Wall Street’s Trading Desks Endure Worst First Half in a Decade | Hacker News Reader

Wall Street’s Trading Desks Endure Worst First Half in a Decade

bloomberg.com

80 pointssikim75 comments

A lot of our clients work in investment banks. There’s been a long (since the election) and growing narrative that the market will correct any second now... any second. Meanwhile the market has gone up up up. Part of that, I believe, is because most of these trading desks sit in one place - NYC, a super liberal anti trump environment - so it’s hard not to buy into the narrative and go risk off which means you would have missed all the market growth. Almost everyone one of my friends that work at hedge funds have underperformed the market over the past 24 months.

For the market to be at an all time high, somebody is making money. The good news is that most capital exists in pension funds which are effectively owned by “the people” so most 401ks should be doing well.

It’s definitely a strange market. My worry is that the poor get basically no benefit from this (nor the tax cuts, nor the policies). They’ve gotten a 3% raise in the last year after several years of no unemployment and double digit growth for the stock market, and you can bet that’ll fall away after any downturn. It’s like we’ve created a perfect system to make the rich richer while not dealing with pesky inflation because wages are stagnant.

I don’t pretend to believe I can predict the market... I suspect flight to quality is playing a role. If America is in a precarious situation, how would we position Europe (brexit, macro trade immigration), the Middle East (Iran, war), South America (Venezuela melt down) and Asia (trade war, militarization)?

A lot of money is pouring into the US because it is relatively stable. Helps that US companies have favorable tariff policy, economic policy and a competitive landscape.

That's certainly part of it, but I think share buybacks are another major reason for the disproportionate rise of US markets. US corporations have bought more of their own shares than anyone else in recent years (Unfortunately I can't find the data right now). It explains a huge chunk of EPS growth.

Of course that wouldn't have been possible if corporate balance sheets hadn't been better in the US than elsewhere (especially in Europe). So it's still a sign of strength.

But it also raises a couple of questions: Is it sustainable? Why can't corporations find anything better to do with that money? Why is capital spending relatively muted while productivity growth has been subdued for years (both indicators have improved somewhat only very recently)?

I think low interest rates explain some of that. It makes sense to move funding from equity to debt in a low interest rate environment. But when buybacks run out of steam, I think we may well see a negative stock market reaction.

Perhaps this is what you get when when everyone learns the lessons of a truly severe recession/financial crisis?

People anticipate a recession because timing wise one should be due, they actually plan for it and reduce capital investment and just do buy backs instead?

So instead of a blowoff followed by recession, we sort of get a leveling off while everyone waits for the next shoe to drop?

I agree that this could explain modest capex. It also explains a lot of other things that are going on right now, such as the Fed planning interest rate cuts purely based on fear without any supporting data.

But if corporations expect a recession, why would they increase debt and weaken their balance sheets? Aren't they supposed to do the exact opposite?

Perhaps management compensation and shareholder activism explains some of it.

I think "expecting a recession" is maybe too strong, I think it's more a case that they just don't know what's going on. Same with me honestly, history suggests we should have a recession but it's not obvious at all what would cause it, at least to me.

In financial markets it's easy to see behaviour driven by fear and by greed, but this might simply be behaviour driven by confusion.

"timing wise one should be due"

Recessions do not have a schedule. Moreover, the much bemoaned "slow recovery" during the Obama administration would totally change any hypothetical boom-bust cycle with its unprecedented policy moves.

> but I think share buybacks are another major reason for the disproportionate rise of US markets. US corporations have bought more of their own shares than anyone else in recent years

Share buybacks are just a more efficient way of returning profits back to investors than dividends [0].

> Why can't corporations find anything better to do with that money? Why is capital spending relatively muted while productivity growth has been subdued for years

Most companies are demand limited which limits their investment opportunities. Also, you want to move capital where it can get the highest return. If a companies best investment opportunity gives a return of a measly 2% a year when the market is doing 7%, than you should not do it and instead return that money to investors so they can divert their investments to companies with higher returns.

[0]: https://en.wikipedia.org/wiki/Share_repurchase#Tax-efficient...

Share buybacks aren't necessarily done on a regular schedule nor do they imply the same sort of public commitment or are required to be paid for out of profits.

