Scientific American: How To Game Your Trading Career

I have to admit that I was pretty surprised at the source of the following article. You wouldn't think Scientific American would be aware of the "career put". But here they go pointing out how to make a seven-figure trading bonus on Wall Street with no risk. Hint: it's gonna take an accomplice at a rival firm.

Here is a guaranteed way to get paid well if you work on Wall Street. Find a best friend at a competing bank or hedge fund and take opposite sides of the same large bet. In one year’s time one of you will have a huge profit and get paid well. The other person will have lost and perhaps be fired. The sum of both your profits will be zero, but the sum of what you get paid will be positive. Split the pay.

The author of the piece is a former prop trader who spent 20 years on the Street, and he outlines a couple other ingenious schemes for gaming the compensation system. It's no coincidence that he knows about this stuff, either. He interviewed a math PhD in 2000 who eventually went to work at another bank and "milked the franchise". He walked away with almost $20 million in comp while his firm ate $300 million in losses. The subject of his doctoral thesis? Game Theory.

It's interesting to see something like this turn up in the pages of a magazine like Scientific American. Just about anyone on Main Street will tell you that Wall Street's compensation system is broken, but won't be able to tell you why. Those of us who've been there know it's broken as well, and we do know why.

Obviously the kind of abuse outlined in the article isn't common and I know this because successfully running a scam like this would make you a Wall Street legend to insiders. I'm not saying that we don't all know somebody who blew up and just walked away, only to be hired by another bank a few weeks later. I'm talking about somebody who blew themselves up deliberately by goosing their book into oblivion year after year.

Or maybe I'm wrong. Maybe this does go on more than I realize. I'd love to hear about it if it does. You don't need to out anybody, just a simple, "I know this one guy who..." will suffice. Do tell.

What do you guys think? Is this kind of thing common enough to warrant the attention of Scientific American? Would you ever consider "milking the franchise", only to run your book into the ground and walk away clean?

I have to admit, it's pretty tempting...

This is great. The only problem is that game theory would also lead to the person who had the winning side to 'forget' there was an agreement at the outset. A contract where there is an intent to defraud another party wouldn't be enforced, so that wouldn't help either.

 
SirTradesaLot:
This is great. The only problem is that game theory would also lead to the person who had the winning side to 'forget' there was an agreement at the outset. A contract where there is an intent to defraud another party wouldn't be enforced, so that wouldn't help either.

Hence the use of the phrase "best friend", a concept perhaps alien to some of those in the world of finance, but I've found it utterly bizarre that sometimes in life human connection trumps dominant strategies.

"#1: I want a Times New Roman in the streets but a Wingdings in the sheets."
 
TierOne:
SirTradesaLot:
This is great. The only problem is that game theory would also lead to the person who had the winning side to 'forget' there was an agreement at the outset. A contract where there is an intent to defraud another party wouldn't be enforced, so that wouldn't help either.

Hence the use of the phrase "best friend", a concept perhaps alien to some of those in the world of finance, but I've found it utterly bizarre that sometimes in life human connection trumps dominant strategies.

When there's eight figures on the line, they'll probably be ex-best friends. Especially when you consider that you had two parties willing to engage in illegal behavior to get that money. No honor among thieves.
 

I am also very surprised by this article... I find the "traditional model" of persuading someone into buying crap assets much better, especially because it eliminates the need for splitting the profits and laundering huge amount of money :)

 

Why not alternate this method on many smaller trades so that both sides have a chance to gain, and there will be an incentive to cooperate because of expected future payoffs. Since the trades are small, you wouldn't be losing too much if the counterparty decides to renege.

 

This is total nonsense, and nothing new. It's just a collusion variant of the trader's option.

Also, in reality, trading firms/desks have risk limits, and generally traders cannot take huge risk on any one bet. Even if there is such an event, any decent trading manager/risk manager would see that the trader's PNL came from one event. It's unlikely a trader would get a huge % payout in such a case.

 
Best Response
justin88:
This is total nonsense, and nothing new. It's just a collusion variant of the trader's option.

Also, in reality, trading firms/desks have risk limits, and generally traders cannot take huge risk on any one bet. Even if there is such an event, any decent trading manager/risk manager would see that the trader's PNL came from one event. It's unlikely a trader would get a huge % payout in such a case.

This is why this article is just an interesting view on compensation for funds. The measurable risk that a trade like this would have to take would be far greater than any responsible investor would take. The bad side of this scenario is when both parties get fired (one for poor results, the other for unreasonable risk levels).

"Now watch this drive." -W.
 
justin88:
This is total nonsense, and nothing new. It's just a collusion variant of the trader's option.

Also, in reality, trading firms/desks have risk limits, and generally traders cannot take huge risk on any one bet. Even if there is such an event, any decent trading manager/risk manager would see that the trader's PNL came from one event. It's unlikely a trader would get a huge % payout in such a case.

Have you forgotten about the London Whale already? Maybe Moby Dick got some best friends that really took advantage of those illiquid trades.

 
justin88:
Also, in reality, trading firms/desks have risk limits, and generally traders cannot take huge risk on any one bet. Even if there is such an event, any decent trading manager/risk manager would see that the trader's PNL came from one event. It's unlikely a trader would get a huge % payout in such a case.
cosigned
Get busy living
 

Yawn. The prop trading "game" has "cheat codes"? No shit.

Edmundo Braverman:
What do you guys think?

I think that it is blatantly obvious that bank employee incetives and bank shareholder interests are totally incongruent, which is exactly why banks fail so spectacularly nowadays.

Edmundo Braverman:
Is this kind of thing common enough to warrant the attention of Scientific American?

Yes. Honestly, I am angry that this issue hasn't gotten more attention.

Edmundo Braverman:
Would you ever consider "milking the franchise", only to run your book into the ground and walk away clean?

Yes. Prop traders are obviously incentivized to do so. Does retiring with $20 M not sound appealing to you?

Edmundo Braverman:
I have to admit, it's pretty tempting...

Making a lot of money usually is, even if it is fraudulent/legal/illegal/immoral/whatever. You admitting it's tempting is a normal human reaction.

Man made money, money never made the man
 

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