
Stopping the Finance 'Brain Drain' Of The U.S. Economy - cwan
http://www.wbur.org/npr/146434854/stopping-the-brain-drain-of-the-u-s-economy
======
cma
A good rule of thumb is if you are working in an industry where, if everyone
agreed to work half as hard (or half as frequently), the end results would
still be the roughly the same, you are in a largely zero-sum waste of time
job.

Latency arbitrage: if the underlying price change in gold commodities takes
one millisecond to be reflected in the stock price of gold-holding/gold-mining
companies rather than half a millisecond, utility to society isn't going to go
down anywhere near half. And since the awards are meted out solely based on
ranking, not on absolute gain in speed, there is very little relationship
between how much utility is provided vs. how much the provider is rewarded.

Index arbitrage: if an index fund is priced +- .001% off of its underlying
basket of securities rather than +- .002%, utility isn't going to go down by
half, and you certainly wouldn't want to pay some HFT guy to make it happen--
he ends up charging you one cent to flip a fair dime on every trade rather
than flip a fair quarter for free. Who do you think wins in that scenario?

Lawn care/car care/dry cleaning/etc. etc.: if everyone's grass got mowed/car
got cleaned/clothes got ironed half as frequently, there probably wouldn't be
a 3% drop in the utility provided (if your neighbors kept up the pace though,
it wouldn't be the case).

~~~
yummyfajitas
Your first example of latency arbitrage is correct. But your "index arbitrage"
example is confused.

If you place a sell order for your index at a price $0.02 less than the cost
of the basket of securities, why don't you want an HFT to fill your order? If
you didn't want your order filled, why did you place it? Would you prefer it
if a human daytrader placed the order, or if a retail investor cashing out his
IRA did it?

I'm also confused by your claim that the HFT is "charging you one cent to flip
a fair dime". Could you explain what this means?

~~~
msellout
He's saying (I believe) that the only positive externality of HFT is a slight
reduction in pricing errors. If the pricing errors were very large, then HFT
would be providing a valuable service. The implication of the quarter versus
dime metaphor is that the efficiency gain provided by HFT is very small.

However, my own study suggests the true situation is worse than he claims.
Though HFT does appear to increase efficiency most of the time, it also
creates sudden flares of inefficiency at the times when a well-functioning
market is most needed.

~~~
yummyfajitas
How does HFT create "sudden flares of inefficiency"?

~~~
sireat
HFT provides liquidity(a good thing) except when you most need it in times of
uncertainty.

Example, was the flash crash(I read the report and other sources), HFT
algorithms (and people too) decided it was getting too risky to provide
spreads and just decided to stop trading.

The old market maker system is gone, and we really do not have a substitute
that can handle the unpredictable.

That is, HFTs are free to get paid for providing liquidity, but they are also
free to pack up the shop and leave, if "things get heavy".

This does not serve institutional and retail investors.

~~~
yummyfajitas
During the flash crash, HFTs did not pull out due to market risk. They pulled
out due to regulatory risk. See my explanation here.

<http://news.ycombinator.com/item?id=2875927>

If HFT's save retail investors and institutions billions of dollars most of
the time, but fail to do so for a single 1-hour period when they run the risk
of regulators screwing them over, what's the problem?

------
jcnnghm
Engineering salaries are too low. There isn't enough money in it, and startups
are too much of a gamble. For every guy that makes a million dollars a year
doing startups, ten other people will make almost nothing.

Want more developers and engineers. Start paying what they are actually worth.
And stop fucking people out of their options and equity. After Skype and
Zynga, equity compensation is worthless. If the company really succeeds,
you'll get screwed out of it, and if it doesn't, it's not worth anything
anyway. In a $5M talent acquisition, the 1% of equity you'll get after 4 years
of vesting is worth $50,000, not even enough to make up for the reduced
salary. At this point, startups should be paying a 30% cash premium above
market rates because of the risk of failure.

How about paying a market wage, instead of offering a "free lunch" to people
that cannot negotiate. I am not interested in playing video games at work, I
have a house for that. Last I looked at it, the difference in pay between
finance and stem jobs is enough to hire a personal chef to deliver lunch to
you at work every day, and cook for you at home, and buy all the games you
want, with a bunch of money left over. Apple and Google are both posting ~25%
net profits because engineers are willing to work for peanuts, and a free
lunch.

An average (median) engineer should be making $200,000 a year, and the
"rockstar" (>80th percentile) engineers that everybody is trying to hire for
$85,000 and 0.5% of equity, should be making $350,000+. These are hard jobs
that few people can do at all, and fewer can do well. Great engineers can
create millions of dollars of value a year.

~~~
temphn

      After Skype and Zynga, equity compensation is worthless. 
    

The Facebook IPO is creating more than 1000 millionaires. Early people didn't
do so badly with LinkedIn, Zynga, or even Groupon either. There were a grand
total of four (4) people affected by the Zynga equity contract renegotiation
you reference.