Saying they are just a more tax efficient alternative to dividends assumes that they are exactly substituted for dividend payments in amount and timing, but I don't think that's the case in practice.

Something that I've wondered is, if a company has excess capital why not, instead of acquisitions, dividends, or buybacks, just buy an S&P 500 index fund?

> Something that I've wondered is, if a company has excess capital why not, instead of acquisitions, dividends, or buybacks, just buy an S&P 500 index fund?

Because that would tie the value and riskiness of your company to the sp 500 which is inefficient as that effectively forces anyone who wants to invest in your company to also invest in the sp 500. Not everyone has a risk/reward preference that matches the sp 500. It's better to instead return profits to investors and let them reinvest into whatever they want.

Not everyone owning a given company has a risk/reward preference that matches some hare-brained acquisition.

However, the S&P 500 is approximately the same as the stock market, and so I think it's arguable that "everyone" together does have about the same risk/reward preference.

Buybacks, even if better in the best of all possible worlds, make it difficult to change your mind, whereas an index fund could simply be sold, rather than having to issue more stock. It seems like a lower-friction alternative to accomplish something economically similar.

Sometimes they do take the profits and put them into investments, or how they hold cash reserves for future purchases, payroll, etc. for example: https://en.wikipedia.org/wiki/Braeburn_Capital

Dividends are sticky: once the level is set, they are expected in perpetuity and any reduction is assumed to be indicative of poor performance or future performance. Buybacks have the benefit of not having that expectation attached.

Sure, that's what I was alluding to, but I think it's obvious that the difference is not necessarily beneficial. People make commitments for valid reasons, and they are usually worth something.

>Share buybacks are just a more efficient way of returning profits back to investors than dividends

True, but the effect on share prices is very different. If you compare the S&P 500 with an index (a price index, not a total return index) comprising companies that use dividends instead of buybacks, you get a distorted picture of relative economic success.

>Most companies are demand limited which limits their investment opportunities.

How do you reconcile lack of demand with the historically tight labor market?

>If a companies best investment opportunity gives a return of a measly 2% a year when the market is doing 7%, than you should not do it and instead return that money to investors so they can divert their investments to companies with higher returns.

I do agree with that in principle (provided you account for risk as well), but I'm starting to wonder if there is a self reinforcing element at play that's driving buybacks right now. Shareholders see stock markets rise. They demand buybacks based on your (fundamentally sound) logic. Management feels pressured to buy back stocks, which makes markets rise even more...

> How do you reconcile lack of demand with the historically tight labor market?

Look at employment to population ratio, labor share of income, birth rates.

Not historically tight.

True, good point.

We are back in a market manipulated by central banks. I call it “junkie mode”, you can tell because when there is bad economic news the market goes up, as it expects central banks to pour more liquidity/lower rates, lifting asset prices, like a junkie waiting for its fix. A healthy market goes down on bad economic news.

I think you shouldn’t forget December last year, which was a pretty clear warning shot. The last 6 months of gains could be reversed very quickly.

Yeah, the market will act on its own when the news is both powerful enough and outside the market’s perception of the central bank’s expectations; i.e. the Fed is “stabilizing” which reduces competition and efficiency.

Moreover, it’s inequitable. The economic instability is what allow upward mobility. The Fed’s stability goal equates to a goal of preserving entrenched wealth from competitive pressures.

What the central banks do is profoundly anti-free-market.

'Reduces competition and efficiency' is a phrase that really suffers because it doesn't capture the scale of the problem. For markets to rise on bad news indicates that the entire economic signalling apparatus is being disabled.

The people who think that disabling economic signals is a good idea are actually dangerous. Real wealth cannot be created by optimism and hope. Economies are supposed to purge themselves of idiot capitalists who can't create new wealth.

You're making assertions without evidence. Which economic signals aren't working? Seems like some retailers going bankrupt lately are a sign that there is plenty of competition, in some sectors, anyway?

We are on an internet forum. What do you want him to do? Get his post peer reviewed?

Maybe link to a news article or two?

We are not "back" in a market manipulated by the Fed. The Fed has been THE most important player in the market for at least 30 years, and probably 90...

