For the Love of Money
nytimes.com
nytimes.com
Is this statement (from the article) true?
I'm under the impression that financial innovations throughout history have generally spurred capital investment. Innovations like fractional-reserve lending have made bankers&investors wealthy, but also spurred spending on infrastructure in a way that could be a win-win for society as a whole.
If today's financial wizards went away, would we feel a surprising amount of ripple impact, or would they really just not matter?
The point the author was trying to get at was not that finance geeks don't provide any social utility.
Just that in any rational category of needs, the value they provide would have to rank far below the value provide by nurse practitioners (and schoolteachers, police officers, lawyers even... a zillion other working categories, in fact).
If today's financial wizards went away,
It's not just a question of "if." To all intents and purposes, the financial services sector as we know it today (both in its technical prowess, and in sheer size and scope) did not exist 30 years go. True, we didn't have Facebook or iPads then. But people managed to live healthy lives, raise children, have careers, buy houses, fight wars, etc, just the same.
So from one point of view, yes the financial services sector can be seen to grease certain wheels (like IPOs, M&A). But in the larger picture, (in the view of many) it doesn't seem to provide all that much value, in proportion to the resources (and brainpower) devoted to it. It also seems to generate no end of collateral damage (the recent mortgage crisis being just one example).
1. There would be a substantial impact... for the better. You and I would see the benefit as lower spread between cost of production and price of purchase of goods and services (the spread is where the "financial wizards" take must come from).
There is a huge benefit from proper distribution of resources - which used to be the job of financiers and brokers. But now, they work not on "proper distribution", but rather on "distribution which is the most profitable for themselves".
2. And if the "financial wizards" did not go "away", but instead into professions where their intellect could be used for good instead of for evil (e.g.: science), that would be even better.
If not, why do you believe insurance mechanisms are damaging in finance?
From Jaredsohn's link further in the thread: http://en.wikipedia.org/wiki/Derivative_(finance)#Economic_f....
In the context of a 2010 examination of the ICE Trust, an industry self-regulatory body, Gary Gensler, the chairman of the Commodity Futures Trading Commission which regulates most derivatives, was quoted saying that the derivatives marketplace as it functions now "adds up to higher costs to all Americans."
As a relatively ignorant layperson, my guess is that derivatives allow productive businesses to hedge against uncontrollable risks.
A business with less risks requires less capital buffer, which encourages & allows for more capital investment and profit-taking.
In a nutshell, derivatives allow businesses to run and grow on less capital, by reducing the amount of capital-on-hand required to buffer against risk.
Is there some other way in which derivatives serve an ostensibly positive function in society? Am I missing something here?
I think the largest benefit is for organizations like pension funds which are required to minimize risk. Being able to hedge against specific types of risk (e.g., via a "longevity swap") allows pension funds to allocate their limited "risk budget" in ways which yield higher returns (thereby allowing them to pay out higher pension values).
Derivatives are nice, in that sometimes its possible to separate the risk out from the asset. Consider a $50k loan at 5% with a 1% risk of default.
A pension fund and a hedge fund both have capital, but the pension fund have extremely conservative investors and the hedge fund have extremely risk hungry investors. That loan is not a good investment for either.
So a derivative is created: the hedge fund agrees to make the pension fund good if the loan-taker defaults for a one-time fee of $550 (the cash-value of the 1% risk + a $50 fee). The pension fund now has a $49,450 loan (actually, it will be booked as a $50k load both paying a bit less that 5% interest - the exact amount depends on the running time of the loan) and a $0 risk budget and the hedge fund just made $50 + a 99% chance of $500 more. All are happy, including the loan-taker who might have struggled to get someone to load him money.
(Numbers pulled from thin air for illustrative purposes and lots of details omitted)
I resolved not to play poker again until I understood the game much better.
Ditto for derivatives. If you don't understand the game, you should invest in something else.
There would certainly be an impact if all that stuff went away but it wouldn't be because of it's absence it would be because of the pain of unwinding it all.
Forward contracts in Sumer http://www.realmarkits.com/derivatives/3.0history.php
I think the point of "the world goes on without Wall Street" is that banks and stock markets will still provide speculative capital to expensive ventures whether or not high frequency trading is around, and agriculture will still grow and sell food whether or not hedge funds are buying and selling futures.
My understanding, which is tiny and very limited, is that you can think of the role of finance operators as "liquidity providers". They're the grease in the wheels of capitalism; by either providing access to capital (via loans, or investment) or by matching buyers with sellers.
A classical example is you're a farmer that wants to hedge the risk that your crop will fail due to random weather events or that there will be such a glut in the market that you won't be able to sell your crop profitably. So, you enter a contract to sell your crop at a fixed rate long before harvest comes along. That's a future contract, and it's a kind of derivative.
So, derivatives can be really socially useful instruments. They can act like certain kinds of insurance, or allow you to capture different dimensions of value on assets that you already own.
However, and here's where the argument comes in, it's not clear that all kinds of derivatives provide socially useful forms of gambling. The prime example here is that of the collateralized debt obligation in which huge portions of the US mortgage market got sunk into.
Mortgage backed securities are probably not in of themselves terrible ideas but the way CDOs were structured made it impossible to objectively value the risk behind the instrument. It's just not clear how a dip in the market might affect the value of your CDO tranche. It's actually an np-complete problem - https://freedom-to-tinker.com/blog/appel/intractability-fina...
Another example is high frequency trading - where you're a day trader on steroids and have computers exchanging massive quantities of stocks based on fluctuations of fractions of cents. HFT people will argue that they provide more liquidity in the market - it's easier to sell your stocks because HF traders increase the overall volume, etc. However, it's in effect launched an arms race between different trading firms and some people say that they're literally making money by skimming off everyone else who trades stocks. There's a very reasonable argument that we don't want markets to operate faster than human perception. If you have to make a decision about selling something, placing a ground foor and minimum transaction time of say half a second isn't going to harm anyone who needs that liquidity for their business, or anything else that touches the "real economy".
To summarize: certain kinds of financial instruments seem to provide no value above and beyond letting well-connected actors to place (potentially ridiculous) bets. Using your money, one way or another - whether it's your farm, the mortgage on your house, or your pension fund.
--
If we accept the above as true, we can go further on a limb and ask questions about why is the wealth that passes through financial markets so liberally redistributed to people in the industry? Some people talk about it being a function of volume, but individuals are rarely if ever liable. When do they stop providing a service, and when do they start skimming off the top?
HFT people will argue that they provide more liquidity in
the market - it's easier to sell your stocks because HF
traders increase the overall volume, etc.
http://en.wikipedia.org/wiki/Market_maker
HFTs provide liquidity when the market's good, but you always have plenty of liquidity when the market's good. You only really need liquidity during a price crash, which is precisely the moment all the HFTs head for the exits, and the exchange seizes up.
HFTs are essentially a tax on stock transactions, and if you actually wanted that, why not have a legislative tax, rather than giving 5% to whatever stock trader has the shortest fiber optic cable to the exchange?
I think it is very stupid to allow a system to evolve where half the trading
is a bunch of short-term people trying to get information one-millionth of a
nano-second ahead of somebody else. It’s legalized front-running; I think
it’s basically evil and it should never have been able to reach the size
that it did ... why should all of us pay a little group of people to
engage in legalized front-running of our orders?
To make this concrete:
Say Charlie & Warren wake up one day and decide Company X is undervalued and that they want to by 5% of it. They start buying stock. In the old pre HFT days it would take a while for the market to notice all this new demand so they could get a lower price. But now HFTs are really good at noticing this so the price rises faster.
But wait you say! This is the "front-running" that Charlie is complaining about and that's bad! He's getting screwed!
But what if you were one of the people selling to Charlie. Before HFTs made the price faster you were the one getting screwed! There was all this new demand and you didn't know about it yet so you weren't getting as good of a price as you otherwise could have.
HFTs aren't front running. They just move the stock to it's true price faster than the humans doing the job before could.
If I'm buying, the HFT buys ahead of me and resells it to me at a higher price. If I'm selling, the HFT shorts ahead of me and buys from me at a lower price.
This isn't about liquidity or efficient markets, it's about gaming the system through preferential access to data and executions. It results in higher prices for buyers and lower prices for sellers.
They cannot jump ahead of you except by offering a better price.
