Comp/bonuses went up for some. It went to zero for many others. In 1985, banks had armies of line workers processing trades, managed by officers making decent money. The average comp at a bank might be the average of 1 officer and 100-500 low level line workers. It would be better than other office jobs, but not great.
In 2010, the officer specs out business requirements after talking to traders and regulators, sends the high level work to IT and the CRUD apps to Bangalore. 475 of the 500 line workers have been replaced by a data center in Nutley, NJ, 5 remain in the US handling cash wires and other time-zone sensitive work, and 20 work via email out of an office park in Pune.
For obvious reasons, the average comp of 1 officer + 3 IT guys + 5 US line workers is going to be far higher than the average comp of 500 grunts + 1 officer.
Additionally, for many reasons (IT being one of the biggest ones), it's also vastly easier today to strike out on your own than ever before. In 1985, if you wanted to quit and start a hedge fund, it was tough. Today, a hedge fund can be operated by 3-4 guys + servers. Banks are forced to pay their traders enough money to prevent them from quitting and doing exactly this.
(Remind you of another high comp industry, with established players giving out big comp packages to retain talent?)
Edit (in response to your edit): RE: hiding the big trades in noise. What's wrong with that? Why should they have to develop a special HFT algorithm in order to simply move shares around without getting their lunch eaten? This is exactly the kind of value extraction I'm talking about. HFT shops have now created a huge expense for these retail shops that didn't exist before..
When you make a large trade, there will be a price impact. This is unavoidable - if you are selling millions of shares, supply went up, and price must drop.
In 1985, institutional investors (not retail investors) tried to make sure that other people (their counterparties) suffered the price impact. They would sell shares at full price, retail investors (i.e., my Mom) would buy from them, and then shares would go down once the market figured out supply dramatically increased.
In 2010, some HFT shops will sell to my Mom at a favorable price, and then buy from the institutional investor after prices go down. This benefits the HFT shop and retail investors at the expense of the institutional investor. I'm not saying this is good or bad, I'm saying it benefits "dumb money" (little guys who can't afford to rent an algorithm) at the expense of "smart money" (Goldman, Vanguard, Calpers Pension Fund).
[edit2: just a disclaimer - specific numbers/cities should not be taken as precise. The data center might be in Jersey City or Brooklyn, Pune might be Cebu or even Baltimore, and there might have been 250 or 1000 line workers rather than 500.]
This is an awesome convo BTW, thanks for providing all the detail about the industry.
Regarding our high comp industry vs theirs.. we've reinvented the world at least twice since 1985, and like I said, I haven't seen a reinvention of finance in any positive way. If they're that much more efficient now (and I agree that they are along the lines you're saying), where are the savings for the rest of the economy? I'm all about the TD Ameritrades of the world where I can do an $8 trade, that's providing value and they deserve every penny they earn. But it seems like most of the hedge funds are just playing games to extract money from less sophisticated investors.
Regarding your average comp comparison -- that's fine, I'm all about profiting from efficienbut what about the aggregate comp? Is that higher, too?
Regarding our high comp industry vs theirs.. we've reinvented the world at least twice since 1985, and like I said, I haven't seen a reinvention of finance in any positive way.
In almost every financial service that existed in 1985, margins have been cut to the bone (the main exceptions being M&A and IPO services). The commission on stock trades is now $0-8, it used to be $150, as you note.
When businesses need futures/options (mainly for hedging purposes), they often just buy them on the open market rather than contacting a GS/MS/JPM rep and paying through the nose for the privilege.
Regarding hedge funds/private equity, Warren Buffet and others have commented that there are very few hidden gems left, particularly gems detectable by financial/technical analysis. I.e., good businesses are getting more investment.
Regarding your average comp comparison -- that's fine, I'm all about profiting from efficienbut what about the aggregate comp? Is that higher, too?
It's a good question. Top traders get more, but they also tend to earn more. Good IT is certainly vastly cheaper than armies of line workers, and HFT is cheaper than human market makers. More financial services are provided today - my understanding is that credit cards were hardly pervasive in 1985, and no one would cell you a phone on quasi-credit like they do today.
I have absolutely no idea and I'd be very skeptical of anyone who claims to know.