By market, I assume you mostly mean assets and particularly equities. All of the Fed's moves so far have /arguably/ been against the equities markets.

Considering that, it is quite strange that every time there is "bad" news, the market rallies. But that's probably just a symptom of the very bullish market we've been in. The market usually rallies on "good" news as well...

You couldn't be more right. QE and the Fed propping the market up are why we're at where we are right now. Conversely, last December the tough talk, rate increases, and general hands off approach led to the sharp sell off. Until policy changes or something else drastically affects the market in some way, we're probably back to the slow grind up.

Data didn't show that at all. The market seems to be doing the exact opposite of what the fed had been wanting it to do. They have been so bad at it all they've managed to do is invert the yield curve on the short end.

YOY the crb commodity index is down as well as the metal index. Gold is even only up a little since beginning of 2018.

All of this would be the opposite of the fed was pumping too much liquidity into the system or controlling interest rates at all.

>I believe, is because most of these trading desks sit in one place - NYC, a super liberal anti trump environment

I would disagree. Most of the bankers where I worked last were happy with Trump winning.

>I believe, is because most of these trading desks sit in one place - NYC, a super liberal anti trump environment

That’s ludicrous. If you know anything about the politics and culture of the NYC finance crowd you know it’s super pro-Trump through and through.

He is — literally — one of them.

And doubly wrong by implying that said crowd would place politics over money. We're approaching "Not Even Wrong" territory here.

I believe that is a demonstrably false position. I’ve worked on Wall Street in NYC for 11 years, this statement is not consistent with my experience. There is even data to support it -donations to candidates from these employees is public. Hillary raised 10-1 vs Trump. Link to article below, leave it to you to dig into the fulsome numbers.

“Employees of the 17 largest bank holding companies and their subsidiaries have been sending her $10 for every $1 they contributed to Trump, according to a Reuters analysis.”

http://money.com/money/4554617/hillary-clinton-wall-street-b...

Is that statistic meaningful? I highly doubt that even a majority of the 256k people at JP Morgan are traders.

I see red baseball caps in FiDi.

I don't see them anywhere else.

I don't know how you infer ideology from this. Wall Street is all about betting on winners, and NOBODY thought Trump had a chance.

"In 2012, the same group contributed twice as much to Republican candidate Mitt Romney as it did to President Barack Obama’s re-election campaign."

Your own source doesn't really support your narrative.

You are looking at only part of the data and only at the part that supports your story. Donations are not all public, only donations from “little people” are public. The wealthy use Super PACS. From the Washington Post:

Meet the wealthy donors pouring millions into the 2018 elections By Anu Narayanswamy, Chris Alcantara and Michelle Ye Hee Lee Updated Oct. 26, 2018 Wealthy donors who have given at least $1 million contributed 74 percent of the $1.1 billion that has flowed this election cycle into super PACs, which can accept unlimited contributions from individuals and corporations.

While these groups cannot coordinate their advertising with candidates or political parties, they often work closely with official campaigns, and they are influential forces in this year’s congressional midterm elections.

Clinton was one of them, too, though. I think I get the point.

It's always like that though. Everybody wants to be 'in' while things are soaring, but wants to be 'out' by the time it turns downward. Some people get out too early, successfully missing the low but also missing the highest highs. Others wait too long and the low wipes out all their highs. The trick is being able to stay at the party until juuust before everybody else smells smoke and starts running for the exits.

Whether or not most capital is in pension funds (I doubt it), roughly 85% of the US stock market is owned by the richest 10%.[1]

I think it’s wrong to say these stock market gains have been enjoyed by “the people” when the richest 10% enjoyed the lion’s share of them.

1. https://en.m.wikipedia.org/wiki/Wealth_inequality_in_the_Uni...

Sure the power law holds in the stock market value ($), but you're confusing that it will hold with market returns (%) as well.

The rate of return (%) has been better for pension funds, IRA, 401ks invested in market wide index funds than the wealthy that have invested in active hedge funds. (This has been very true historically, especially net of fees.)

So it's fair to say that the wealthy have seen worse returns compared to the public. And that the public has seen the "lion share" of market growth.