I wrote a blog post a while back that explains the mechanics of matching engines, you might find it helpful: http://www.chrisstucchio.com/blog/2012/hft_apology.html
There was a big trade for a while where people had different account types. the CBOT matching engine, for example, had customer orders prioritized over marketmaker or firm, so customers actually COULD jump the line.
Some companies had customer accounts specifically so they could insert orders in higher priority in the queue (the tradeoff is that customers pay for CXLs, but you can just do the math to see when you should be using which account)
to @panarky of the comment, its not on the order of microseconds -- the stuff people used to rip on were flash orders, which are exactly 30 milliseconds.
So @panarky has a bit of a point about knowing the order in advance, but its still damn hard to profit from it. The narrative of just front running trades by having order information in front is just not feasible because of the bid-ask spread (the flash orders are to try to help maintain some semblance of BBO consistency across exchanges)
So as yummyfajitas says, it's not possible to sell ahead (saying "short ahead" in that way exposes you as not really knowing the trade, btw) or buy ahead in a way that necessarily affects price.
So, basically, you're paying for your own decision.
The sellers sell at their ask price (or at my bid), it's their decision to sell. If you offer to sell something to me at $10, I haven't "screwed" you just because someone else was willing to pay $11.
It absolutely is front running. Moving the price of a stock to your advantage because you know my intentions is exactly what front running is.
Incidentally, if it's acceptable for Charlie Munger to sell in such a way that others will suffer the price impact of his trade, why is it not acceptable for HFTs to do the same thing? In both cases, it's just one trader playing short term games against other traders in order to make money.
It's not uncommon at all and I've seen it happen quite openly in many situations. It's tricky business outside of the pure electronic game.
Also what does it even mean to "Move the price of a stock to your advantage" ?
That is the definition of "front running".
I'd like to see a 1 cent tax per share per transaction. That'd dramatically limit HFT.
HideNotSlide does not cause an order to "jump to the top of the order cue[sic]." It preserves your order entry time at a price that is contra the NBBO if there is not an order at Direct Edge at the NBBO (if there is an order at Direct Edge at the NBBO the incoming HideNotSlide order is filled).
I doubt "HFT" would be dramatically limited by a transaction tax. I believe that it would lower trading volume by some amount and widen the bid/ask by some amount. The number of "HFT" firms and their trading habits would look mostly the same though.
http://www.directedge.com/Portals/0/04Support/Membership/EDG...
The point is that no special license or membership is required, although you may have to do some work to implement this type of order.
Source? I believe you but I'd like to be able to quote an authority if I'm telling someone else about this. I've gotten into this HFT debate with colleagues, and I'm pretty sure none of us knew about this nifty trick.
http://online.wsj.com/news/articles/SB1000087239639044481270...
The non-populist argument these days seems to be less about fast, electronic market making and more about whether there should be a fixed, minimum trading time, e.g. by discretizing trading into intervals of a certain length.
The fact is that would never happen. I'm all for investment.. hell, I'm all for gambling, sex, drugs and rock and roll for that matter. I don't think most things should be illegal... but labeling the stock trade and wall street as investment companies is ludicrous.
Instead of making money by choosing stocks, market makers make money by providing a concrete service to the market: they make it easier to buy and sell for people who are investing. They are more like the merchants or shipping companies of finance, rather than speculators. And there is nothing wrong with this!
In fact, calling it gambling is just wrong: most market makers actually take on very little risk! While their actions are not felt by the company directly, they are felt by people who own the stock and people who either want to buy or sell it. And knowing that it's easy to buy or sell a stock makes people more likely to participate in the markets, which is definitely a good thing.
Also, it's very important to note that even non-trivial investment strategies do not involve buying and holding on to large blobs of stock for months. Instead, you likely want to micro-manage your portfolio following some sort of mathematical model every day to minimize risk and exposure. Again, there is nothing wrong with this! But it does involve quite a bit of buying and selling stock, and the liquidity created by market makers really helps.
Viewing the stock market as solely a means to invest for long periods of time is really missing most of the picture. Your suggestion would actually increase most people's risk, leading to more gambling rather than less--or just significantly less investment over all!
I would argue that investors with a 3 month holding period are actually exerting a pretty corrosive influence on businesses: emphasising a focus on the next quarter's results at all costs.
After all, the investor needs to understand the business strategy, the operating conditions, and the particular risks and opportunities available to that business. The company and (particularly) it's management have an interest in increasing demand for the stock, so they normally oblige.
The conversation is not one-way. Stock options mean that the personal financial interests of the senior leadership team are normally well-aligned with that of the investors, so all the parties to these discussions have a mutual interest in the performance of the stock.
Investors have a mandate to maximise return and minimise risk. They have a limited ability to predict the future; an ability which drops precipitously the longer into the future they look. Investing client funds based on unreliable long-term predictions would be an irresponsible dereliction of duty on the part of the fund manager. In addition, measuring the performance of fund managers is also notoriously difficult, so there is a very human need to get as much feedback on performance as possible as quickly as possible. All of these factors combine to exert incredible pressure on the institutional investor to focus on gains in price over shorter time-spans (months rather than years).
This interest and short-term focus will naturally come across in discussions between the investor (=owner) and the senior management in the company. It takes an unusually self-aware, self-confident and self-assured management team to recognize (let alone resist) this inexorable pressure.
What I have seen far more often is smart decisions delayed to please the investors, or costly decisions taken, at all stages: before or during Series A, B or further, before or during an IPO, etc. The most common ones are related to HR: contractors costing double and won't be here when what the set up breaks rather than employees to set-up a strategic asset because, otherwise, accounting practices would show increasing long-term duties to said employees. More generally, many companies suffer from a lack of investment because of the short-term focus — this I can describe in details in repeated cases, for the dozen of more companies that I’ve worked with. The single exception was when investors used the product themselves and behaved more like end-users.
There are a lot of products, especially outside equities, where that's not at all true.
Providing liquidity in all situations might be useful, but it is an added bonus. If you don't do this, you are still a market maker.
The numbers are made up here, but that's the principle.
One is that the seller loses on additional value. The other is that the HFT has bought from a seller who would have sold to you, but sees a higher buy price and sells to that instead, so you miss your trade.
For low-volume traders these aren't huge issues, but for institutionals or others looking to make or exit a large position the costs can mount. Again: HFT wouldn't be undertaken if there wasn't value to be extracted in doing it, and that value is coming directly from other buyers and sellers, just as when you introduce a middleman to any other transaction.
It's the same kind of automation we've seen in many other industries.
That's ... an unsubtantiated assertion. Lots of evidence to suggest the situation's otherwise, at least in large part.
There was an excellent ACM paper posted to HN a few weeks back:
Deleted comment
http://www.stocktrading.com/HFTDennis.ppt
http://online.wsj.com/news/articles/SB1000087239639044403240...
Broker-dealer internalization, queue jumping, flash trading. Regulators are years behind the traders on methods.
Trading center proximity is a big one. The Internet travels at the speed of light (actually, somewhat less than that). Which is finite and within the bounds of algorithmic trading. The HFTs get pricing data before the general public, even if it's just a few thousandths of a second (5000 km is about 0.01 light seconds, 500km is 0.001 ls).
With HFT operating at the 250 microsecond level, 75 km is significant.
http://queue.acm.org/detail.cfm?ref=rss&id=2536492
Or just plain cheating. Remember the Chicago Faster-Than-Light trades?
http://www.theverge.com/2013/10/3/4798542/whats-faster-than-...
"Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01."
So, 2 possibilities, you don't say, but you are sending a limit order to buy at $100 or a market (or marketable limit, or fill-and-kill) order to buy at $100. Apparently, you seem to be suggesting that there is a seller in the market, presumably offering at $100. Now, you seem to be suggesting that the HFT sees your order before it hits the matching engine (nonsense) and also that they can somehow re-negotiate with the seller and get him to lower his limit sell to 99.99 (I'm not sure how, do they send goons around to kneecap him if he doesn't? All in the 20 milliseconds your order is on the way to the market?).
" and offers you $100.01"
...but let's assume that somehow the magic omnipotent packet-sniffing HFT knows your order is enroute to the exchange, can force market participants to lower their offers, now you're claiming that it can force you to buy at $100.01. Why didn't you send a limit buy at $100, if that's the price you wanted, you saw, and were prepared to pay?
>wrapped in condescension
If you want to write entire paragraphs about something you know nothing about, you're not really adding to the conversation are you? So you'll open yourself up to a little condescension.
