Category Archives: Finance

Financial Crisis Guest Blogging

Many have complained about the lack of posts on this blog of late, but one reader has stepped up to do something about it. Watch this space for guest posts from novelist, finance veteran, and regular commenter JSpur, who has volunteered to share his thoughts on the current state of the markets and economic policy. Meanwhile, I will continue to post on my somewhat erratic schedule.
Content disclaimer: I’ve given JSpur keys to the blog so that he can post at will; therefore his posts are not edited by me, and my approval or endorsement is not required to post here.
Technical disclaimer: I moved the byline up to the top of the posts to avoid confusion. Please let me know if this isn’t working somewhere. Also, I apologize if this causes old posts to reappear on the RSS feed.

Physics, quants, and the crash

I am pretty much required to blog about this piece in the New York Times entitled “They Tried to Outsmart Wall Street”: “they” being physicists who left science for Wall Street. And the not-so-subtle implication of the title is that we failed to outsmart Wall Street (and possibly wrecked the economy in the process). To that I say, in the words of Bart Simpson: it was like that when I got here.
More seriously, while I have no doubt that there were crappy quant models out there that contributed to the current crisis by maximizing short-term gain over long-term risk, this was true all the way up and down the chain and the quants don’t deserve any more of the blame than anyone else. Quants respond to incentives the same way everyone else does, and the compensation structure on Wall Street can incentivize immediate profit and deferred risk. (My employer is trying to curb this effect by instituting a clawback provision on bonuses; I don’t know how widespread this is, but it seems like a good idea to me.)
The Times article is curiously focused on ex-physicists, as if quants don’t come from any other fields. In my ten months on the Street I’ve met quants from a broad range of science and engineering fields, and physicists aren’t a majority. That might be a peculiarity of my department’s hiring practices, with physicists being much more common elsewhere, but I’d be surprised. Anyway, Kevin Drum noticed this too and wonders why physicists are so suited to quant roles. He has a theory that it’s the culture:

Even among the number crunching set, physics has a reputation as the most aggressive, male dominated branch of geekdom: only 14% of physics PhDs are women, the lowest of any of the sciences. (Math is pretty male dominated too, but pales compared to physics: 29% of math PhDs are women.) If the first thing that “aggressive and male dominated” reminds you of is the big swinging dick world of high finance, give yourself a gold star. Call this the testosterone theory: physicists are attracted to Wall Street because they like the atmosphere.

I don’t think this is right: the atmosphere in a typical physics department is nothing like the stereotypical Liar’s Poker trading floor that Drum is alluding to. To the extent that the environment I work in is like academia, it’s because I’m lucky enough to work with a group run by ex-academics rather than people with a typical trader’s background. Instead, what Drum calls the “affinity theory” really is the right one. The work I do now is a lot like the problems I worked on as a physicist. It’s not just (as Drum suggests) about math; it’s about the ability to work with huge data sets and make sense of them, and to find signals in a noisy system. This is a much bigger factor than testosterone levels.