The wealthy don’t just invest in hedge funds, they also have index funds and plenty of real estate. Also, pension funds don’t just have index funds, many are invested in hedge funds. At a certain level of AUM and intent the allocations become similar. It would be wrong to say the common man has suddenly outrun the wealthy, wealth continues to be highly skewed, esp given asset inflation.

Sure - agreed that I may have simplified a bit too much for the sake of illustrating the apples ($) to oranges(%) comparison u/thundergolfer was making.

Still, I highly doubt that the asset allocation of the median investor of the bottom 90% is similar to that of the median investor of the top 10% -- even if PFs have access to the same vehicles that HNW/FO have.

Wealth is definitely skewed. But, if you're willing to accept the wealthy have allocated more to HFs which have underperformed market, recently, it seems that the "common man" have outperformed by keeping it simple and letting their automatic biweekly 401k contributions go to VOO instead of some highly complex financial product.

EDIT: simplified wording

> And technological advancements have narrowed spreads in many areas of trading.

> “Part of the problem is that it’s too late to hedge interest-rate volatility, there’s not currency volatility to hedge. Speculators need volatility to hedge and enter the market.”

Sounds like a good thing to me.

> New rules limited lenders’ ability and willingness to make principal bets with their own money

Anyone know what regulation this is referring to?

One of Steve Mnuchin's stated goals was to reduce the domination of the 5 mega-banks and help bring back a healthy market of smaller banks that got squeezed out by new rules added after the financial crisis. Rules that were designed with the bigger banks in mind. So I wonder how the smaller players are doing.

https://en.wikipedia.org/wiki/Volcker_Rule

The smaller players are doing worse - at least on the trading side that the article is talking about. Even well-bankrolled foreign operators like Deutsche Bank and Nomura are too small to make money and are exiting the market bit by bit, and anyone who is smaller than that just doesn't have the economies of scale (Not just on regulatory compliance but to be competitive on pay). There are a few niche players who carved out a place to be profitable, like Imperial Capital, but if they grew any bigger, one of the big 5 would just buy them.

The rule they are talking about is the Volcker Rule. Prevents certain banks from proprietary trading. They are only allowed to buy and sell for the purpose of market making.

This, of course, is an incredibly stupid rule. There’s not really a big difference between market making and proprietary trading in the first place.

Proprietary trading is trading your own money with no obligation to transact or do any business with others.

Market making is offering public liquidity as part of a market function. They are designated market participants with rules and responsibilities.

They are not the same.

I think you might be a bit focused on the equity market there. In fx and interest rates markets there is no “public liquidity”, everything is bilateral.

There's not a market maker in America that's selling and buying in order to provide liquidity.

You buy low, and sell high, that's the end of the story, for both proprietary trading, trading for clients, and market making. There's no fundamental, categorical difference between these functions.

The difference between prop trading and market making is fundamentally about the time horizon of exposure. Market makers are aiming to zero out their exposure through frequent trading, while prop trading attempts to express a view on the market in the long-term (seconds for market making vs minutes/day/years for prop trading).

I'm a professional quant, and I don't see much of difference, at least as far as the government is concerned.

They are not the same, but Market Making requires hedging. Hedging is not usually 1:1 but rather portfolio hedging — so distinguishing prop trading from hedging is difficult except in the obvious case of prop desks where there was not hedging mandate.

Consider the London Whale incident — the entire $6b shortfall was a giant prop position passed off as a hedge.

,,we haven’t seen a lot of people repositioning their portfolios, we haven’t seen leverage increase.”

Maybe people are starting to realize that changing portfolios all the time without a computer making the calculations is not the best way to make money (quite the opposite)

You're not wrong, but this seems to be focussing on the institutional share holders, whose job it is to trade, not trading so much. For them trading is the best way to make money, thus the layoffs.

I wonder how much of this is a short term blip, and how much is the new normal, and if it is the new normal, where does it all end up, is buying and holding going to get more expensive, or will the active investing core maintain the same cost structure, but just shrink. Will we be seeing more Lehman Bros, or more Deutsche Banks?

Dumb question: so is this about trading that the large banks arrange for their clients and get commission on? And if so, how is this problem different from MGM, Wynn, Aria complaining that Las Vegas is having a couple of slow months?

