade.

tree5• 17 years ago

You're right that the value of a trade is minuscule. But, a trade's value only amounts to only a handful of cents.

The top high-frequency traders though multiply that minuscule effect by millions (amounting to a much higher-value add as a whole to society), which IMHO justifies their high earnings.

redcap4• 17 years ago

I believe liquidity is a good thing, but can there be too much liquidity?

These computer algorithms seem to be really good at making things very liquid, is there any inherent danger in that? I seem to remember reading an article that the automated nature of the high-volume trading machines posed a danger in and of itself.

cynicalkane2• 17 years ago

I can't imagine a scenario where long-term investors are burned because they have an easier time buying equities.

Anyway, I think most people are confused because they think of Wall Street as though it is all about equities. Equities are a casino because the public treats them that way. If people learned not to throw their money away in the stock market, maybe equities traders would be in fixed income and derivatives instead, where they provide a much more important service.

Maro• 17 years ago

A good analogy is gold farming in a game like WoW: bots killing off pigs and cows, collecting the in-game gold and selling it on eBay for US dollars. Quants are in the stock farming business. Both are "hard" in the programming/modeling sense, both are about liquidity and the WoW analogy helps one to see both are about beating the rules (and other farmers!) in a "virtual world".

adamsmith• 17 years ago

> how [does] making money from money contributes to something worthwhile to society?

I don't have any formal training for credentials, but here's how I've come to think about it...

The markets (of which the stock market is one, but the venture capital and private equity markets also count) are capital allocation machines.

This is easier to see in venture capital. The market for startups makes it possible for promising startups to raise capital. It also "encourages" "bad" startups to die.

It's capital allocation.

Same thing for the public markets. They give companies access to capital (either through debt or equity) at a cost that's proportional to how valuable the company is, or is likely to become.

So society, through the open markets, gives Apple and GE the opportunity to raise capital.

Dying public companies, on the other hand, have a really high cost of capital.

And my favorite way to think of capital is man-hours.

So if you were king, and you were responsible for allocating man-hours to different projects, this is the same problem as capital allocation, and it's the same problem that securities markets solve.

They also provide liquidity and at scale the operational overhead goes to zero.

They also provide opportunities for investors to hedge against inflation, participate in society's long term growth, etc.

But the most important function from a societal standpoint IMO is very efficient capital allocation.

vixen99• 17 years ago

They are part of society and it's worthwhile to them. What they do with their wealth is up to them as indeed it is for you. Who knows what is necessarily good for 'society'? Politicians are constantly telling us what's good for society and they get it wrong most of the time IMHO.

redcap4• 17 years ago

It used to be the case that if you were fabulously wealthy you would put at least some money to help the needy. Bill Gates does a lot of this today. I'd wager that a lot of the wall street fat cats don't do this.

As you say what they do with their money is up to them.

I say that they shouldn't earn as much money, and that they should be more like Bill Gates.

euroclydon• 17 years ago

The hedge funds and the Goldman Sachs of the world (as if there is more than one GS), are profiting at the hand of institutional investors, you know, the folks that don't get pensions any more, but instead have some 401K pitchman come into their office and tell them how to plan for retirement.

They used to have this graph that showed the DOW never lost money in any ten year period. It wasn't adjusted for inflation, do that, and you'll hear a giant sucking sound. 401K chumps don't stand a chance of beating inflation, they're sole purpose in life is to add volume to the markets so the skimmers, who add far less value than they take, have someone to fleece.

It's white collar crime: if you can pay off some legislators and capture a couple regulatory agencies, then it's almost legal, though it's far from moral.

Joe 401K should seriously consider keeping his retirement money closer to home where the electronic thieves can't get their hands on it. Let the hedge funds make the long investments. I know corporations need to issue stock in order to grow, but the hedge funds just sit in between the investors and the corporations and manipulate the market.

gaius• 17 years ago

Joe 401K should seriously consider keeping his retirement money closer to home where the electronic thieves can't get their hands on it.

