Stopping the Finance 'Brain Drain' Of The U.S. Economy
wbur.org
wbur.org
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).
... in an industry where, if everyone agreed to work half as hard or half as frequently, the end result would be an improvement for the overall economy.
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?
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.
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.
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?
Note the word "people".... Are you claiming that someone (or something) has an obligation to trade? Who? (If the answer isn't you....) Why?
> The old market maker system is gone, and we really do not have a substitute that can handle the unpredictable.
We had "flash crashes" during the old market maker system too, so if you're claiminging that human market makers prevent flash crashes ....
More simply, how many levels deep do you carry this analysis?
Also, can you guesstimate how much of the income generated in the US is not derived from zero-sum waste of time jobs/products when you carry the analysis at least 2 levels deep?
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.
After Skype and Zynga, equity compensation is worthless.
startups should be paying
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
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.
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.
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.
I would enjoy working outside of Wall St., but you're going to have to pay me to get me to leave.
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.
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.
[1] http://articles.businessinsider.com/2012-01-23/tech/30654463...
In regards to Ivy Schools, they are generally ranked top 10 in most non-engineering subjects in the USA, including math, physics and economics. An Ivy grad is a reasonable guarantee that you are getting top class talent.
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.
Corruption between the two could be a driver to seek that dictatorship however...
I think the same kind of signaling is used at its fullest in big banks investment dpts. In most cases, what is actually done by e.g. quants is far from very sophisticated mathematically speaking. But you can more easily claim that what you do is complicated if most of your quants are from prestigious institutions. Having everyone coming from a similar set of cultural values also helps cohesion.
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.
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.
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 :)
I agree with what you're saying - it's not necessarily student loan debt, I misstyped. But the average Yale scholarship package (no loans) is 30k-ish, so the average family pays about 20k a year. I got in to Caltech EA, and it's pretty much the same for me.
But basically what I meant is that students from middle-upper middle class (majority of applicants) have families who spent a good amount going to an Ivy/equivalent, so they're even more encouraged and pushed towards a high-paying field. You should see the looks on some of my friends' parents faces when, after 4 years at Yale, their kid wants to become a freelance artist instead of a doctor :P
But I do agree, private colleges are almost never "sticker price", and are well worth the money IMO.
I wonder - after Challenger and Columbia, did anyone claim that fewer smart people should go work at NASA?
Of course, the real problem is our deficits. We can't pay for them any longer. The Fed is buying 91% of all long term government debt now. So they have to keep rates low or the US Government will become insolvent. Keeping rates low causes a huge surge in liquidity. And if you a reduction in slack in the real economy, zooooom there goes a bubble somewhere.
The financial industry, through lobbying, the federal reserve system, and the revolving door between it and the government, have created institutions that have such a high barrier to entry, that they face no real competition. We cannot create a competitor to Bank of America. We have to trust the Bank of America's competition with Goldman Sachs, Wells Fargo and Citibank will be enough to see the banks make smart bets, charge lower fees, take a smaller cut, and demand fewer bailouts when they screw up. The problem is we've seen them do none of these things. This implies the financial instituions are essentially working in trust, blocking new entrants, and marching lock-step to continue making massive profits.
The fact that the largest bonuses in Wall St. history occurred just after the financial bailout will always serve as the most obnoxious proof of the deceit of the industry as it exists in its current structure.
The problem was caused by an imbalance between the intelligence of the people building sophisticated and dangerous ways to use leverage and the people policing them, so unless these grads are going to work for the government ... the problem is just building on its self and will certainly re-occur as the government stays one step behind the geniuses Goldman Sachs et all hires to create money for them
I wonder - after Challenger and Columbia, did anyone claim that fewer smart people should go work at NASA?
This is a bad analogy because the Space program is not a for-profit exercise, the motivations are entirely different.
From what I have seen, there is something fundamentally wrong in the finance sector - and I don't think it has much to do with morality. It has more to do with the fact that they have so much money that they can afford to do things in very stupid ways. Retail is e.g. most likely far more sophisticated in their usage of IT than the big investment banks. Banks are full of custom systems that are 10 times less efficient at solving problems that have become commodities everywhere else. The fact that they have so much money working the way they work suggests that some rent positions are at play.
Changing this would require a cultural shift that is not likely to happen if they take people from a similar cultural background IMO.
NASA laid all these guys off, what were they supposed to do, flip burgers and drive taxis? No jobs in research or academia. HFT is one of the very few industries that pays mathematians and physicists commensurate with their skills.
I want to make a t-shirt with that on the front, and "PAY UP CHEAP ASS!" on the back.