Former senior managing director (quant): 'Trading is no longer a balls job, it's a brains job'
|
Version 0 of 1. <em>He wrote to the blog after reading </em><em>this disillusioned interviewee</em><em> claim that "the most dishonest bankers walk away with the most money". He found the piece "distorted and self-serving. There are arseholes and idiots in every profession (I'm pretty sure journalism isn't immune) but it deserves to be counterbalanced by a more measured assessment."</em> <em>We meet in a pub in Farringdon near the heart of the historic City. He is a boisterous and good-humoured Brit in his 50s, casually dressed. While gently mocking my choice of cranberry juice he orders a Diet Coke and a coffee.</em> "I have the wrong accent. I am a bit loud, I went to a shit school … Forty years ago I wouldn't even have been given an interview in the City. Finance today is fiercely meritocratic. Doesn't matter if you're gay or black or working class, if you can do something better than the other person, you'll move up. I spent around 15 years in an absolutely top bank, made it to the top and then went to work for a hedge fund in the mid 2000s. "The first time I stepped into the bank I was expecting something very different. This was the early 90s and until then I had been in academia, as had so many quants of my generation. My idea of an investment bank basically went back to the two famous books I'd read: Liar's Poker and Barbarians at the Gate. Both paint a picture of traders as loud, crass, bad-mouthed macho dickheads. The sort of guys with red braces who shout 'buy, buy, sell, sell' into their phones and have eating competitions. "Many outsiders still seem to believe that these are the guys taking the big positions, and with it the big risks, in banks. That's over. "Some of the best traders are now women. Totally unassuming, cerebral and talented. Trading is no longer a balls job. It's a brains job. To be sure, the kind of maths that traders now have to be able to do is not of the wildly hard variety. But it requires real skills in that area. "Trading is no longer about gut feeling, using intuition to punt around. There's a whole thought process that precedes risk taking which is going to be questioned and probed by your peers and your bosses. "The term 'trader' is confusing, by the way. There's trading as in broking: you have a buyer here and a seller here and you match them. What I'm talking about is trading as in taking a view by seeking exposure to price. Taking risk. You have a market stall and you go out and buy 100 kilos of bananas. You now have exposure to bananas. Your 'view' is that you can sell those bananas for a profit. "Talking about traders, do remember that what traders do in banks is not systemically important – their actions cannot sink the system. Sure, 'rogue traders' like Jérôme Kerviel lost their firm a whole crap-load of money but he didn't put the system at risk. The insurer AIG could. What AIG did was pick up nickels in front of a steamroller. No skill, no point. They put the entire system at risk by taking risks they didn't understand or quantify until they went down. "Also remember there's a lot of peer-pressure in a bank. If you've got somebody swinging around taking big risks, everybody will say: 'that's not right. If this guy loses us £100m, I won't have a bonus. Let's control this loose cannon'. The fear of that happening to you is a natural risk control. I remember when 'fixed-income' lost a great deal for the bank. They became pariahs. "At one point in my career I interviewed traders. My most important objective was to find the sane ones. That's right, the sane ones. Who to ferret out? The mad, bad and overconfident ones. There's no point for the bank to have somebody punting around and making us 50 million in one year only to lose 50 the next. We call those the 'lucky monkeys" and my bank was working very, very hard not to hire those and to get rid of the ones who had slipped through the net. "How do you spot overconfidence? I'd ask them 'tell me a good trade you did'. Now, the lucky monkeys would analyse that trade by what happened ex-post, not ex-ante. They'd say, 'I bought this and then X,Y,Z happened and so I made a lot of money so I'm great.' That's attribution bias. You take the credit for good results produced by events over which you had no control. What I'd want to hear is: I bought this because I analysed the situation and there was a good probability that X,Y, Z would happen and then they happened, so great. "Next I'd ask them, tell me about a bad trade. With lucky monkeys a bad trade was always really a good trade if only this or that hadn't happened. 'I bought US government bonds and then Greenspan said something unexpected so it was bad luck.' The good ones would talk about how they had misanalysed the market or missed a critical piece of information – and learned from it too. "Finally I'd ask them about their mistakes. Again if they say, my mistake was to go to Deutsche Bank because they really didn't appreciate how great I was … "There's probably more introspection in finance than anywhere else. You know who are most terrified of lucky monkeys? The traders and risk takers themselves. They are terrified of being just a lucky monkey themselves and constantly ask themselves: was it luck? What's going on? Have we missed something? "Bankers get tarred with the behaviour of a few. It's a witch-hunt. In some of the commentary including this blog, replace the word 'banker' with 'Jew' and you see what I mean. The vast majority of those working in financial services are decent, honourable people doing decent and honourable things. Finance weeds out the arseholes, idiots, charlatans and fools pretty quickly and that's the main reason I don't recognise the picture painted by many of the contributors to the blog. Maybe they are some of the ones who have been weeded out? "I cannot count the number of times we were looking at a deal that was very lucrative but decided: no, let's not do it. Too risky. Or not good for the client. Not