Joe 401k doesn't have much choice in the matter; the tax system leads him in by the nose.

Here in the UK, the housing bubble was largely caused by individuals looking for a viable asset class for their retirement. The stock market was out due to a combination of poor returns and Gordon Brown's tax raids on the pension funds. So we see when regulators meddle too much, lots of honest individuals making the correct decision for their own and their own family's future leads to negative effects on the economy as a whole.

protez• 17 years ago

The essence of capitalism is free market. What is free market? It's a price mechanism that simply works far better than any other alternatives. There's no mathematical proof, but it's a matter of consensual observation. Maybe, it's worse than others in some special kinds of markets such as healthcare, but it works far better in most cases.

Then why is that? Why free market beats any other forms? Because it computes prices better than any single intelligence known in this universe and it's possible by massive interaction not just between real demand and supply sides but all the participants who care about price. The group of people who care price the most is traders. Traders are the participants whose job is all about pricing, or balancing between demand and supply. Whether or not it's profitable, it's enormous contribution to the price mechanism of free market.

Actually, all the producers in any kind of markets are essentially traders. Whether it's manufacturing, mining, or agriculture, the profit can be made only from meeting price right, not just from hard working oblivion to real demand and supply. If you broaden the concept of trading in this way, you will realize traders are everywhere and they're important as much as any other kind of physical labors. An Internet start-up is also a trader. It can succeed only in the market where it can make successful trades between its product and the cost of what it produces. That's the essence of trading and we all do it every single day.

lanstein• 17 years ago

To me, the point of being rich is to be able to give the money away as you see fit. It's a lot easier to complain that such-and-such symphony orchestra is going bankrupt than it is to figure out how to become successful and then help that same orchestra. If you have a look at the patron list of the SF Ballet, you'll likely recognize a name or three.

pxlpshr• 17 years ago

While not without its benefits, the stereotypical technical trader reminds me of a parasite. The fact that people focus on "taking profits off the table" through volatility disgusts me personally.

Whatever happened to value-driven investments... </facetious>

johnl• 17 years ago

If it doesn't get out of hand, program trading is a good thing. It allows the value and small investors to get in and out of the markets smoothly and cheaply. As an example, moving to electronic trading killed the option market makers life style by dropping the spread between bid and ask to almost nothing. The problem, it will probably get out of hand.

jsm386• 17 years ago

A bit off topic, but I find what the 'geeks' are producing to be the most interesting part of this article. When the next financial mega-crisis erupts (note - financial, not economic - that part comes next), perhaps this will be the reason:

John Malitzis, vice president of market surveillance at the New York Stock Exchange's oversight body, told a conference in September that he has seen examples, both in U.S. markets and elsewhere, of computer algorithms malfunctioning. He calls them "algos gone wild."

Couple 'algos gone wild' with the fact that 60% of trades (article's figure) are HFT algo trades and you have the potential for absolute chaos in the markets. Many of the algorithms mimic each other (crowding into the same trades). Some algos are programmed to essentially hunt down other programs and exploit things they expect them to do.

As the article states, the high frequency traders have moved beyond equities into options. Imagine if we see a global cap and trade scheme implemented, with a marketplace for carbon credits. Could algos 'gone wild' drive the price of carbon credits to some absurd extreme (think the speculation-fueled oil bubble in summer 08, but in reverse) that dramatically influences how much CO2 our collective industries emit?

pwnstigator4• 17 years ago

I don't think there's more risk of "algos gone wild" than there is of manipulation and malevolence, as there has been forever.

Software bugs combined with human error are a source of danger though, such as in the infamous Japanese trading disaster (someone transposed the size-- 1-- and price-- ~600000 yen-- on a short-sell of an IPO, effectively giving away more shares than existed). The fail was not so much that the clerk put in a bad order, but that the exchange software wouldn't let the firm cancel it, leaving them to eat $225m in losses.

tlrobinson• 17 years ago

For those who are curious:

http://en.wikipedia.org/wiki/Mizuho_Securities

http://www.physorg.com/news8901.html

But I thought exchanges could retroactively cancel trades in some cases?

jakarta3• 17 years ago

Interestingly enough, Goldman Sachs is reporting that quant strategies may be becoming overcrowded, yielding negligible returns: http://www.reuters.com/article/rbssFinancialServicesAndRealE...

