What the interns have wrought, 2021 edition
blog.janestreet.com
blog.janestreet.com
For those genuinely interested, for the most part trading firms employing quantitative and automated strategies look to keep the price of derivative or correlated assets in line with their underlying securities.
For example a stock ABC might either directly or indirectly represent two other underlying stocks FOO1 and FOO2 and a trading firm will create a model to determine the relationship between ABC, FOO1 and FOO2 so that ABC = f(FOO1, FOO2).
The role of trading firms then is to compete both on coming up with an accurate model (one firm might believe that the relationship is really ABC = f(FOO1, FOO2) while another firm models the relationship as ABC = g(FOO1, FOO2) and yet a third firm models the relationship as ABC = h(FOO2, FOO3) for some third asset FOO3) as well as premium (a firm will trade ABC = f(FOO1, FOO2) + small_fee and pocket that fee), as well as engineering aspects such as identifying cheaper costs to trade, providing fast execution etc etc...
In the absence of efficient trading strategies or market makers whose job is to maintain this price, what you get is ABC will trade at a huge spread and trades will cause the price of ABC to fluctuate significantly. Both of these properties are vaguely lumped together and called "liquidity" so that trading firms are said to provide liquidity to the market. They ensure that ABC is available to buy and sell at all times at a price that reflects its actual value at every moment in time.
If there's some kind of economic inequality created by keeping the price of assets tightly coupled to one another so that their price reflects their actual underlying value then you are welcome to take some time to present that argument.
From my point of view having done this now for close to 15 years, I find it to be a very interesting and challenging career that lets me consolidate knowledge from a variety of different fields. I get to study and put to use knowledge of many areas of computer science from machine learning, graphics/data visualization, compilers, databases, computer architecture, networking, as well as other fields such as physics, economics, law. I feel very privileged to be able to work in a multidisciplinary field and be able to see almost in real time the effect of my work. I worked as a software developer at Microsoft and Google prior to this and while those were both comfortable and pleasant places to work, it didn't compare in terms of feeling like you had an actual impact on anything. I felt at both of those companies like I was being paid a lot of money to do basically menial jobs.
There is nothing menial about working at a trading firm.
All of those firefighters, police officers, and teachers can't get their monthly check unless the pension funds converts part of their investment into cash, and the amount traded gets so large you need well-funded financial participants who will pay the pension fund a large lump of cash and assume the risk of unwinding the position.
The same thing goes for portfolio rebalances. Some smart and prudent retirement fund has run their risk model and decided that their sector exposures are off by like a few percent. They've got 2% too much financials, 2% too little tech, they want to move 1% from consumer staples to consumer discretionary, etc. We're talking about billions of dollars being moved right here! They want to use the money from the assets they sold to purchase the assets they bought, but they want the transaction to happen all at once... not in two parts. Again, this is where the quant funds and market makers of the world come in.
It's easy to think that finance is all fat cats, hedge funds and multibillionaires, but anybody with a retirement plan, a pension, ETF holdings, or mutual fund holdings, benefits from the work these quant funds do.
So yes, it's a leap of abstraction for most people to grasp that 'market making' etc. is an important function, and that there's legit value created.
... but the amount of surplus capture is gigantic and that's the problem.
Fouquet became Louis IX 'CFO' and somehow at the same time amassed massive wealth possibly illegitimately and so he lost his head very quickly.
It's always the people closest to the piles of Gold that end up with all of the Gold. There are a million ways they justify it, and in free markets where information and relations are 'the power', well, they have it all.
Usually it's 'generally very talented' people involved, of that I have no doubt, but that again doesn't justify necessarily the surplus capture.
Honestly it's a lesson I've taken in my career so far - those who are closest to the money flows get to siphon off the most for themselves. I'm by no means that close, but it certainly informs what I put myself forward for.
Does the difference in skill, effort and output justify it? No, and many of the people working close to the money are no better (or are often far worse) than people further away, being paid less. But people are willing to pay them more, because they are also close to the larger flows of money.
Also either it's 'market making' or 'trading' I think it should never be the same thing under one roof and that market making should have a fair bit of regulation and transparency.
Because your statement about "either it's 'market making' or 'trading' I think it should never be the same thing under one roof" is like saying "it either gotta be 'playing soccer' or 'kicking the ball', they should not be the same".
Sure, "kicking the ball" is done by many different sports and in many different ways, but it is literally an integral part of playing soccer, so you cannot say "either or" here. The same.
The whole point of market making is trading securities at both ask prices and sell prices, thus providing liquidity to the markets. So they essentially are making profit off bid-ask spread, but doing so reduces bid-ask spread and decreases market inefficiency (thus converging on a more accurate value of the security in question).
And to your point about regulation of market makers, they already have more than just a "fair bit of regulation and transparency".
If you search for "David Lauer interview", he's a former Citadel HFT that has spoken out about how the funds operating right now are a world away from the platonic ideal of market making you speak to.