Why do we need the banks for the trading anyway? Aren't there ways to handle it with technology rather than paying whatever fees the cartels want?

Maybe I am a little bit cynical in general about this stuff.

This is a piece in Bloomberg, it’s written for people who work in the banks and money managers, so naturally they are interested it’s a slow period, jobs will be cut.

There is a vast amount of technology involved, but someone sets the strategy and that person takes home millions if it works. They are supported by thousands of other workers who also, in total, take home millions.

Small correction: way more money is made by actually buying and selling than by taking a commission on someone else’s trade. These roles are called “dealer” vs “broker”.

http://archive.is/rSS5h

oh no, jpm only got 10.7 billion instead of 12, i guess it's time to close shop

The harder you think it’s going to be the market, the less you are going to trade. You need your confidence interval to reach a certain point before you are going to trade since you’lol have a negative expected value if you don’t have an edge (50/50)

Off-topic discussion below.

This is the most vile dark pattern I have seen in recent times.

On loading this page, there is an auto-playing, muted video. When you press its pause button, it is unmuted and keeps playing. Only when you press the pause button AGAIN does it actually stop playing.

At some point when implementing that feature someone said "Sure, I'm OK with that". What went wrong there?

Is that even a dark pattern? Surely that's just outright lying.

There is a user interface pattern that predominates these days, where a view/page will be loading/changing, and it will reflow between when you click/tap and when that is processed, causing an incorrect response. Sometimes I get caught in a loop, where I try to select something repeatedly and every time it jumps just as I choose it.

I always thought that was incompetence and not malice, but maybe apparent interface glitches are a significant profit center.

This happens on espn.com as well

> What went wrong there?

nothing out of the ordinary, probably some team had to increase some company wide KPI of engagement, and likely every team has their own spin on it.

it was ab tested and provided statistically significant increase on video engagement, which was likely defined as "people interacting with the player", in the end you see a chart with engagement growing due to experiment x,y,z.. and everybody is happy and convinced they are doing the right thing.

Advertisement is a cancer. It is time we forbid it instead of making it fund every website in existence.

It will end only when there is a viable alternative and as of now there is none.

There will be a viable alternative the day advertisement is gone.

There will be thousands of startups rushing to fill the gap.

What about all the projects being posted lately (quid, Mozilla with scroll, brave Browser, etc)?

I think the friction of getting started, both as creator and as contributor is still too high. I created a proof of concept site about this as well (https://news.ycombinator.com/item?id=20448087), but I don't think that's an ideal solution either, just maybe a little easier to get started. Any feedback is welcome, of course.

All you have to do is pay ALL the websites you visit and it'll go away...

I would be fine with paying them the amount they get from the advertisement they show me.

Force banks to accept micro-payments (In 2019, for God's sake! That's not rocket science! That's a database transaction!) and I'd be fine with it.

Is there any way to search the internet except for all the advertising supported sites?

Or you could spend $65 on a raspberry pi and install pi-hole. Then a huge amount of advertising and tracking never gets accessed and everything goes faster. This is a little more pragmatic then expecting all advertising to go away.

Messing with autoplaying videos (or fonts) in the most deliberate annoying way is not uncommon currently. My hypothese is that they want people to quit the web as fast as they can to increase the number of visits with the less expensive computers/bandwidth possible. Maybe also splitting the events in two or three (many short visits by the same people instead a longer one) to fake an increase in the counter of visits.

With NoScript blocking the javascript, there is no auto-playing video at all.

I'm not sure the crowd here is technical enough to use your advice. Or at least that's my conclusion after seeing this same whining thread on every. single. submission.

"Oh how fast the sun can drop." Pearl Jam

I'm going to lay everything I have on the line next week by trying to catch a short position on index futures by Monday morning, July 22, 2019. My guess for Sunday is a big dip down, followed by dead cat bounce for somewhere at or near the open Monday morning.

Sell the rallies as long as we are below ES ~8,000 / NQ ~3,000. Would be interesting to see MSFT, for instance, take a 70%-75% haircut in the next X years. [SPX 666 <- 10 years | 3,000 -> ??]

This is not investment advice.

Short now

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