Arcane Gazebo’s financial crisis FAQ

I won’t attempt to explain the financial crisis here, but I will answer a few questions that have frequently been asked of me.
Q: Why haven’t you been blogging about the recent events in the financial sector (or anything else, for that matter)?
A: One reason is that I don’t have a lot of insight to add over what others are already saying. On top of that, since I work in proprietary trading I’m not at liberty to talk publicly about the aspects that affect me the most. As for blogging on other topics, I’m spending a lot of time at the office, and posting to the blog from firm systems is (I believe) frowned upon in the same way that using personal e-mail accounts is.
Q: Do you still have a job?
A: Yes.
Q: What’s it like starting out in the finance industry right now?
A: Sort of like you got the last ticket on a luxury cruise, and the cruise ship was the RMS Titanic. Or you moved to Tokyo just in time for a Godzilla attack.
And now, some questions that have not been asked of me but to which I have answers:
Q: What’s happened to the Lehman Brothers building since they went bankrupt?
A: Since it’s on the edge of Times Square, it has a big TV screen on the front that used to show attractive video of various landscapes. When Barclay’s took over the building, it didn’t change for a few days, and then turned into a still Barclay’s logo on a hideous blue background–BSOD blue. They later figured out how to animate the logo, but it’s still that awful blue and the entire block glows with the color at night.
Q: Is there a blog collecting those dumb trading floor pictures you complained about a while back?
A: Yes: Sad Guys on Trading Floors.
Q: Can you give me financial advice?
A: I think my employer would frown upon this.
Q: I work in the financial services industry. What is a good song to play at the office this week?
A: “Always Look on the Bright Side of Life”
Q: Is there a bright side to all this?
A: Barack Obama is now the overwhelming favorite in the presidential election.
Q: So why haven’t you been blogging about politics?
A: The political news cycle moves so fast that by the time I get home from work my commentary is redundant.
Q: What about the music blogging?
A: I’ve just been lame. I did catch a couple shows at Austin City Limits a couple weeks ago (Spiritualized, and Iron & Wine). And I’ve been listening to the new TV on the Radio album, which is excellent.
Q: Should you put a disclaimer on a post like this?
A: It should go without saying, but the opinions expressed here are my own and do not reflect the views of my employer. I should just put that on the sidebar.

The information content of trading floor photos

I’ve been noticing lately that whenever the New York Times runs a market-related story, they always include a photo of traders at the relevant exchange looking troubled and/or frantic. (Today’s example is here.) This raises a number of questions:

  • Given that all these photos are basically the same, do they actually go to the floor and take new ones each time or just post from a collection of stock photos?

  • And isn’t it likely that floor traders always look like this, not just when something newsworthy happens?
  • What will the journalists do when the exchange floor closes entirely as a result of the shift towards electronic trading? (Probably just keep using the stock photos.)
  • If only there were a more informative graphic they could fill the space with… if there were an “index” reflecting recent market movement that could be plotted as a function of time. Someone should invent something like that.
  • Instead of complaining about lame photos in the NYT, shouldn’t I just subscribe to the Wall Street Journal like everyone else in the industry?
  • Or has Rupert Murdoch already turned it into the financial equivalent of the New York Post or Fox News?

Thought I was done with exams

Tomorrow I take the Series 7 exam, which is the standardized licensing exam for stockbrokers. Even though I work in a proprietary trading group, and don’t go anywhere near any brokering-related activities, this is apparently one of the certifications I need if I’m going to be involved with the details of trading.
I think the last time I studied for a standardized test was when I was preparing for the physics GRE; needless to say this is a very different experience. I’m used to tests where I reason out the answers from a few basic rules, but the Series 7 mainly tests knowledge of the regulations concerning brokerage firms, so it’s almost all memorization and nothing more. There’s some logic to the general boundaries of these regulations but almost all of the specifics are arbitrary: there’s no way to derive the Regulation T margin requirement from first principles.
So I’ll get a question like, “How many additional shares may an underwriter sell under the green shoe option?”, and unless I can remember the one line in the phone-book-sized study guide that referred to this, and not get the percentage mixed up with the countless other similar numbers in other regulations, I’ll be stuck. And it doesn’t help that “green shoe option” only makes me think of this:

If only securities laws were as easy to remember as Mario trivia…
(Actually, there’s a mnemonic here: the Kuribo’s shoe only appeared in world 5-3 of Super Mario Bros. 3, and 5×3 is 15, exactly the percentage allowed in the green shoe option. Having discovered this, I’m unlikely to miss a similar question on the actual exam. This suggests that if I can just create a mapping between my Mario knowledge and the Series 7 material, I’ll do very well (and then I can write the Super Mario Guide to the Series 7 Exam). However, I expect to pass the test as is and higher scores are frowned upon in my group, as they indicate too much time spent studying rather than doing something more productive.)