Hi Ash1972,
I think what you would learn is market making is a very good business. And an even better business when technology is applied and economies of scale kick in. Then an even better business when customer orders both market, resting and potential are used as leans for proprietary trades where this knowledge of order flow is the edge.
You know how difficult it is to generate pure alpha without the advantage of an order book so when you walk onto a huge investment bank or commercial bank trading floor and see dozens and dozens of âtradersâ you know the vast majority of them are not generating alpha as proprietary traders but instead use market making and leaning against flow to make money.
After market making/leaning against flow the next thing that gets classified as proprietary trading at an investment bank is what I call ânaïve risk aversionâ.
This is when an supposedly smart investment banker thinks volatility is risk and is thus so adverse to volatility risk that he takes on tons of other kinds of risk such as credit, liquidity, concentration, counter party etc to minimize the scary âvolatility riskâ and this is why Wall Street blows up every several years or so.
Also known as the "as long as I can't see a tiger he can't eat me" guide to jungle survival.
Personally in the general sense I view risk as Ben Grahamâs definition that Risk is the permanent loss of capital (drawdown you donât recover from) rather than Markowitz risk where risk is standard deviation i.e. âvolatilityâ.
An example of the above is the 2008 credit crisis when Wall Street bought its own bullshit and warehoused tons of bundled ABS/MBS using firm capital to take on huge concentration risk rather than remaining diversified etc.
What I find amusing is when watching those government hearings where the Wall Street Investment bankers have to answer questions about what happened that they never just admit that they were just as stupid as the innocent and naïve customers.
It is hilarious that Wall Street bankers would rather be rather be seen as an evil genius pariah that sold garbage to naïve investors than let the secret get out that he is just as stupid as his customers since he had the same trade on. The difference is the taxpayer will bail out the banker but not the main street investor.
Still there are many guys on Wall Street working in investment banks that really know the business but if they can generate alpha inevitably they leave to start hedge funds and the stupid but brilliant political players end up running the Wall Street Investment Banks and after several years put on a similar huge concentration trade with the fashionable product de jour to avoid ârisk/volatilityâ because this time its different and the cycle continues over and over.
And that is my explanation for it.
Anyway you also have to be impressed with Simons who uses market making camouflaged as proprietary trading without the Wall Street blowing up part to make billions and billions.
Obviously this rant shows I am not happy with the Italians.
Cheers Smoker
I think what you would learn is market making is a very good business. And an even better business when technology is applied and economies of scale kick in. Then an even better business when customer orders both market, resting and potential are used as leans for proprietary trades where this knowledge of order flow is the edge.
You know how difficult it is to generate pure alpha without the advantage of an order book so when you walk onto a huge investment bank or commercial bank trading floor and see dozens and dozens of âtradersâ you know the vast majority of them are not generating alpha as proprietary traders but instead use market making and leaning against flow to make money.
After market making/leaning against flow the next thing that gets classified as proprietary trading at an investment bank is what I call ânaïve risk aversionâ.
This is when an supposedly smart investment banker thinks volatility is risk and is thus so adverse to volatility risk that he takes on tons of other kinds of risk such as credit, liquidity, concentration, counter party etc to minimize the scary âvolatility riskâ and this is why Wall Street blows up every several years or so.
Also known as the "as long as I can't see a tiger he can't eat me" guide to jungle survival.
Personally in the general sense I view risk as Ben Grahamâs definition that Risk is the permanent loss of capital (drawdown you donât recover from) rather than Markowitz risk where risk is standard deviation i.e. âvolatilityâ.
An example of the above is the 2008 credit crisis when Wall Street bought its own bullshit and warehoused tons of bundled ABS/MBS using firm capital to take on huge concentration risk rather than remaining diversified etc.
What I find amusing is when watching those government hearings where the Wall Street Investment bankers have to answer questions about what happened that they never just admit that they were just as stupid as the innocent and naïve customers.
It is hilarious that Wall Street bankers would rather be rather be seen as an evil genius pariah that sold garbage to naïve investors than let the secret get out that he is just as stupid as his customers since he had the same trade on. The difference is the taxpayer will bail out the banker but not the main street investor.
Still there are many guys on Wall Street working in investment banks that really know the business but if they can generate alpha inevitably they leave to start hedge funds and the stupid but brilliant political players end up running the Wall Street Investment Banks and after several years put on a similar huge concentration trade with the fashionable product de jour to avoid ârisk/volatilityâ because this time its different and the cycle continues over and over.
And that is my explanation for it.
Anyway you also have to be impressed with Simons who uses market making camouflaged as proprietary trading without the Wall Street blowing up part to make billions and billions.
Obviously this rant shows I am not happy with the Italians.
Cheers Smoker