I'll freely admit I find this confusing. And that's with having studied this shit in school and worked in the financial industry (in trading no less).
There are a number of methods of getting inside or around the order book, most of which involve breaking rules. But the regulators aren't even playing catch-up, they're so far behind.
HFT is very time sensitive, operating at or within the 250 microsecond window -- that's the time a light beam takes to travel 75 km. So one way of jumping in on the order is being, say, a few thousand km closer to the exchange than some other trader.
As to limit orders (and you really haven't explained how the order book avoids this), by beating others to the trade on both sides of the order, the HFT can get in and spin the equity, taking a cut, or stealing your trade (you look to buy at $100, seller is at $99.99, HFT buys at $99.99 but finds a buyer at $100.01).
The point is that by inserting themselves between other traders, by virtue of speed, HFTs skim a proft. It's small (and was enabled largely by decimalization), but can be made up for in volume.
The saving grace is that the HFTs are up against one another (at least until they start colluding), so they're weaving complexity traps against one another that wear down the advantage. Though there's the risk of more flash crashes and other disasters resulting from processes they barely understand themselves.
Or flip this around: instead of telling me how HFTs can't arbitrage their trades, tell me what's actually happening. Because HFT's like deepwater oil drilling: it's an awfully expensive hobby to be doing if there's no profit in it. Where's the profit? And who's that coming from? Because in the world of the financial market, it is a zero-sum game, where one set of traders extracting value means another set isn't getting it. It's not as if they're building widgets for a value-added proposition.
I've seen the HFT trade price-seeking patterns -- bandsaw and crop circle visualizations from NANEX (this is now a few years old, so ancient history, but):
http://www.nanex.net/FlashCrash/CCircleDay.html
The point is that by being able to generate thousands or millions of buy/sell orders, across a band of price points, the HFT is getting in on any movement faster than any slower trader.
You're also not addressing straight out fraud where book is open, which is what I understand queue jumping to be. It's one thing if everyone's playing by the rules. Something tells me that's not the case. Oh yeah. That's my former officemate doing time at Club Fed for insider trading.
What's the mechanism for matching buyers and sellers?
Does HFT provide a benefit to the HF trader? If so, from whom does that advantage accrue?
What's the net effect on a non-HFT buyer with and without the presence of HFT? For market orders? For limit orders?
What's the net effect on a non-HFT seller with and without the presence of HFT? For market orders? For limit orders?
HFT provides liquidity to all other traders, including other HFT. They are paid in either the bid-ask spread (in the case that HFT is passive) or arbitrating bid-ask spreads between different exchanges, e.g. they aggress and take out an offer on exchange A which is below the bid on exchange B, providing liquidity to the standing offer on exchange A immediately instead of letting the prices disjoin.
The answer to the last two lines are the same -- there is no meaningful difference between a buy and a sell. The net effect is more liquidity than without any short term market making, for both market and limit orders (IMO market orders should simply not exist, but that's a small aside).
http://online.wsj.com/news/articles/SB1000087239639044398920...
Relevant quote: "He became convinced exchanges were providing such an edge after he says he was offered one himself when he ran a high-speed trading firm—a way to place orders that can be filled ahead of others placed earlier. The key: a kind of order called "Hide Not Slide."
Whether it is legal is highly questionable but it appears that exchanges indeed offer this feature to sophisticated traders.
That aside, Hide not Slide orders are an interesting case. They exist only in US equity markets, and they're a great study in unintended consequences. US equities are quite fragmented (the same security can be traded on several different exchanges), so well intentioned US regulators introduced something called the NBBO (National Best Bid Offer), ostensibly to "protect investors" from getting a worse price on one exchange. What this meant is that different exchanges trading in the same product could never be "locked" - you could never have one exchange showing say 101 on the bid when another has 101 on the ask (because in theory then they are crossed and should trade). Pretend the tick size is 1 for following discussion...
This leads to a situation where every equity exchange in the US may be trading 100/102 (with an empty tick in the middle), but as long as one remaining exchange is trading 100/101, you aren't allowed to insert a bid at 101 on the other exchanges (since the interpretation of the rule is that this would be unfair on the resting 101 offer). But HFTs are all very keen to be the first to fill that 100/102 gap in the spread - to be the first on that new queue is an advantage since you get filled first. And obviously that one holdout exchange will soon get filled and the price will tick up. But the other exchanges legally can't accept a bid at 101 yet.
So exchanges started to either reject orders or "slide" them - you submit that 101 Buy and they slide it down to a 100 Buy. Which leads to this:
10 SUBMIT BUY@101
20 IF RESPONSE = "SLIDE TO 100" THEN DELETE, GOTO 10
All of a sudden the exchanges are being flooded with messages, as algos are pinging the exchange constantly wanting to put that 101 bid in. Which leads us to 'Hide not slide' - the exchanges promise to sit on your order until the NBBO ticks up and put it in the queue then. The problem is that these order types, while documented and available to all who are connected to the exchange directly, aren't usually going to be available to someone who is trading through an intermediary - a broker or some retail trading platform. So that's the story of how a well intentioned bit of regulation ended up disadvantaging US investors.
US equity markets are full of weird quirks like this, the NBBO needs to be done away with.
HFTs pay brokers for order flow so they get orders before they hit the exchange and decide to trade on them from their own book (at NBBO) or pass them on to the exchange. Besides jumping the order book at the exchange they get advance information on orders about to hit the market.
http://www.optiver.com/pdf/FSA%20consultation%20on%20PFOF%20...
I believe brokers in the US are now legally required to reveal any such arrangements to their clients.
The curious thing is that you can do the same thing with your "socially useful instrument" example. Suppose that instead of selling mortgages, Wall St. had used the same tactics to sell crop futures. They had gone to farmers who promised to provide more food than their land could produce in exchange for cash up front, then resold those contracts at a profit to "investors" and walked away.
What would happen? At first food prices would fall, as in the mortgage crisis loan interest rates fell, because the supply of food on paper has increased. This would cause consumption to increase: Lower price, higher demand. The demand would have to be met from current food stocks because you can't eat securities derivatives, so food reserves would begin to deplete. It would also cause future actual supply to be reduced: Lower price, fewer suppliers. The farmers who can't profit at the artificially lower price would go out of business and stop planting.
Then, next season, the contracts would come due. The farmers who promised more food than they could deliver would default on their obligations. Their inability deliver wouldn't be able to be met from food reserves, which had been depleted when the price was low, nor from other farmers, who declined to plant crops last season when they expected doing so to be unprofitable. Instead of the housing crash there would have been a famine.
Allegedly, Wall Street did use similar tactics to sell crop futures, and there was a famine. See http://www.foreignpolicy.com/articles/2011/04/27/how_goldman... (note: annoying registration prompt, but registration is free or you can use your browser's webdev tools to remove the overlay) and http://www.independent.co.uk/voices/commentators/johann-hari...
(Disclaimer: I haven't checked any of the claims in these articles.)
[EDITED to add: of course maybe AnthonyMouse's "Suppose that ..." was a rhetorical trick and his whole point is that it really did happen.]
The article you link to merely shows that under certain circumstances, a CDO market can become a market for lemons. Everyone already knows this, which is why the standard industry practice was for issuers/packagers to keep skin in the game - sell off the AAA tranches but keep the risky ones for themselves.
If you actually want to learn about CDOs, go read this paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1421837
It was not impossible to objectively value them - they were simply valued incorrectly based on assigning low probabilities to the possibility that house prices go down.
Your claims about HFT are simply ignorant. No one has to pay the spread (which is lowered by HFT), you can always post orders at the bid/ask and use ALO orders if you want to avoid it. People choose not to because they don't want to accept execution risk.
When you borrow money in order to buy a house, it isn't your money that is being used by others. My mortgage got regularly sold to different entities, the only effect it had on me was I wrote the monthly payment check to someone else. The terms did not (and could not) change without my consent.
I'm a buy & hold stock investor. The machinations of HFT have no effect on me, they only really affect other HFT traders.
It would not take to great a stretch of the imagination to imagine regulation covering the maximum frequency at which trades could occur.
We would have to decide what sort of delay we consider tolerable, then (perhaps) hold auctions at that frequency - perhaps once per millisecond, perhaps once per minute, maybe even once every 10 minutes?
