The Best and The Brightest Leaving Wall Street

Yesterday my friend Terry Duffy penned an article for the Wall Street Journal.  It is unfair to sum up what he said in one sentence, so I encourage you to click over and read the whole thing.

The gist of the article is that students that are attending the nation’s top schools are eschewing jobs in finance to do other things.

In 2008, Harvard sent 28% of its graduating class to firms where they would become bankers, traders or investors. By 2010, Harvard was sending just 17% of its graduating class. Yale graduates entering the finance business fell to 14% from 26% during the same period. Even Princeton, traditionally the most finance-friendly school, fell to 35.5% from 40%

Terry is pretty sharp and understands markets combined with data.  You don’t survive as long as he did in a trading pit without that skill.  As Executive Chairman of the world’s largest exchange, he has his finger on the pulse of finance better than probably anyone else in the world.

He is correct.  Bankers have gotten a lot of unfair drubbing in the press, and especially from the President of the United States since 2008.  That tarnish was placed there intentionally.  Critics really don’t understand the system they are poking holes in.

However, that system is fundamentally changing as well. Much of the reticence of graduates desire to go into finance has a lot to do with the internal metrics of the industry itself.

When I decided to become a trader, I could work my way up through the traditional route of trading floor:  runner, clerk, trader.  That route is gone.  The old networks that existed for 150 years on trading floors in New York, Chicago, Hong Kong, London and other financial centers have been disintegrated.

Occasionally, students contact me whose dream it is to become a trader.  Unless they have a quant degree I tell them to find another passion.  There are very few that have survived from the old days.  The traders that have made the transition have personal networks where they can find out information the rest of the market doesn’t know about. (NOT illegal inside trading info)  Additionally, many of them can take information and synthesize it differently than the average Joe and see around corners before anyone else.  They are smart.

One day I had lunch with an old friend who started an electronic trading shop.  He said to compete the way we did in the old days on the electronic platform starts at a price of $50 million.  Powerful computers, co-location, talent to program doesn’t come cheap.

That’s a lot of startup capital for a risky business.  In the old days on a trading floor, you could back someone by leasing a seat and putting up some capital.  Less than a quarter million all in would do it.

Having coffee with another old trader he remarked, “You know, the money was good.  It was just enough money every year to make a family really comfortable, but you didn’t get filthy rich.  When I look at startups, they don’t make any money but they have the potential to become very wealthy.  I feel like I wasted my life with 25 years on the trading floor.”

As the electronic trading world has grown, it’s begun to evolve.

The spreads in HFT and electronic arbitrage have decreased.  Fixed costs have gone up.  It has gotten a lot more competitive.  The quants that program the fast trading have to create new algos and figure out new ways to find market niches to exploit.  That’s hard.  Almost as hard as doing a startup company.

The finance industry is in a massive period of consolidation.  More volume being traded-but less breadth.  More volume is being concentrated among fewer players.  If you aren’t a quant, your choice is wealth management or a precious few actually get to engage in real investment banking.

It is unclear whether the consolidation is dangerous to market transparency and efficient price discovery.   It might not have an effect at all. I don’t think anyone really knows.

At the same time, the regulatory system put out by the SEC and CFTC in Washington has hurt independent traders competitiveness.  Today, the CFTC has turned its sights to electronic traders.  Many of the things that I have seen are totally unfair and show a lack of knowledge about how markets work.  No doubt, there are some nefarious operators out there.  There were always scummy people in trading pits too.  But, the regulators clearly have no idea what they are doing and don’t understand the economic consequences behind their decisions.

Washington has always been out of step with the marketplace, and today it’s worse than it ever was.

Given all this, if you are a smart quant and have a choice between going to work for a startup company in big data that could sell someday for a princely sum, or going to work at a trading house, what’s your choice?

There are huge opportunities in the health care space for predictive algo’s to harness big data and turn it into meaningful diagnoses that save lives.  Other quants are heading to marketing companies to use big data to micro target customers.

As the data tells everyone, people are choosing the startup world which seems less risky than the trading world.  They are making economic choices versus that balance more potential money early vs later,  quality of life and stress.  There are differences between the two paths, and right now the path is tilting toward avoiding finance.

Related articles

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• Quants-R-Us? Algorithmic Trading Trickles Down To Individual Investors.
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• Citigroup to close trading desks on CBOT floor -source
• Fewer Harvard MBAs are going to work on Wall Street. That’s great news.
• CFTC Coming At HFT
• Quantopian raises $6.7M to build its quant army and take on Wall Street traders
• How to think more like a Wall Street Trader

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