As for doing good in the world, there's an awful lot of businesses that really only contribute via tax. They do something where the entire benefit, sometimes more, is captured between the business and its customers.
But to say it specifically, you need market makers, because if they weren't there you'd have to wait a long time for someone with the opposite intention to you to show up, and that has a huge cost. And keep in mind MMs are only one part of the capital apparatus that we need in the world. This isn't just fluff, I literally had a friend phone me last week looking for money for his African startup that has had to turn down business for lack of capital.
The how of it is a long story as well, but quite an interesting one that spans a number of fields. Coding, economics, finance, and so on.
1. Market making (providing two sided liquidity in a market), and in general providing liquidity (even one sided) is a real benefit that (some) trading firms provide (e.g. Virtu, but also many proprietary shops).
The market making function solves the time-mismatch between client A who wants to buy now, and client B who would want to sell in 1 hour.
The liquidity provision is what allows, through pay-for-order-flow, retail investors to get the best current price for AAPL through their Schwab app. Not only that, they do not have to worry about the order execution (how long would it take to get filled), and their fees are low or 0 (because someone is paying Schwab for the order flow).
2. A similar, but slightly different trade is what ensures that ETF are priced "correctly". This is also a boon for retail investors.
In order to ensure the ETF price are in line with the price implied by their underlying assets, someone need to do the "index arbitrage" trade. Again, retail gets a nice useful product (e.g. SPY which tracks S&P500) instead of having to buy a lot of stocks (naively, 500).
3. And then there are directional trades, which are basically trying to "arbitrage away" moves in correlated prices. Is there a value in this? Maybe, but it is just accelerating existing trading realities. Someone would have done it anyway.
I am guessing the perception that the industry adds no value is because of stories about the ridiculously low latency number - trade in the blink of the eye, reacting in nanoseconds, etc.
And I tend to agree.
If the exchanges changed the way they matched orders (e.g. instead of First In First Out/time priority ["who came first"]) to a procedure that introduces randomness that eliminated the advantage from nanosecond/microsecond differences, it would make no difference to the world.
The prices would still be "good enough" (no retails participants care if the prices settled within 100 nanosecond, 1microsecond, or 1 millisecond).
So to sum up, does it bring value? Yes, but it does not mean there is no silliness involved.
And 87 interns, that's quite a lot.
Given the level of granularity in that code, I can't imagine what they are all doing.
How do you have 87 people tweak a code-base and then just leave?
There's an incredible amount of sophistication in some of those project, surely they're not all used, but imagine the team you need just to maintain any of that. With only 1200 staffers, how many are in Development?
I think there must be a huge amount of surplus spend here. Basically, they are swimming in cash, hire the best interns, get a few nice things but mostly it's not that important. But if those marginal contributions eventually do provide a tiny bit of value the amount of leverage involved is so huge that it can make them a fortune.
I worked at a blue chip we hired a lot of interns and we put them to work, man they ran a lot of things.
That said, it was hit or miss.
From https://www.efinancialcareers.com/news/finance/jane-street-p...
If you are ultra profitable then the difference between paying market rate and top of market rate might be double the salary and that would still be a rounding error on a spreadsheet somewhere.
I guess it also depends how sensitive your output is to the quality of the developers, lots of enterprises I've worked for you'd be hard pressed to tell the difference between a competent developer and an excellent developer since the end result is from a distance pretty much the same in that case it would make no sense to pay more than will get you a bunch of competent developers.
My impression from the outside is that janestreet does see that value.
Some what correlated I love it when companies say "We hire the absolute best developers" and you ask what they pay and market-rate is the answer.
JaneStreet remains fascinating to me though because while they do programming and I'm a programmer we are almost different species because of the problems we solve - which makes it interesting to me.
So it does seem very high, but not impossible?
Edit: I just noticed base pay–then yes, that's about what it'd be, but base pay tends to cap out very quickly so it's not a good measure of compensation.
To be fair I don't care about salaries as much as half of HN appear to, I'm quite comfortable on that with a wife on a postdocs wage too.
A solid salary helps.
Pre or post tax?
As a London fintech contractor (until recently) I have able to pull in around $22k USD pcm pre tax, or very, very roughly $14k USD pcm post tax - contractors have various ways to manage tax load and time off so it's never a direct translation.
$16.5k pcm for an intern still seems utterly crazy, given my starting annual salary of £21k 20 years ago, but if there is a) a ton of money flowing through the company and b) the intern is able to help them bring in more than that over the course of a year then... I guess it's worth it to them, and that's all that really matters.
The salary numbers on https://levels.fyi seem to be plausible enough for US FAANG salaries, if you want an idea of what they look like.
From what I hear though, interviews are hell, worse than FAANG or any tech companies and probably extremely competitive.
https://www.levels.fyi/comp.html?track=Software%20Engineer&s...
Finance non-competes seem to be MUCH more restrictive than tech. Also, you have to average 5-year comps... because Finance pay can be very volatile. Also, in tech, many more companies try to filter out non-team players during interviews.