It's also a very broad question, kind of like asking "Is science good?". On the one hand, science has brought us all sorts of good things but it's also yielded weapons of mass destruction. (Ironically, Warren Buffet once famously - and presciently - described derivatives as "financial weapons of mass destruction"[1].)
> So, you enter a contract to sell your crop at a fixed rate long before harvest comes along. That's a future contract...
Technically (and pedantically), that's actually a forward contract, which is, admittedly, very similar in nature to a futures contract[2] (and, typically, a forward contract will often underpin a futures contract) and a perfectly excusable error to make. The reason I point it out is not to score a point but to highlight the distinction in order to illustrate how esoteric the financial markets can be.
Their esotericness/esotericity (clearly not real words but I think you get my point) means that the specialised knowledge and skills are highly valued. We generally accept that a ninja/rockstar engineers can be 10x as productive as an average engineer. The distinction is even more marked in finance - not only can a more knowledgable, better-skilled, more talented person make more money than someone who isn't as good, but the latter can end up actually losing large amounts of money (e.g. JP Morgan's London whale[3]). I learnt this the hard way just a few weeks into my (short) career as a trader when I made a very simple mistake and lost $16,000. Do that once or twice a week, and you'll easily end up down over a million dollars over the course of a year. To avoid "fat finger" errors, you need to be capable of being very focused for (in my case) up to 12 hours a day (or, at least, being able to switch from "relaxed, joking with your work colleagues" mode to "laser-focus" mode in a split second). Not everyone is capable of doing that. Some people can't handle the pressure. Others simply lack the brain configuration required to do it - they may well be smart, intelligent people - it's just that it's a very specialised job and some people's brains are going to instinctively better at it than others.
Add to that the fact that the financial markets are, by and large, a zero-sum game (which means that the best guys can actually take money off the not-so-good guys) and you have a situation where the top talent are able to demand (and end up feeling entitled to) the sort of pay packets mentioned in the original article.
It's a bit like Mayer hiring De Castro at Yahoo![4] - if he'd turned Yahoo!'s advertising business around, the company would have earned $600m more revenue over the past year, and a $60m pay package wouldn't have looked so crazy. If a bank hires a rockstar trader away from their competitor by offering a salary of $3m and he makes a $300m trading profit over the course of the year, it's a pretty good deal. On the other hand, of course, they could lose $300m and this was traditionally an asymmetric, one-way bet (i.e. if the trader made profit, he got a bonus but if he lost money, he didn't suffer any downside, which meant that he was implicitly incentivised to make big, dangerous bets) until new rules came in around claw-back provisions (so previous year's bonuses could be reclaimed if it turns out they were based on phantom profits) and paying bonuses partly in shares (thereby linking traders' fortunes more closely to their employers').
I still work in finance but back on the technology side of the fence (I'm basically a freelance product manager for an in-house piece of software that's used by a couple hundred people globally). I spend 25% less time at work than I did as a trader (i.e. 9 hours maximum instead of 12), the work's a lot less stressful and I find it interesting/challenging/fun. Whether I'm still doing it in six months time (as opposed to, say, working for a startup) is anyone's guess but the perceived social worth (or, more accurately, the lack thereof) of finance in general wouldn't be a factor in that decision.
[1]: http://www.berkshirehathaway.com/letters/2002pdf.pdf
[2]: http://www.investopedia.com/exam-guide/cfa-level-1/derivativ...
[3]: http://en.wikipedia.org/wiki/2012_JPMorgan_Chase_trading_los...
To give an extreme example, let's say you stick a buy order for some equity at the best bid, and a large event happens shortly afterwards (say the employment numbers, the non-farm-payrolls are released). Consider two scenarios. a) Number is good, market takes off, you didn't get filled and you've missed out on profit you could have made had you just crossed the spread. b) Number really bad, everyone else is already out of the market, or fast enough to get out of the market, but your limit order is sitting there like a duck in a shooting gallery, gets filled instantly but the stock tanks well past that level, and you're already showing a loss.
Your expectation on a limit order is negative. It is more likely to get filled when you don't want it to get filled - this is adverse selection. Unless you really do have the tools to compete.
Even this assumes that you are directly accessing the market, it is even worse if you go through a broker. They get up to all sorts of shenanigans, including what they call "price improvement", where they'll jump in front of your limit order by some tiny increment.
That was the original author's point (give or take a few work categories, which I'm taking the liberty of throwing in for the sake of illustration).
Oh right, and then said entity can't actually allow 10% of all withdraws on itself else it is called a "run" on the banks and they close their doors.
What sort of innovation do you see here other than a banking cartel that completely controls the money supply?
Comments like yours make me sick because it shows the brainwashing the banking cartel has implemented is complete from the bottom up and unifying; you now have people like you strutting around calling criminal activity innovative.
When banks create money it is innovative, when the little guy creates money, it is counterfeiting. Pull your head out of the banking cartels ass for a second, and take a breath of fresh air.
But it's a nice, easy way to make the narrative work.
TL;DR:
If a high-powered lawyer who makes $1,000 an hour chooses to take an hour off to help clean up litter on the beach, he's wasted the opportunity to work overtime that day, make $1,000, donate to a charity that will hire a hundred poor people for $10/hour to clean up litter, and end up with a hundred times more litter removed. If he went to the beach because he wanted the sunlight and the fresh air and the warm feeling of personally contributing to something, that's fine. If he actually wanted to help people by beautifying the beach, he's chosen an objectively wrong way to go about it. And if he wanted to help people, period, he's chosen a very wrong way to go about it, since that $1,000 could save two people from malaria. Unless the litter he removed is really worth more than two people's lives to him, he's erring even according to his own value system.
If he feels it's unfair that he makes so much more many than others, he should make even more and give out what he think is enough to make it fair.
To address your second comment, we must consider the possibility that people are interested in long-term solutions to problems. What happens when the person who thinks that his profession makes too much money has given away all his money? Is the problem fixed?
The world isn't binary. When someone says "I want to help the poor", there's a world of meaning you can gather from context. We aren't AliceBot, we're humans. And humans are fairly good at understanding statements like that. After all, one way to help people is to kill oneself in a manner that preserves organs for donation, but you'd dismiss this kind of meaning even coming from a down and out guy who makes nothing and has no family. Why? What's he implying when he says he wants to help people?
Your story only works if the people making all the money actually spend it on helping others. Most of the time, they do not. One of the things that will trigger people to charity and generosity is going out and doing some charitable work on their own. It lets them see the results, show them the personal satisfaction that can be gained by it, and sets them up to have the desire to contribute in other ways.
Seriously. Enough already!
Disclaimer: I was an evil, greedy, detached-from-reality monster in a previous life.
I think everybody should want to be rich.
I've tried poverty and in my opinion - it sucks. It sucks big, steaming donkey balls.
The desire to make more money, to improve one's "lot in life" and to succeed, this is a Good Thing. Because a few assholes go too far in some ways, or do bad things along the path, does not change the fundamentals.
You can be rich and unhappy, or poor and unhappy. Given a choice, if I'm going to be unhappy, I'd rather at least be rich.
No one should feel any need to apologize or feel guilty about wanting to make money, even lots of money. If you want to be a fucking billionaire, go become a billionaire. Just feel guilty if you lie, or cheat or steal, or otherwise do unethical things to get there. And remember that having more money doesn't make you a better person, or intrinsically more valuable.
Also being rich vs poor, and Wall St vs Main Street, are not the same thing by any stretch of the imagination. You can become rich without working in finance. And you can hate Wall St's culture and also be rich.
I don't think that all the people who are pissed about the financial crisis are poor or that they think being poor is noble. That seems like a pretty false dichotomy. Being poor does truly suck!
I think the main issue the author is pointing out is how ignoble it is to be unhappy with a 2mil bonus for a job that really isn't that important in the big scheme of things. 2mil is a lot of money for the vast majority of people and bitching about it just makes you out to be an asshole. If that is a cultural issue with that section of finance then that seems like a legitimate concern.
Yes that's been stated, but I wouldn't say that it's been proven. There are a LOT of theories about what did and didn't happen as part of the 2008 financial crisis and in the run-up to it. For a take (from an insider) that may be a bit different from some of what has been said elsewhere, read John A. Allison's The Financial Crisis And The Free-Market Cure. Not saying Allison's take is 100% correct, but I just want to point out there are are certainly different points of view on that crisis.
I don't think that all the people who are pissed about the financial crisis are poor or that they think being poor is noble.