right. Dare I say it, an 'immoral' thing to do. "I have never heard anyone in finance say: 'who cares when it goes wrong?' What happens is that people say: 'that's a great idea, now tell me what happens when it goes wrong?' "Quants like me are geeks. I'm fine with that word, we've absorbed it, the way homosexuals have with 'gay' and journalists with 'hacks'. Even 10 years ago there was far less respect for us. Now we are highly prized. Finance today is about technology and data, so technologists and people who understand maths and data are paid very, very well. "I will admit that among quants there is a tiny little bit of a feeling like 'in the end we are the only ones here who still understand what's going on'. There's a strong divide between quants and the rest. In some ways a quant at UBS will identify more with another quant at JP Morgan than with his non-quant colleague sitting next to him. "Compare the quants' models with weather forecasts. There are different ways to predict the weather. You can look up in the sky. You can become very experienced, like a shepherd after decades on the same hill. And then there's meteorology, which is what quants do. If used properly models can be of great use. "The crisis was certainly exacerbated by over-reliance on models but like the weather, it's an uncertain thing. Meteorology is a great science but whilst it might guide your actions tomorrow if you know that it's quite likely to be sunny, you wouldn't bet your family's life on the 10pm BBC Weather forecast. Similarly with financial modelling. Like so many things in life, overconfidence is the cause of so many problems... "In banking nobody who is any good at his job says: 'this is true' or 'this is certain'. You speak in probabilities. Or you should. The trouble is, many non-quants don't think in probabilities, or statistics. Say, I look at a portfolio of trading positions in the market and I tell you that there is a one in 100 chance of losing £5m tomorrow. Now what did I just tell you? "I told you that one in every 100 days you are going to lose at least 5 million. But many non-statistically trained people misinterpret this and think I told you that you can't lose more than 5 million. Those same people won't realise that I didn't say anything about the losses with a chance of one in a thousand or one in a million. "There are risks with huge impact hiding in the 'long tails' of extremely low probability events. At 8:45am on September 11, 2001 the chance of two aeroplanes hitting the World Trade Centre would be indistinguishable from zero. Not 'impossible' but very, very unlikely. Then it happened. "There are risks you cannot account for. You can determine the risk of a nuclear reactor melting down. But what's the chance of two 747s colliding on top of a reactor? "The interconnectedness of finance carries special risks too. And not just in finance. What happens if the power grid in London goes down for a week? The mobile networks? The food supply system? "All systems of a sufficient degree of complexity have embedded in them the possibility of failure. And even if you can spot a threat you may decide not to act on it. There is absolute certainty that at some point an asteroid will destroy life on earth. Now society could say, we must stop all activity until we build something to protect ourselves against this. Yet we won't. Because the cost is too high. And mind you, this is a known unknown, we know it's going to happen one day, we just don't know when. Catastrophic risk. We take that risk, because the costs of reducing it would be too high. The global financial system today carries both known and unknown risks. "We could say, finance must be run as a utility, like nuclear plants. If that's what the world wishes, then fine. I'm a democrat. But then we must also accept the associated costs and knock-on effects: lower pensions, higher borrowing costs for people and corporations due to greater inefficiency. The reason you can use your credit card on holiday, buy an iPad made in China, eat food from around the world, get a mortgage is all about an efficient banking system. None of those were possible prior to the 1980s when banking was a utility. Don't think that changes can be made without costs. "You ask, if there's such fierce competition between banks why are there no newcomers in global finance and where is the downward pressure on compensation? "Well, there are huge barriers to entry. Every time a new piece of regulation comes out it is harder for new competitors of to enter the field. You know how vast the post-crisis regulation is? Sarbanes Oxley, Dodd Frank, the Financial Conduct Authority (FCA), the European Securities and Markets Authority (Esma) … you name it. Endless regulation which is expensive to comply with and, frankly, 90% of it is utterly useless. "There are newcomers in investment banking. A lot of 'boutiques' have sprung up in recent years. But they tend not to compete on price. Is that market failure? Well, the libertarian in me says: if it were possible to do banking for less, somebody would do it. This is just how much it costs. "Maybe things would change if we returned to the traditional partnership model where a bank isn't listed on the stock exchange but uses capital provided by the partners themselves. The bank I worked for used to be a partnership and still retained some of the culture. I remember one time, I was very new and maybe a bit cocky. I thought I'd built something very clever. So I went over to the head of trading and showed it to him, saying, isn't this clever, look how we can make a lot of money with this! The head of trading was a partner in the traditional sense. He looked at me and said: "Don't forget, this is my money you're fucking with." That was the system back then. As a banker you had the shareholder sitting next to you. Maybe that was a better way." • If you would like to comment on this interview, please visit the accompanying blogpost Our editors' picks for the day's top news and commentary delivered to your inbox each morning. |