Comments
Comp/bonuses went up for some. It went to zero for many others. In 1985, banks had armies of line workers processing trades, managed by officers making decent money. The average comp at a bank might be the average of 1 officer and 100-500 low level line workers. It would be better than other office jobs, but not great.
In 2010, the officer specs out business requirements after talking to traders and regulators, sends the high level work to IT and the CRUD apps to Bangalore. 475 of the 500 line workers have been replaced by a data center in Nutley, NJ, 5 remain in the US handling cash wires and other time-zone sensitive work, and 20 work via email out of an office park in Pune.
For obvious reasons, the average comp of 1 officer + 3 IT guys + 5 US line workers is going to be far higher than the average comp of 500 grunts + 1 officer.
Additionally, for many reasons (IT being one of the biggest ones), it's also vastly easier today to strike out on your own than ever before. In 1985, if you wanted to quit and start a hedge fund, it was tough. Today, a hedge fund can be operated by 3-4 guys + servers. Banks are forced to pay their traders enough money to prevent them from quitting and doing exactly this.
(Remind you of another high comp industry, with established players giving out big comp packages to retain talent?)
Edit (in response to your edit): RE: hiding the big trades in noise. What's wrong with that? Why should they have to develop a special HFT algorithm in order to simply move shares around without getting their lunch eaten? This is exactly the kind of value extraction I'm talking about. HFT shops have now created a huge expense for these retail shops that didn't exist before..
When you make a large trade, there will be a price impact. This is unavoidable - if you are selling millions of shares, supply went up, and price must drop.
In 1985, institutional investors (not retail investors) tried to make sure that other people (their counterparties) suffered the price impact. They would sell shares at full price, retail investors (i.e., my Mom) would buy from them, and then shares would go down once the market figured out supply dramatically increased.
In 2010, some HFT shops will sell to my Mom at a favorable price, and then buy from the institutional investor after prices go down. This benefits the HFT shop and retail investors at the expense of the institutional investor. I'm not saying this is good or bad, I'm saying it benefits "dumb money" (little guys who can't afford to rent an algorithm) at the expense of "smart money" (Goldman, Vanguard, Calpers Pension Fund).
[edit2: just a disclaimer - specific numbers/cities should not be taken as precise. The data center might be in Jersey City or Brooklyn, Pune might be Cebu or even Baltimore, and there might have been 250 or 1000 line workers rather than 500.]
This is an awesome convo BTW, thanks for providing all the detail about the industry.
Regarding our high comp industry vs theirs.. we've reinvented the world at least twice since 1985, and like I said, I haven't seen a reinvention of finance in any positive way. If they're that much more efficient now (and I agree that they are along the lines you're saying), where are the savings for the rest of the economy? I'm all about the TD Ameritrades of the world where I can do an $8 trade, that's providing value and they deserve every penny they earn. But it seems like most of the hedge funds are just playing games to extract money from less sophisticated investors.
Regarding your average comp comparison -- that's fine, I'm all about profiting from efficienbut what about the aggregate comp? Is that higher, too?
Regarding our high comp industry vs theirs.. we've reinvented the world at least twice since 1985, and like I said, I haven't seen a reinvention of finance in any positive way.
In almost every financial service that existed in 1985, margins have been cut to the bone (the main exceptions being M&A and IPO services). The commission on stock trades is now $0-8, it used to be $150, as you note.
When businesses need futures/options (mainly for hedging purposes), they often just buy them on the open market rather than contacting a GS/MS/JPM rep and paying through the nose for the privilege.
Regarding hedge funds/private equity, Warren Buffet and others have commented that there are very few hidden gems left, particularly gems detectable by financial/technical analysis. I.e., good businesses are getting more investment.
Regarding your average comp comparison -- that's fine, I'm all about profiting from efficienbut what about the aggregate comp? Is that higher, too?
It's a good question. Top traders get more, but they also tend to earn more. Good IT is certainly vastly cheaper than armies of line workers, and HFT is cheaper than human market makers. More financial services are provided today - my understanding is that credit cards were hardly pervasive in 1985, and no one would cell you a phone on quasi-credit like they do today.
I have absolutely no idea and I'd be very skeptical of anyone who claims to know.