Fair enough. I didn't read TFA as being mainly about the 2008 crisis specifically, but that could be a mistake on my part. I do tend to generalize a bit as well.
I think the main issue the author is pointing out is how ignoble it is to be unhappy with a 2mil bonus for a job that really isn't that important in the big scheme of things. 2mil is a lot of money for the vast majority of people and bitching about it just makes you out to be an asshole.
I can (and do) agree that complaining about a $2MM bonus makes you something of an asshole, especially from some points-of-view. I think what bothers me about these articles is the implicit suggestion that "something ought to be done", which leads to the idea of more regulations, more laws, more rules, more restrictions, etc., which I believe - by and large - are counter-productive.
Again, see the John Allison book... if one buys his angle (and I mostly do), there's a strong argument there that it was government policy and the behaviour of government regulators, things dating back to the LBJ era, if not earlier, that ultimately led to the 2008 crisis. Anything that reads as an argument for more government involvement evokes something of a visceral reaction from me, since I am a proponent of laissez-faire.
It also frustrates me when I see people seemingly painting a picture of "wall street VS main street". I don't think that's accurate at all, and I think it's an unhealthy attitude. "Wall Street" and "Main Street" are just different views of the same system. The people of "main street" can certainly leverage capital markets to build wealth... you don't have to be a bigshot wall-street insider to do that. And, in fact, many pension funds, university endowments, etc., are heavily invested in "Wall Street" which means that many people ultimately do benefit from growth in the markets, even if they aren't day-trading or investing as individuals.
Of coure I'm not saying that everybody on Wall Street is perfect, or faultless or anything. I just think it would be better if everybody saw Wall Street as something they can take part in and benefit from, not as some mythical enemy.
That is fine that one guy wrote a book about the crisis. And it is very nice that he decided to pass the buck on who was at fault by using the stale "Big Government Is Bad!" and "Any Regulation Is Big Government!" lines. But when the group in charge of looking after derivatives (ICE Trust, an industry self-regulatory body), that is independent of the government, comes out and says that after looking into the issue there was a fault with the actual system... I tend to give them a bit more credit... Perhaps everyone should just believe John Allison and his incredibly strong (Ayn) Randian ideological bent though?
Also you seem to be missing the point on the Wall St. vs Main St. thing... The bigger issue to most is that somehow Wall St. firms are 'too big to fail' and the little guy (read: everyone else) had to give them a huge bailout because they gambled and lost. In the eyes of most, its as if they had to pay for someone's trip to the casino, out of their own taxes. It's not about being able to leverage capital markets... It's about having to pay for your losses yourself, rather than having everyone else bail your ass out to the tune of billions of dollars. Taking all of the risk out of the system for the big boys, while it still exists for everyone else seems pretty BS (especially if you're part of 'everyone else').
Edit: Wall St. isn't 'bad' but the way it shook out this time was utterly bullshit and people have the right to be angry and adversarial about it.
Again, I'm not arguing that it hasn't been stated, or suggested, or argued that "derivatives were one of the big causes of the crisis". I'm arguing that it hasn't been proven, and that there are other, credible, competing views. And even to the extent that derivatives might have been a significant part of what happened, one can question if they were the cause - or whether there might have been "upstream" causes which pulled the derivatives trading along for the ride.
That is fine that one guy wrote a book about the crisis. And it is very nice that he decided to pass the buck on who was at fault by using the stale "Big Government Is Bad!" and "Any Regulation Is Big Government!" lines.
A lot of people wrote books about the crisis. But from your discussion here it seems to me that your mind is made up regarding what did or didn't happen, so this discussion is probably pointless.
Perhaps everyone should just believe John Allison and his incredibly strong (Ayn) Randian ideological bent though?
Are you suggesting that? Because I'm not. And what, exactly, does Rand have to do with this? Ideology is irrelevant, an argument is sound (or not) regardless of the ideological orientation of the initiator of that argument.
8Also you seem to be missing the point on the Wall St. vs Main St. thing... The bigger issue to most is that somehow Wall St. firms are 'too big to fail' and the little guy (read: everyone else) had to give them a huge bailout because they gambled and lost. In the eyes of most, its as if they had to pay for someone's trip to the casino, out of their own taxes.*
Oh, whoah, whoah, whoah... you seem to be assuming that I approved of the bailouts. Absolutely not. I was as angry as anybody you're going to meet about that bullshit. And yes, that particular aspect of the whole situation, the "why should I bail you out because you made bad choices" line of thinking, I mostly support.
* It's about having to pay for your losses yourself, rather than having everyone else bail your ass out to the tune of billions of dollars. Taking all of the risk out of the system for the big boys, while it still exists for everyone else seems pretty BS (especially if you're part of 'everyone else').*
Absolutely. But I see that as an indictment of the corruption in our government, and the "crony capitalism" we have going on, not as an indictment of just "Wall Street" in and of itself.
One of the key points of this essay is that making more money doesn't necessarily improve one's quality of life. The author clearly talks about at age 25 being financially secure and wealthy, so his pursuit of additional wealth wasn't really about an increase in quality of life.
> You can be rich and unhappy, or poor and unhappy. Given a choice, if I'm going to be unhappy, I'd rather at least be rich.
Wealth and class aren't about binary choices. There are levels of income that are wholly satisfactory for an individual's life that still classify that person as not rich.
> No one should feel any need to apologize or feel guilty about wanting to make money, even lots of money. If you want to be a fucking billionaire, go become a billionaire. Just feel guilty if you lie, or cheat or steal, or otherwise do unethical things to get there.
Is it even possible to be a billionaire without exploiting others? Even if so, is it right that you can be a billionaire while there are more empty homes each night in the US than the homeless population? Is it right that you can safely eat anything you like while others have to make sacrifices and choices because of political cuts to SNAP? The answer is clearly no. In this way, pursuing money for wealth's sake is unethical.
Why wouldn't it be? Wealth is created, and if you can create a billion dollars in wealth, then so be it.
Even if so, is it right that you can be a billionaire while there are more empty homes each night in the US than the homeless population?
Depends on what you mean by "right". Is that a troubling, even disturbing situation? Yes, I would find it to be so. But is any particular billionaire (or any other particular individual at all) somehow obligated to fix the homelessness problem? No.
Is it right that you can safely eat anything you like while others have to make sacrifices and choices because of political cuts to SNAP? The answer is clearly no.
I would disagree, again with the caveat that it depends on what you mean by "right". I think I would rank that situation as "unfortunate", and I think we all wish the rich would do more to help the less fortunate. I know when I was dirt-poor, living below the poverty line, I resented the rich a bit, so I get this mindset. But as I've moved through life and seen what hard-work and determination can accomplish, and become more comfortable in my own skin, I find that I no longer cherish the idea of handouts greatly, except for the real edge cases: People who literally cannot fend for themselves - the elderly, children, people who are physically or mentally disabled, etc.
In this way, pursuing money for wealth's sake is unethical.
I guess this also depends on how you define unethical. Is a really rich person who does nothing to help the less fortunate a huge asshole? Arguably, yes. But is that the same thing as behaving unethically? I wouldn't say so. But I expect we have fundamentally differing worldviews on some basic issues, so I'm betting we'll always disagree on this.
You can't just "create wealth" like magic. You have to do something to build wealth. and for billions of dollars you either have to do a great deal of something or do it to an incredible degree more successfully than someone else. The question is are you going to screw over someone else (or even a large group of people) to make that happen in a society where the next biggest fish probably has little compunction about doing so.
Its a rhetorical and philosophical question really, but your answer that you can create wealth so you don't have to exploit anyone, isn't even a thoughtful attempt at an answer. The ideas don't even touch each other.
As you get wealthier, your ability to affect society expands. I'd argue that, in the same way one can feel responsible for members of your family, society is your larger family. Humanity, an even larger one. Perhaps a wealthier individual should feel as though more of society is their 'family' as he/she gets wealthier — and treat them as kin.
Instead, what you often find is self-involved individuals becoming more and more distant from their society as they get wealthier (large households with gigantic yards, vacation homes, remote travel).
No, actually the article says addictive preference towards money doesn't improve quality of life. Not having lots of money. Having lots of money nearly undoubtedly increases your quality of life.
>>There are levels of income that are wholly satisfactory for an individual's life that still classify that person as not rich.
Higher the levels go better the things get.