    
    
      startups should be paying
    

Obviously startups don't have money, they have equity and a dream. This is the
point of a startup. If all one cares about is median-case money rather than
impact or max-case money, startups are indeed irrational and one should work
at Oracle or something.

That said, it is the presence of startups recruiting great engineers that
don't care as much about money that is causing bigcos like Google to offer
higher salaries. It is the only way they can compensate for the bureaucracy.

    
    
      An average (median) engineer should be making $200,000
    

Unfortunately, this is similar to saying that teachers, cops, firefighters,
housemakers should be extremely well paid. Everyone thinks their own talent is
surpassingly rare and their job is crucial to society. But the truth is that
engineering salaries have been driven up by a startup bubble in much the same
way finance salaries have been driven up. When the bubble pops and many of the
startups without much revenue fail, salaries are likely to fall back down to
earth.

Additionally, savvy employers will find other ways to get more people into
programming. As people who would have trained to become chemical, electrical,
or mechanical engineers start retraining to learn programming (e.g. via sites
like Codeacademy), in response to market signals, salaries will invariably go
down.

------
wtvanhest
The people supporting this movement seem to say that people should choose
entrepreneurship over financial services/consulting etc. because it is better
for the economic good of society.

Maybe, but entrepreneurship takes a much different skill set than various
financial roles and even in finance an investment banker has way different
skills than a quantitative hedge fund analyst.

When we start talking about the smartest 5% of people on earth even within
that smart group there are huge differences in skills.

Most entrepreneurs could not be hedge fund analysts or even stock pickers and
most stock pickers and hedge fund analysts cannot be entrepreneurs.

~~~
wtvanhest
At first I was surprised by the down-vote, but then realized the audience on
HN is comprised by a large percentage of people who are in financial services
and thinking about making the entrepreneurial plunge.

We are in the minority of people in financial services and when I look around
I doubt highly that the people I work with would ever want or be able to run a
startup.

~~~
wisty
Well, a lot might make good accountants, VCs, managers, or consultants. You
probably wouldn't want all the smart people doing web startups, either.

------
insaneirish
The "solution" to this "problem" is very simple. Give exceptional engineers
exceptional compensation outside of Wall St. and things will level out.

I would enjoy working outside of Wall St., but you're going to have to pay me
to get me to leave.

~~~
ThomPete
But this is the problem. Most other industries do not operate with profits
that allow for Wall St. salaries.

~~~
msellout
And much of the reason for those low profits is the high levels of debt that
non-financial corporations take on.

Or in another way of analyzing the corporate world, if you track who owns the
shares, you will find that almost everything is owned by a few large banks
[1]. So in a sense, banking is the only activity that is profitable. This
follows naturally from the structure of the economy -- capitalism [2].

[1] "The network of global corporate control" Vitali, Glattfelder, Battiston.
<http://arxiv.org/PS_cache/arxiv/pdf/1107/1107.5728v2.pdf>

[2] Every Economics 101 textbook ever written.

~~~
FD3SA
Unfortunately, as you've alluded to in your post, capitalism is a winner take
all game of poker that never ends. This means that those with capital have
disproportionate leverage over other players, to such a degree that skill and
chance become almost negligible.

To have any chance of becoming a force in the game, you have to accrue massive
capital by going all in with every hand you are dealt and every chip you have;
i.e. the startup philosophy. However, this does not stop the trend of capital
consolidation in the hands of fewer and fewer players. Conversely, the rapid
advancement of technology allows even more leverage for skilled and/or lucky
and/or wealthy players to exert their influence over the market.

Capitalism will not be logical once a trillionaire emerges with enough
purchasing power to decide the fate of the entire economic market. By
definition, the current capitalistic model of economics is transient, and will
not reach steady state. Once the system has crashed beyond repair, I pray that
intelligent engineers can construct a new system which better allocates the
world's resources to its many needs.

~~~
eligottlieb
One of the few things that actually stands to make a difference in this zone
is the possible implementation of crowdfunding laws. If small, new businesses
like start-ups could actually raise investment through crowdfunding (ie:
through people who don't have the 1%-er status to qualify as accredited
investors), it would be possible to use capital sources not already controlled
by the existing players.

------
sopooneo
Why are Ivey grads so valuable to these financial institutes? It seems like if
they wanted general smarts and abilities, there would be better filters. Like
STEM grads from across the top universities. My suspicion is that it is partly
about brand name. That is, these companies have an easier time selling a fund
if they can say it is managed entirely by people with Harvard/Princeton/Yale
degrees.

~~~
localhost3000
it is _entirely_ about brand name. add to your example the strengthening of
ties within the old-boys ivy league network. it's perfectly rational - if
you're them do you take the smart kid from the university of connecticut who
comes from a modest background and is on in-state tuition or the smart kid
from yale who, chances are, is related to a congressman, corp executive, or,
if you're lucky, a saudi prince. kind of a no-brainer if your business is
based largely on relationships and protected largely by class barriers.

come to think of it, why is everyone on here so concerned with 'killing
hollywood' lately? we should be killing the too-big-to-fail financial
institutions.

