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.
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.Here is a guaranteed way to get paid well if you work on Wall Street. Find a best friend at a competing
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...
Surely this would be illegal in some way? Some kind of market manipulation / abuse?
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.
i came across this on zite the other day and was going to share on the site (or have a writer post about it) but you beat me to the punch, interesting stuff
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 :)
I need to track down the source, but I read research about how game theory's predicted actions by rational actors tend to only be accurate for people who have learned game theory. As is obvious from the linked article, it's counterproductive from a societal standpoint.
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.
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).
Have you forgotten about the London Whale already? Maybe Moby Dick got some best friends that really took advantage of those illiquid trades.
All I know is there isn't a person dumb enough to risk his job at a hedge fund where he can take a position as massive as that, risk not getting any meaningful gig in the future and most of all risk not getting half of what he was promised by the said best friend.
All your comments have reminded me of this hilarious scam that was really prevalent when I just got into the business. I'm gonna write about it in my post tomorrow. Should be good for a laugh.
Yawn. The prop trading "game" has "cheat codes"? No shit.
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.
Yes. Honestly, I am angry that this issue hasn't gotten more attention.
Yes. Prop traders are obviously incentivized to do so. Does retiring with $20 M not sound appealing to you?
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.
Animi dolorum aut adipisci et vitae cumque enim sunt. Velit aut et architecto assumenda maxime alias perferendis. Dolores illo aspernatur expedita quos. Laudantium assumenda vel eligendi aut doloremque voluptatem. Magni autem officia magnam aperiam. Sint quas soluta harum odio et autem. Sed sed accusamus dicta expedita.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...