Not that I think being a Billionaire automatically makes you an asshole. I'm just curious if that is possible just from a logistical standpoint. Somewhere along the line someone gets screwed right?
That question actually has deep philosophical implications. I think the net content of evil and good has to be cancel out at a social level completely for the society to go in total social harmony.
So there has to be in some way a balance of evil and good in any society for it even to survive.
Some social science guys would say that this is true for every business - since you're operating in an exploiting system(capitalism) ,someone is bound to get exploited.
Under capitalism, man exploits man. Under socialism, it's the other way around.
Some we can't: land (including natural resources), social status, political power.
We should aim for a society that produces plenty of the first type of wealth, and aims for fair distribution of the second.
False because, wealth can be added to any economy every time you build/sell some thing other people want.
True because, though wealth can be added over a period of time at any given time the current net circulation is still a static constant number.
As it happens, I think #2 isn't correct, because given the way the world is (a) being rich is the only way to be reasonably well assured of never being poor, and (b) there are a whole lot of people in the world who are desperately poor, and if you care at all about them then you have a use for an unlimited quantity of money, namely sending it their way.
But in a less messed-up world, I think it would be eminently reasonable not to have a strong preference for being rich over merely comfortably off, and if the former takes a lot more work or risk than the latter then it would be reasonable not to bother.
True... in the name of brevity, and perhaps out of haste, I did generalize a bit. And the two points I mean to emphasize are:
1. Being poor sucks (I think we can all agree on this)
and
2. There's nothing intrinsically wrong with wanting to be rich, even "dirty, rotten, filthy stinking rich".
In the case of (2), I posit that the desire itself is fine, but the actions you take to try and achieve that end, may or may not be noble, just, good, or ethical.
Suppose you desire to be a billionaire (and stay one -- it's not that you want to get $1B so that you can give most of it away to deserving recipients, or use it to lobby governments to improve the world).
In particular, you would prefer to have $1B than to have $0.5B in your hands and $0.5B transferred to the world's poorest people.
The thing is, half a billion dollars can do a lot of good. A typical estimate is that you can save a life (i.e., something like a life's worth of quality-adjusted life-years) for a few thousand dollars, if you're happy for it to be a life in what used to be called the "third world" and if you take care to put the money where it can be used most effectively. Let's be conservative and suppose it's $10k/life.
So our hypothetical would-be billionaire would rather have $1B than have $0.5B and (5e8/1e4) = 50,000 Africans' lives saved.
I'm sure it's very nice to be a billionaire, but damn.
Something like this sort of prioritization of one's own welfare applies to pretty much all of us, of course -- would you rather have a car or save a life? would you rather have a slightly larger house or save ten lives? etc. And maybe this means we're all monsters. But, so far as I can tell, the difference in personal well-being between having a billion dollars and having half that is really small, and the difference that money could make to the lives of others is really large, and it does seem extra-specially monstrous to prefer that really small difference to saving tens of thousands of lives.
So I really do think there's something morally iffy about a very strong desire to be dirty, rotten, filthy stinking rich, in a way that there isn't about a desire to be merely rich. Wanting to have, say, $10M seems to me morally quite a different sort of thing from wanting to have $1B.
Of course if you want to have $1B and then give most of it away then, please, go for it. As long as you select the recipients of your largesse with some care. Likewise if you have other plans for your billion that involve having beneficial billion-dollar-sized impacts on the world. Fund important scientific research, bribe politicians to do things you think are valuable, whatever. What strikes me as problematic is wanting to have and keep all that money. You don't need it that badly. Really, you don't.
("You" above, of course, doesn't mean you personally.)
[EDITED to add one more remark (because the above wasn't long enough already). I'm assuming that "want" means something like "seriously intend, to the best of your ability" rather than just "find yourself with some sort of desire". People want all kinds of things and that doesn't have much moral significance until they start actually trying to get them.]
For example, in the movie "Wallstreet", Gordon Gecko gets asked this same question, but he can never truly answer it. If a man who gets to his position, makes millions of dollars, and has the mental capacity to make a ton of business decisions daily, can't answer this simple question- that's definitely a problem.
Surely, for the average person $1.5 million is considered "rich". To keep making money for the sake of making money, is clearly an addiction, which (as mentioned in the article) is supported by our culture of excess.
I think it's great for everyone to have the desire for wealth, as long as you are making your money in an honest, value-producing way. I don't think derivatives hedge fund gamblers are honestly earning their pay.
The only thing that can stop them is financial education of the public. The stats show, year after year, that the vast majority of hedge funds lag the market---and get paid massive fees to do so. Someone has to be paying for these bonuses, and that someone is you--if you buy mutual funds or other high-fee actively managed funds.
That's why I boycott even my 401k as there aren't any passive index funds for me to choose.
Wealth is awesome; no doubt about it. But, as you are accumulating wealth, are you simultaneously creating value? Personal wealth and value creation don't always go hand-in-hand.
Also, as the author (and commenters) pointed out, this isn't a reflection of all of Finance. Stocks, bonds, future, options and other derivatives are essential for growth. We will always need ways to finance investment and tools to manage the accompanying risk. The author was saying that he was getting rich by trading credit default swaps (and probably synthetic CDOs), which -ultimately- played the largest role in destroying massive amounts of value post-2008 because of the sheer volume at which they were being traded (and because the securities that the CDSs were insuring were backed by subprime loans).
Honestly though, you don't have to know much about the 2008 crash to recognize the weakness of your argument. Elon Musk, Steve Jobs and Bill Gates may be (or may have been) addicted to wealth and success. But they accumulated wealth by creating innovative products.
The same could not be said of the typical fixed-income trader circa 2007.
It's somehow noble or good to not want to be rich after you've become so, is the cliché.
As a software developer, the value you provide is not quantifiable like that. Everyone works on the product, sure, but everyone is insulated from the actual money being made. Who is to make how much? It's a difficult question, and it also lets companies get away with paying quite a lot less--especially to the top performers. This also makes salaries (and, more importantly, bonuses) far less variable in software.
1.Sales and Marketing
2.SEO
3.Bloggers
4 ..
Sales: the highest paid people at an enterprise software company, excluding people who joined really early and have stock grants to match, are the commissioned sales force. I met a gentleman who doesn't speak Japanese who nonetheless was I Can't Believe He's Not Tony Stark's #2 sales rep in Japan. Let me throw out a number for sales picked out of the ether: $50 million in a year. Let me throw out a second number, picked from the industry: 6% commission rate.
SEO: Most of the really good ones work for themselves rather than working at an agency or an in-house SEO team. I am friends with a couple of them. One once lamented his lack of programming skill, said that I was the most talented marketer among people with programming skill he knew, and made me this proposition: "You would be a very, very effective black hat. I'll stake you with a million. You pay me half of what you make." (I didn't take him up on it.)
Bloggers: The overwhelming majority make nothing. Then again, most are not running businesses. There are some businesses which have a blog as one portion of the business which are Quite Lucrative Indeed. One I'm aware of has revenue roughly equivalent to an enterprise software company with a few dozen employees. (Again, though, the blog is a small portion of that business, even though readers might not know that.)
>>You can use software development to achieve very quantifiable results for companies.
Can you direct me to books / resources to understand more in depth what you are talking about here. I have read what you are saying many times but never quite get it. I am struggling to understand why would someone want to pay me % of their profit when they can hire some programmer for $50/hour. Is it about how you present yourself to the client s or types of clients you go after ? I am working as a freelancer and all I am getting is very budget sensitive clients who doesn't want to pay more than their cleaning maid.
In other words, it's pretty uncommon (and generally ill-advised, IMO) to ask for a "% of profit". What you are doing is anchoring your price tag against the value you can create, instead of the time you spend. (This is somewhat muddled by the fact that consulting engagements are generally billed by multiplying a dollar rate with the amount of time over which the engagement took place, but the only number that matters to the client is the one at the bottom of the invoice. It is the consultant's responsibility to find clients for which that last sentence is true, and to make sure that they are able to consistently generate positive ROIs for those clients most of the time.)
Yes, it is extremely important that you're pitching the right sort of clients and that you're proposing to do something which meaningfully impacts their business. My typical client towards the end of my career was a B2B SaaS company with $10 to $50 million in annual sales. Bringing me on was generally not their #1 activity in any given year -- after all, they all have dozens of full-time employees, so they can do lots of things in any given year -- but it was generally for an initiative with a fair amount of strategic importance on, typically, a product which everybody knew would make serious bank if the initiative worked out.
