Quote from christianhgross:
First I was not a risk manager.
Second the team I was part of was drum roll.... CUSTOM PROGRAMMING!!!
You see the way that the teams were split up were according to business on one side and software on the other side. And in the software it was split up in products. And I guess since you are from one of those environments you can probably understand that there are a whole host of products, like Front Arena, Lighthouse, etc, etc... Because this was the software side of things they thought it would be better to keep Front Arena with Front Arena even though they might cross business boundaries...
So guess what, being in custom programming we were an odd lot of various skills...
Next time don't presume to know something that you don't know about, ok?
So if I understand well, you're essentially a programmer that built risk systems, as opposed to trading systems. Is that correct? You never traded or designed trading algos, never managed portfolios, never designed electronic exchanges, never studied in financial economics, or anything that could make you remotely understand HFT more than my mother does. Is that right?
Quote from christianhgross:
There is more to investment banking other than computers. There are a whole host of things that big investment banks do, that do not require an arms race. For example, wealth management is not an arms race. Or how about M&A, Equity Underwriting, or Debt underwriting... Not an arms race either since it is just a bunch of quants sitting down thinking how things can be structured.
Arms races don't exist only when it comes to computers. All technology applied in such a way that it could make a business more simple to operate and eventually commoditize it is an arm.
Wealth management is an arms race. Private portfolios are being increasingly built following model portfolios that are optimized and cloned. Institutional portfolios have been optimized for long, and risk models are increasingly similar from one firm to another. Stock selection models are increasingly automatized and proven to often render manual stock picking rather useful. And those models are also increasingly similar across firms. Fees are driven down, margins are tightened, people are getting fired, AUM is being consolidated, less people manage more money, etc.
M&A is less and less of a contributor to the P&L of traditional investment banks. More firms are starting to rely on the services of smaller but equally prestigious boutiques that are less prone to conflicts of interest and information leaks. Of course, GS is still a leader, but their star bankers can always be inclined to leave to start their own firms, and clients could easily follow as it is a peoples' business - the firms commit no other asset to this business segment than their own employees.
Everything else will eventually fall into the arms race category, including underwriting activity, which could easily be replaced by auction systems for new issues. Institutional investors will provide the bids and liquidity, and underwriters will go from risk takers to simple platform operators.
And structuring deals, not an arms race? How far and deep can you go in thinking of new structures that fit a client's needs? How much value can useless complexity create? The recent crisis just revealed us how complexity can obfuscate things more than fullfill natural needs. Once you've thought of the few structures that naturally fulfill a client's financing, risk transfer, trading and M&A needs, and once the models, pricing formulae and hedging strategies have been written down, how can you say that deal structuring does not become an arms race?
Truth is, the whole banking industry is technology driven and most of it is subject to an arms race one way or another. But hey, wait, such are most non-service industries also. How can you think that pumping oil from the ground is not an arms race? Or mining ore? Or producing clothes?
Are these fads also?
Quote from christianhgross:
Again, this is only one part of the business. You need to read the following book:
"The Business of Investment Banking" from Amazon...
This book gives you are really overview of what investment banks do.
Wait buddy, I know the economics of an investment bank, thank you.
Quote from christianhgross:
Now that is a stretch if I ever saw one. First do long term investors want to trade in higher volumes? They already have it with dark pools since that was the original reason of dark pools. High frequency trading for a long term investor adds very little since the long term investor does not care if they got a stock at 3% higher or lower.
What you are talking about is the trader. The trader is directly affected by high frequency trading since 3% at the bottom and 3% at the top can make quite a difference.
Dark pools increase liquidity but do not improve price discovery at all, quite the opposite. They allow investors to trade with less market impact by avoiding to leak information about their trades. They are great for highly informed investors who want to build up large positions at the expense of less informed investors who mostly seek liquidity (ex. passive institutional investors). This means that uninformed, liquidity-driven traders have absolutely no benefit in trading in dark pools, as they are more at risk of trading against much more informed investors, at a very disavantageous price. On the other hand, trading in the open market allows them to execute at what the market believes is the fair price for a security given the uninformed nature of their trade. In the long run, this means that dark pools will attract only informed investors because of the opacity they provide, but will eventually fail to pool liquidity for the same reason - their lack of transparency.
As for your 3% example, you sure must be kidding me. I don't know any portfolio manager who would be willing to pay a 3% trading cost on any trade. Not even in Ghana. Just think about what it would look like if index managers were paying 3% on their trades! What kind of fees would index funds carry? How much fees would you pay for a simple S&P500 replicating ETF? 5% per year?
Quote from christianhgross:
High Frequency trading works because the odds are unevenly stacked. Some are getting lots and lots chips, whereas others are not. But that will change with time to the point where it will not be interesting anymore. ^
No, HFT works because there is natural demand for liquidity and price discovery. The fact that some are getting lots and lots of chips wheras others don't is just the nature of the industry. You eat what you kill, the winner takes it all, survival of the fittest, etc. You've heard all these before. This is corporate america. And no, it's not a fad.