I do believe there is some truth to this, a couple years ago during the "quant bloodbath" we saw a major down swing across almost every quant fund, because they were all employing generally the same strategy.

At the same time, with the trend towards more complex markets, quants will continue to rise in demand at Wall St. firms (especially since their profits dwarf those of the IBanking division). However, that does not mean you have to be a financial engineer to crank out market beating returns. Traditional value strategies will probably continue to be just as good and beat the market over the long term.

nsoonhui• 17 years ago

>Traditional value strategies will probably continue to be just as good and beat the market over the long term.

I don't think so; the most you can do on average is to match the market return unless you have insider information which is clearly illegal. This is because so many has tried the traditional value strategies that the law of large numbers set in.

jakarta3• 17 years ago

It's pretty well documented that value investing in general will beat the market over the long term.

See: The Super Investors of Graham and Doddsville http://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-an...

How the Small Investor Beats the Market by Greenblatt, Pzena, Newberg (Journal of Portfolio Management, 1981)

More recently, James Montier has released research at Societe Generale reflecting the fact that Graham and Dodd-style investments also beat market averages.

The problem that arises nsoonhui is that most investors lack the emotional discipline which is necessary to invest in these types of companies, because of the psychological biases (people have a hard time embracing contrarianism, they usually cannot stomach the occasional stretches where value under performs the rest of the market, i.e.: dot com bubble). This is precisely why the law of large numbers has NOT set in. Many investors will pick up value investing and then drop it once it under performs. So, inefficiencies in markets continue to persist.

dzlobin2• 17 years ago

As a soon to be graduate, how do I go about getting my foot in the door of a high frequency trading shop?

wglb3• 17 years ago

Learn c++, real-time programming, finance math, move to chicago.

bmalicoat• 17 years ago

How much finance math do you need ahead of time? Is it enough being a great developer who is willing and able to learn the financial side quickly?

dejv• 17 years ago

http://news.ycombinator.com/item?id=966716

tsally• 17 years ago

A very successful quant did an AMA (ask me anything) on Reddit a while back. There's a lot of content there, but totally worth the read. If I remember right his background was a masters in math from MIT.

http://www.reddit.com/r/IAmA/comments/991kc/my_2009_adjusted...

ebrenes• 17 years ago

Thanks, that AMA in reddit was an interesting (and humbling) read.

tom_b• 17 years ago

I've known people who did a MS in comp sci, followed by a 1 year MS program in financial math. The one guy I'm thinking of in particular was a pretty brilliant math/cs double undergrad who used the 1 year financial math program as a springboard into the NYC quant scene.

I've sadly lost touch with him, but there are a number of financial math grad programs out there. If you're really passionate about this technology, try one out and do some internships. Oh - and don't do it because you think you'll make millions.

tybris• 17 years ago

Hooray stereotypes. I've never met a computer science PhD who went to star wars conventions. Most of them are very intelligent, social people who do not obsess over anything. The only thing they all have in common is that they like to climb mountains,

idebug• 17 years ago

wasn't this what helped contribute to the collapse? money loses its value and meaning and just becomes a number of figures and competing algorithms. just seems so pointless to me.

yosho• 17 years ago

I find it interesting how there is a high degree of animosity towards finance people on this site.

My theory is that it has something to do with them being successful and making millions without having to venture out and start their own business.

I mean, there are only a couple of roads that lead you to riches. Building a successful company is one of them, being successful in finance is another. I guess on this site, we've all chosen more or less, one road, so we have to rationalize to ourselves why we didn't pursue the other.

Or at least that's just how I feel sometimes.

Geeks trump alpha males on Wall Street

Related Stories