If you had come up to me and said "We're building an app and need an extra Rails programmer" I'd have said "Cool, I keep a list of folks I like. Let me hook you up with someone." rather than attempting to get that business. Like everybody else who is Good With Computers, I occasionally get pitched on "Hey my aunt has a catering business, maybe you should make her a website?" That will never, ever happen. By comparison, if you'd recently experimented with A/B testing a bit on your $X million a year SaaS product and had increased sales by 5%, I would be very, very interested in helping you find the next 5 to 15%.
If you're continuing to find very budget-sensitive clients, how are you prospecting for them? How are you qualifying them? How are you pitching them?
There are many ways to prospect for clients which will get you lots of crappy leads, like e.g. looking for gigs on Craigslist.
Qualifying clients is an art. You don't have to proceed directly to the "prying" questions like explicitly asking what the budget for a project is. Just ask basic getting-to-know-you questions like what their core line of business is and how many employees they have. If their core line of business is retailing Beanie Babies and they have two part-time employees it is unlikely they can afford professional services. If, on the other hand, they have two dozen engineers on staff, they probably can write any check you can currently envision asking for.
What are you selling them on? If you're selling them things that can get delivered by any other freelancer who speaks your language, stop doing that. Start only going after engagements which, assuming project success, meaningfully increase the revenues of their company. Get case studies about how you've done that previously. Make it mandatory that you build in metrics tracking into all your projects, so that your clients know the ROI you are getting (and so you can quote, in broad terms depending on the specifics of your relationship and legal commitments, the sort of ROI your projects have recently generated.)
The trivial conclusion is that starting your own company is how to be accurately rewarded for your work. But that assumes there's no way to better measure employee performance. It seems like measuring it for engineers and programmers is an impossibly hard problem (At least, that's implied from all of the well-run organizations that have given up or failed miserably on quantizing performance over the years.). However, I would like to see some creative attempts at making teams better at this.
They are doing it to us, as we do to many professions. This whole thing of 'Some professions just can't benefit from economics of scale' come to my mind. Just like how the guy flipping burgers makes minimal economic impact compared to you and I, we make a minimal financial impact compared to these guys.
But there are a lot of areas where you could disrupt this theme of work. Profitable side projects, start up's, bootstrapping and stuff like that can help us out here. But the point is most geeks and nerds are to a great extent very naive when it comes to money matters. We are poor in negotiating skills and we buy into this loyalty thing too easily.
I don't know of one single VP/exec/CEO who wouldn't leave their job for a bigger bonus/paycheck/options, yet if an engineer did it- You would have see these people shouting 'greed' from top of the buildings.
So, don't feel bad asking for $XXX,000, especially if that is the range for your profession, in your geolocale. That's that the market has decided this labor is worth, because of the type of value it creates. Do the research on the job market, and if you have valuable skills, exploit them, for fair compensation.
A second reason why they are compensated so highly is that they are working in a highly leveraged job where the labor cannot be easily be divided between multiple people. This is similar to how CEO's make a lot of money, because being a good CEO produces a lot of value for the company and the position cannot be split between multiple people. (I'm not trying to imply that traders produce as much value to society as CEO's do) Being a marginally better trader will make your firm millions more per year. Good hedge funds have 100-1000 million of assets under management per front-office employee. (For example, D.E. Shaw or Bridgewater Associates)
I've seen some people join as devs and swap into trading. Ironically in these cases they were terrible devs, but increased their salary several times by becoming traders.
Consider, for example, the the repeal of Glass-Steagall act. Just by repeal of this one regulation, the bankers were able to bet many times more money, dramatically increasing short-term profits at the expense of making the system more fragile.
[0]http://www.ocregister.com/articles/obesity-596818-food-stress.htmlAnd I wasn't being sharply critical (snarky) for the sake of being sharply critical. Honest.
He's pretty actively promoting himself, his story, and his business (which is what it is) online, and he just successfully SEO-bombed his way to the top of the charts. You may think it's out of an abundance of goodness, but I think that's as naive a view as you think mine is cynically snarky. (Or snarkily cynical.)
http://www.google.com/trends/explore#q=%20SAM%20POLK
So it's impact augmented by a factor of 20; if he was searched 10 times per month before it means now he is being searched 200. So not that much but even if it were your point still doesn't make sense to me because what difference would there be with anyone writing anything? I guess that your point is not that everyone should write anonymously right? So, what is it?
It's a dilemma, for sure, but a guy who's so apt to talk specifics in terms of his income and bonuses doesn't present himself as operating from a place of humility. I know people who went through roughly the same evolution he claims to, but the ones who actually internalized the lesson aren't humble-bragging to the NYT under a byline, but are actually out trying to do good with as little self-aggrandizement as possible.
Like it or not, the way in which he chose to share his message completely undermines it, and it doesn't make his current situation seem too terribly different from his previous ones. Less destructive and more functional, sure, but the dynamic seems largely unchanged.
It's one rung up the ladder from the guys who make their money in ethically grey ways, find religion, preach their conversion, but keep the money. (But it's still a rung up, mind you, and that's a good thing.)
Good for him that he earned so much, and that he seems to have found meaning in things besides money, but the story is pretty clichéd.
And I'm not sure "irresolvable emptiness" and an "unfillable hole" is quite so universal as you seem to indicate, nor do I think all attempts at filling voids are of equal value. (I'm not saying you do, either, just trying to be clear.)
I wonder how many people really understand the system as whole. From the outside, it looks like a complex natural phenomenon that we don't really understand and don't control.
So next time a self made billionaire thinks he can enter politics on basis of his current success this should be taken into account.
old habits die hard :)
Can this new idiom be stricken from our collective lexicon? I've heard this a lot lately in the tech community (although mostly from manager types) and it's a linguistic abomination. "...he ends by asking..."
What's an equivalent... hmm, suppose I talk "a pull" in the context of a version control system. I'm talking about something with a specific meaning. It would be wrong to try to correct me and tell me I should talk about "a thing that is pulled".
and the author replies back "I have something he'll never have - enough"
Except when the banker wisens up and has the "epiphany" that his tens of millions are enough and lives a paradise of a life ever after.
"The wealth of the 85 richest people equals that of half the world's population, says development charity Oxfam
http://www.belfasttelegraph.co.uk/news/local-national/uk/wea...
However, that doesn't generalize to the entire industry. People (especially men) like money and power because of the benefits they brings. It doesn't have to be an addiction. Furthermore, the idea that it would take an addiction to wealth not to see how immoral the finance industry is, is reliant on having very specific (and wrong, in my opinion) political views.
Hits the nail on the head for me. In the end these people make incredible amounts of money for doing what amounts to a job that is worthless to the society at large.
As opposed to making incredibly amounts of money finding ways of getting Random Joe to click on ads? The only difference between him and most 20 something kids working their asses off in SV is a million dollars.
Edit: Also this article isn't about that sort of occupation. I was focusing on the topic at hand.
That is fair, I presumed you were making a moral judgement of the way they were spending their lives, apologies if that was not the intention.
Then your firehose-manipulation skills are worthless to society at large -- they reduce the net influx of money by $10k/year when you practise them -- but I bet you'd have no trouble finding someone sane and willing to pay you $50k/year to point the firehose their way.
(Of course in this exact scenario you would do better just to take the extra yourself; the real-world counterpart of the skill, though, produces gains roughly in proportion to the amount of money put in, and you can do better by persuading thousands of people to get you to point the firehose their way than by just working for yourself.)
I make no claim that the real-world finance industry is like that. But it illustrates schematically how something can be (1) of negative value to society as a whole and (2) something sane people are willing to pay for. And it's not unreasonable to conjecture that a lot of the things investment banks and hedge funds do have something like the same structure.
Oh, one other thing. Suppose that actually the firehose distributes money very unevenly. Then you might do this: manipulate the firehose to benefit one set of rich people at the expense of another, take their money, and give some of it to poor people. Doing that might be substantially net positive to society. So even taking this rather cynical view of the finance industry, some people in it might be doing a whole lot of good on balance. (It's called "earning to give" by the cool kids these days. But even if you don't explicitly give anything away, the magic of income tax -- if the government spends reasonably wisely -- may turn a slightly-negative-sum activity into something that benefits society on the whole.)
[EDITED to insert an accidentally omitted word and clarify slightly. No change in substance.]