~~~
coopdog
Big institutions threaten to create a drag on todays economy, Hollywood
threaten our entire society by threatening freedom of speech for their own
short term selfish gains. All it takes is one government to use them as an
excuse to censor and become a dictatorship and it could do magnitudes more
damage to society and the economy than the finance industry ever could

Corruption between the two could be a driver to seek that dictatorship
however...

------
chrisbennet
_It has always been a fantasy of mine that a boatload of 25 brokers would be
shipwrecked and struggle to an island from which there could be no rescue.
Faced with developing an economy that would maximize their consumption and
pleasure, would they, I wonder, assign 20 of their number to produce food,
clothing, shelter, etc., while setting five to trading endlessly on the future
output of the 20?"_ -Warren Buffet

------
got2surf
Not only does money talk, but after spending ~200k on college (alright, maybe
100k on average after financial aid) startups are pretty risky. I mean, not
only do you have the normal high-risk, low-immediate-return situation, but you
have student loans on top of that.

Making 6 figures on Wall Street is definitely an attractive offer, and most
grads don't treat it as a final destination - it's more of a "make money for a
while, enjoy the city, and network" deal before they move into other
jobs/consulting.

~~~
tzs
The average Yale student has $9k in student loan debt at graduation in 2011.
They adopted a no loan policy starting in the 2008-2009 academic year to
replace loans with grants.

Harvard, Princeton, Columbia, and University of Pennsylvania have similar
policies.

Also, at many of these schools, if you come from a family that has income
under around $75-100k (the exact limits depend on the school) they will waive
tuition and many fees.

The net result is that, at least for students from middle class and lower
backgrounds, if you can get into an Ivy League school (or Stanford, Caltech,
or MIT), there's a good chance your family will pay less and you'll end up
with less debt than if you went to top tier state school--especially if it is
a top state school out of your state.

~~~
tikhonj
Oh yeah, state schools are absurdly expensive for out-of-state students. I
think here they pay more to come to my school than they would at almost any
private university.

On the other hand, the way the system is set up, it is actually cheaper to go
to a state school if your family is _richer_ \--financial aid depends on how
much you can afford, while in-state tuition is just cheaper for everybody. One
of the reasons I ended up going to Berkeley over CMU is that my dad had just
cashed out some stock options so I was offered no financial aid at either
place. (Maybe we filled the forms out incorrectly, of course, and I would
probably have still gone to Berkeley for other reasons, but it's an
interesting reversal of expectations--Berkeley was cheaper because, on paper,
my family made _more_...)

So the real irony is that going to a nice state school is actually a better
deal if you're in the upper-middle class in the Bay Area. It helps if you're
also into engineering :)

------
yummyfajitas
I don't get it. We recently had a recession which many people blame on
mistakes made by people working in the financial sector. Doesn't this
highlight the importance of the financial sector, and suggest that we need
more smart people entering finance? People who might spot the next bubble
before it becomes large and create new financial instruments to bet against
it?

I wonder - after Challenger and Columbia, did anyone claim that fewer smart
people should go work at NASA?

~~~
rgrieselhuber
I've never heard the recession characterized as resulting from a lack of
intelligence in the finance industry but rather, right or wrong, as a lack of
morals.

~~~
secretasiandan
Perhaps that means companies buying the products that the financial sector is
selling them should hire some smart people to work on their behalf.

------
jacoblyles
Interesting side point, I read in Alex Tabarrok's new book that there were
more graduating seniors in Computer Science 25 years ago than today.

------
rsanchez1
They can feel bad about it, but money talks. There's a reason why so many of
their peers agree to go into the financial sector.

~~~
FD3SA
Precisely. I get a chuckle every time I hear "there's a shortage of
developers!"

I want to make a t-shirt with that on the front, and "PAY UP CHEAP ASS!" on
the back.

~~~
peteretep
I was speaking to a guy yesterday who's having real trouble finding himself an
iOS developer. When I asked him how much he's looking to pay, he said "I don't
like people who think about money". Shocking, shocking I tell you, that he
still hasn't found his developer yet.

~~~
salemh
Endemic in the field, even as a Technical Recruiter (companies unwilling to go
above any sort of range of salary, yet bemoaning the "lack" of talent.) I
recently had a manager stating "they think they are worth so much money... we
have been trying to fill this position [developer] for a long time." Well
then.

------
naughtysriram
There is no finance 'Brain Drain'. There is only 'Money Drain'. Most of the
money is with that 1%, so the country's future lies in their hands. In
addition to that the Federal reserve system is their back up plan which help
them preserve their wealth in expense of other's in any case of disaster.

