

Geeks trump alpha males on Wall Street - cwan
http://www.reuters.com/article/ousivMolt/idUSTRE5B114220091202

======
redcap
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?

~~~
leelin
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.

~~~
dtby
_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.'

~~~
leelin
Because then the very wealthy scalper has a monopoly, and the monopoly power
allows for profit-maximizing pricing, which causes dead-weight loss.

It's better the scalper sell 50% of the tickets at 10x (and let 50% rot) than
all of the tickets at 2x (and have nothing rot).

The scalper will let some tickets rot to preserve the 10x pricing because this
is a repeated game. If people know that he'd rather let tickets rot than lower
prices at the last moment, they'll have no choice but to buy at 10x or miss
the game.

~~~
imgabe
But there's already a natural monopoly on tickets isn't there? You can only
buy them from the venue that the show is taking place at. Surely if they see
that the market will bear 10x the price they're asking, they'll just raise the
face value price on the ticket. This would make it unprofitable for the
scalper to buy them all and resell them, since he could no longer ask 10x the
price.

------
tybris
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,

------
yosho
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.

------
jsm386
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?

~~~
pwnstigator
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
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?

------
jakarta
Interestingly enough, Goldman Sachs is reporting that quant strategies may be
becoming overcrowded, yielding negligible returns:
[http://www.reuters.com/article/rbssFinancialServicesAndRealE...](http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSGEE5B014020091201?sp=true)

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
>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.

~~~
jakarta
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...](http://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-
Doddsville)

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.

~~~
nostrademons
Take a look at the publication dates of those articles. 1981 and 1984. Right
after the "U.S. is going to hell and stocks will never be a good investment"
years of the 1970s, and right before the "If I put my money in a good mutual
fund and leave it there, I'm guaranteed to make money!" years of the late
1980s and 1990s.

 _Any_ investment strategy becomes less useful when large numbers of people
pile into it. They bid up the assets that the strategy dictates they buy,
which raises prices and lowers returns. I ran some cross-market analyses of
stocks in 2006 when I was working at a financial software startup. I found
that basically everything was overvalued: there _were_ no values to be had in
the stock market at that time.

A true contrarian right now would hold cash, in the form of physical U.S.
dollars. What's the one asset class that _everyone_ is certain will decline?
Cash. However, there're fairly good reasons why everyone thinks this, so even
now the picture's pretty muddled.

~~~
jakarta
"I ran some cross-market analyses of stocks in 2006 when I was working at a
financial software startup. I found that basically everything was overvalued:
there were no values to be had in the stock market at that time."

I guess you weren't looking at special situations/event driven investments
were you? Because I know plenty of people who did well during that year taking
advantage of inefficiencies like spinoffs, merger arb, and cap-structure arb,
and so on... these are typically the types of investments that Buffett refers
to when he said that if he was managing 7 figures he could do 50% a year.

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

~~~
tsally
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...](http://www.reddit.com/r/IAmA/comments/991kc/my_2009_adjusted_gross_income_will_be_in_the_8/)

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

------
johnl
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.

------
pxlpshr
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>

------
idebug
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.