Or are you just talking about the financial sector in general (and even so there were loans long before that.)
Wall St. does not exist so people can get loans to purchase houses/cars... You may be missing some points about loans vs trading here...
http://en.wikipedia.org/wiki/Derivative_(finance)#Economic_f...
I would venture that none of these things benefit the 'average' person. Not saying its a bad thing, but the great amount of money dumped into this area of the economy, does not equate to their usefulness to society.
Edit: Actually the next section in the link you provided shows exactly how they can be a great detriment to economic stability including the recent AIG fiasco.
the use of derivatives to conceal credit risk from third parties while protecting derivative counterparties contributed to the financial crisis of 2008 in the United States.
However, the 2008 financial crisis showed that when tested, derivatives don't provide much of the value that they were supposed to (shifting risk to those who want it and will quietly suffer the consequences of failure without having spillover effects on the rest of the economy) which essentially retcons away much of that value.
I'm not going to say these people are earning an amount commensurate to the value they provide to society, but pretending that they are just running a casino is equally naive.
Greater security and insulation against bad investments? (which to be clear the vast majority of people do not have enough money to make in the first place.)
Seems a lot like playing odds at a Casino, to use your example, to me.
And your edit is valid they do not provide the value (though there may be some, if little) that their millions of dollars in bonuses/salary would imply.
"There's an old saying in Tennessee—I know it's in Texas, probably in Tennessee—that says, 'Fool me once, shame on...shame on you. Fool me — you can't get fooled again.'"
And to quote a head of a self-regulatory body in charge of such things:
In the context of a 2010 examination of the ICE Trust, an industry self-regulatory body, Gary Gensler, the chairman of the Commodity Futures Trading Commission which regulates most derivatives, was quoted saying that the derivatives marketplace as it functions now "adds up to higher costs to all Americans."
Deleted comment
As you can guess, it's not even close. That's why I deleted my previous comment, sorry. So why did he have such a nice interest rate? Well, it seems like there's a bunch of discounts on the banking system in Europe for mortgages. For example, there's a really big discount for disabled people, they will only pay, on a variable rate, 65% of the 3m EURIBOR thus 0.16%. No spread whatsoever. Interesting, isn't it?
Prior to winning the lottery, Joe worked as a janitor, and provided a valuable and necessary function to society. He made $10 an hour.
Now, certainly there is some qualitative difference in the reasons society valued Joe at $10 an hour before he held the winning lottery ticket and $250 million afterward.
Certainly we can say that there exist a range of reasons that one might benefit from a system, and that "people will pay for it" can be used to justify just about anything.
And the financial industry that people are upset about is not really the banks that provide loans (although there is some blame in the instances when people loan money to others knowing they have no hope of paying the money back). The loans existed already; without the loans there's no CDO to buy and sell.
The reason the CDO's existed was that the traditional way to make a loan and get your money back over time with interest was just too damn slow, and people needed a way to pretend the risk of a group of such loans didn't really exist and that they'd make exponentially more money in perpetuity.
I wonder, though, how much of what's gone wrong with finance is because of that. The spectacular cockups and conspiracies that have become public seem to be more about seriously pathological greed than about ordinary garden-variety wanting-a-bit-more.
(Also, I offer myself as a counterexample to the strongest versions of the enough-is-30%-more theory: my current estimate of how much is "enough" is lower than it was 10 years ago, even though I have a lot more money now than I had then. However, I am not in the finance industry and I'm only one person :-).)
That was why I believe he highlights that he has started speaking to the less fortunate and trying to 'make a difference' towards the end of the article.
Edit: Not to say this guy still doesn't sound like a total twat. Look at how he ends with a sales pitch...
Instead of tinkering about how the system can be made more just, viable, etc., instead of "hacking", the only "idea" that comes to the minds of so-called "innovators" is: how can i become THAT rich ?, where do i have to sign ?.
Sad, depressing, disgusting, predictable.
This goes for many things, not just the desire to have lots of money.
While I understand the sentiment of wanting to help the poorest of the poor, if it's true that money isn't the be-all, end-all then does it really matter that a trader makes millions while a nurse practitioner only makes $100k? The money isn't what's important, right? And the poorest of the poor in this country are rich compared to the poor from previous generations.
Now how can it be that nurse practitioners don't produce that much value? It is because the relevant quantity is the marginal value of an additional nurse practitioner, not the average value. And why is it fair to pay people according to their marginal value, and not their average value? That is because it incentives the most efficient behavior. An additional software engineer is worth more to society than an additional nurse. The fact that getting rid of all nurses would be worse than getting rid of all software engineers (assuming this was true) is irrelevant, because as people quit the nursing profession, wages will rise.
So the problem is not capitalism, but people's inability to accept that the implications of economics theory: first, that there is no ethical reason to reward people for the average value of a person in their profession, as opposed to the marginal value, and second, that frivolous things like Twitter can be as valuable as medical services (if people are willing to pay as much for either).
I don't find it surprising. Many people feel that way about their job. It must take a lot of courage to leave such a lucrative career.
It can go on for a while, but it doesn't mean people shouldn't address their problems.
TL;DR - I was a douche. Then I was visited by the ghost of christmas past, stopped being a douche, and started giving away groceries. I'm still rich though.
i wonder how much time it'll take until we get to a star-trek-like economic system where people do the things they want to do to the extent that their abilities allow and noone can make the excuse, "i'm not interested in money. i'm interested in what money lets me do."
i like that this guy just came out and said, "yeah, i was interested in the money for its own sake." it sounds a lot less noble, but it seems a lot more honest to me than any other justification for having far, far more cash than any one person really needs, except for, "i'm giving it to charity."
It's a good way to save for other life aims, for sure.
From a distance I can see what I couldn’t see then
Why is it that when you are close you're unable to see something for what it is?
I used to think it was a negative that Europe doesn't have the same "class" mobility. If you're rich in Germany or England, you're still considered middle-class. Politicians don't worship you, your kids still have to work hard if they are to attend good schools, et cetera. (The "upper classes" are hereditary aristocracies that have lost 80-95% of their wealth, privilege, and relevance.) You can't become upper-class if you weren't born into it, but the flip side of that is that middle-class people can rise quite high. (There's less mobility in social class, but more in terms of things that actually matter-- economic well-being, access to education, etc.) The sickness of the US is that we unify wealth, power, privilege, fame, and social connections by creating an efficient market through which people can trade one for another. Instead of having a society where some people have more money and some have less, we have this toxic arrangement where some people are just implicitly held to be universally better.
The issue for the OP (who sounds like a self-indulgent twat, to be honest) is that he learned the hard way that making more money didn't make him a better person-- at all. It didn't make him smarter, happier, or anything else. He met his God and saw vapor.
The sad thing is that he's still better off than any of us. If he wants to start a hedge fund tomorrow, or raise a $5-million seed round for whatever project he wants to take on, he's got the credibility to do it. If he doesn't feel like working hard, he could probably use his VC connections as a cash cow by funding young startup kids on a shoestring while taking an unreasonable percentage in equity (although that's been done before).
Class doesn't really feature in how much "better" you're perceived to be either. Some Lords are highly benevolent, clued in and useful members of society that treat their privilege as a blessing rather than a right; others are completely obsessed with themselves or disregard those without similar means. Similar contrasts can be found at other points in the spectrum of class.
quick point of fact, this used to be true but is no longer the case.
http://www.nytimes.com/2012/01/05/us/harder-for-americans-to...
In the UK, you can be born middle-class and become rich, and that's easier than in the US, but you'll still be considered "middle class". Upper is something you're born into. But the flip side is that almost no one cares about "upper class".
My point is that the UK arrangement is better. The well-connected, the powerful, the wealthy and the hereditary upper class are different sets of people. In the US, they're the same set and it's a disaster.
Actually, if he doesn't feel like working hard, it sounds like he could retire on a comfortable 6-figure income for the rest of his life. Without interest, naively $6m will yield $100k a year for 60 years, which is more than enough to raise a large family in a nice neighborhood anywhere in the states - especially if the home and taxes are paid for.
I'd be willing to bet that somebody from a background in Wall Street and derivatives markets is not going to stuff their cash under the mattress.
If you want a complex statement that can be challenged, 10%/year on that $3.6mln last bonus would result in $360k pre tax.
There are plenty of cities in the US where a $100k income would afford a very nice middle-class or even upper-middle-class lifestyle.