Longreads + Open Thread

Transformers, Perot, Dune, Magnetar, Theory, Alpha, Incentives, Trading



The Trading Game: A Confession: Trading memoirs are hit-or-miss. There are two main themes you can write about: "Here's how I made so much money," or "Here's how I ruined my life." The latter usually takes the form of substance abuse, but The Trading Game spends a lot more time witnessing that kind of behavior than talking about it. Instead, the author's life-ruining is a more introspective one—you can think of it as the story of a man figuring out that his mental downward spiral started much earlier than he realized.

But first, the optimistic part: Gary Stevenson is born into a poor family, runs into a lot of trouble at school—his first experience making a market involves drugs, and authorities are not pleased. But he's smart, tests well, gets into a better school and then wins a trading competition that results in an internship, which later turns into a full-time job.

Wall Street types often get called arrogant, and often for good reason. But given this context, it's astounding how humble he is: in his twenties, he has interactions with his boss that basically take this form: "Thank you for all of your hard work over the last twelve months. Here's a bonus that is more money than your parents have ever earned in their entire lifetimes. But don't worry—it's just because you're extremely smart compared to everybody else!" It takes a lot of mental fortitude to stay even remotely normal in a situation like that.

Stevenson's money partly comes from the usual right-place-right-time sort of thing; he was working for a US investment bank in Europe during the financial crisis, and was basically getting paid to provide dollar liquidity to the European financial system, something that Europe was willing to pay dearly for. That's a brief explanation of why a trader in his seat would have done well at the time, but Stevenson did quite a bit better. His main job was making a market, i.e. buying from whoever wanted to sell and selling to whoever wanted to buy. But he could keep some positions (especially if he made money at it). Stevenson's macro observation was that after the financial crisis, the rich recovered faster than the rest—but rich people have a low marginal propensity to spend, so that didn’t translate into higher consumption or faster growth. As a result, the market persistently assumed that growth would pick up and rates would as a consequence. As long as he kept some bets that interest rates wouldn't rise, and they didn't, he'd prosper. And, in fact, he prospered mightily.

Which led to what happened next. On average, it feels better to make money from good things than bad things. Short sellers in equities can take comfort in the fact that they're making the market more efficient, drawing attention to scams, etc. But in macro, if you make your money betting that rates will stay low forever, you are quite directly profiting from human misery. You might be contributing, in some tiny marginal way, to providing price signals that tell policymakers that whatever they're doing isn't working, but in one of the world's most liquid markets, those signals will be invisible. (The LIBOR scandal was part of a deliberate effort to manipulate rates, but these manipulations usually meant moving rates by a basis point, for a day, and not necessarily successfully. And that’s for a survey-based metric, not a market price-based one.)

So, he spends the last half or so of the book in an increasingly bad mental state—unable or unwilling to work, similarly unable to enjoy his money (he talks about living in an apartment that wasn't just unfurnished but unfinished, with bare concrete floors. (Further reducing the median rich person's marginal propensity to consume!) By the end, it's unclear whether he truly quits or gets fired—both sides seem to reverse their decisions a lot, revealing that there is a mindset that can make one person make big decisions with the same pace and inconsistency of a big bureaucracy.

Stylistically, it's quite good: I've never seen someone described as "a huge, lumbering presence with a body the shape of a muffin, who walked like a farmer falling over." At one point, he muses that the site of his last job assignment "must be the room that you wait in when you're going to hell but there's been some sort of administrative delay." So, as a trading book, a book about the world's most brutal case of burnout, and a well-written look at what life on a trading floor was like in the early 2010s, it's excellent. (I just want to know if he kept the "low rates forever" trade on.)

Open Thread

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