[bblcla]

Tyler Cowen did an 'ask me anything' at Jane Street when I interned in 2016. One of the interns asked him exactly this: "What do you think of the fact that we all work here instead of, I don't know, curing cancer?"

He replied with, roughly, "Those of you who work here probably couldn't do anything else other than perhaps math research. Arguably, working here is the economically efficient use of your time."

I think about whenever I see a comment like this. Quant firms select for a very specific set of skills. In particular, I've found that many traders/software engineers in quant are very smart but not very self-directed. Places like Jane Street work well for people who can excel, but only when given a lot of structure and direction. I think this is not unrelated to why so many people 'accidentally' end up as traders after going to an Ivy League school!

[arthurofbabylon]

Tyler Cowen, master of the ‘cum hoc ergo propter hoc’ fallacy. He frequently mistakes the occurrence of phenomena for causative proof of that phenomena. He particularly exhibits this inclination when his confidence rises amid scant data (like the rest of us).

This error seems to be a particularly common (and often lauded!) trait among those who work in high-conjecture low-evidence fields (eg, economics). The prominent thinkers become skillful at deploying this fallacy: “see, it’s there, therefore <insert-personal-belief> is certainly the cause!”, using their credentials and esteem to mask the error. Listeners think, “well he’s a smart, respected guy,” and nod along despite the missing logical link.

I greatly appreciate Cowen’s podcast, and I definitely respect him as a thinker and inquisitor – so I don’t mean to discard his work or opinions (in fact, I appreciate his occasional brashness because it exposes the underlying thought/principle). However, many of his aggressive-yet-speculative statements (like the one you roughly quoted) are best received with an understanding of the error.

[jxjnskkzxxhx]

> He replied with, roughly, "Those of you who work here probably couldn't do anything else other than perhaps math research. Arguably, working here is the economically efficient use of your time."

Complete garbage. The same way that Jane Street hires smart people that don't know anything about trading and those people contribute, the same would be true if there was money in curing cancer.

[andrepd]

Plus, this post is about someone who quit being a doctor to work in trading!

[Barrin92]

General intelligence is overstated sometimes, but it is a thing. Someone who is smart enough to work for Jane Street probably could at least be an intelligence analyst or software developer at the NSA contributing to national security. (Jim Simmons literally was a code breaker during the Vietnam War)

I don't think there's a gene for playing esoteric minigames on the options market while you literally suck at everything else

[rtpg]

While I’m sympathetic to the “people working hard to build out ad markets instead of cancer research” argument, I only believe in a weak version of this.

Why? I have met many “smart with computers” people. Many of them have terrible people skills, don’t show up to things on time, are unable to keep their workspace clean, don’t know how to explain anything, and cry about how they can absolutely never ever be interrupted because their workspace is so hard. There are also people who are “good at it all”, of course, but I have the impression that the math/computer people tend to be fairly unwilling to deal with even mild inconveniences.

People who can barely deal with the tyranny of daily standups probably would struggle a lot in a world where you need to write grant proposals continuously to justify your existence.

I’m being glib for effect, but there’s so much involved in getting work done beyond “being smart”!

Besides… it’s not like the reason we don’t do more cancer research is because smart people didn’t go into that. “Cancer research” is limited by funding for positions into that domain!

So “this quant should have been a cancer researcher” is saying “this person who decided to become a quant will be a better cancer researcher than a cancer researcher who went into that domain directly”. I don’t know the prestige vectors there but it’s a stretch in my book!

[jampekka]

> People who can barely deal with the tyranny of daily standups probably would struggle a lot in a world where you need to write grant proposals continuously to justify your existence.

I'm continuously writing grant proposals to justify my existence, and have been quite successful (lucky) in it. But I do bitch about the pointless grant game and about the pointless meetings.

Perhaps the problem is that to survive in academia you have to be able and willing to waste your time on all the bullshit that is not research. And it selects for people who are good and willing at the grantwriting and politics game, which is not the same as being good at research.

Maybe there's some point in bitching about the tyranny. Having tech people to do sales and marketing on the side like researchers have to do probably isn't an ideal division of labor.

[pinkmuffinere]

Ya, I’m very surprised by the argument “you’re some of the best at numerical analysis and high frequency trading, and you’d be bad at anything else”, lol. That said, I think there are better reasons to work at such a place. Providing liquidity to the market is a good thing, and has real world value, it’s just hard for us to connect it to concrete outcomes. But as a simplified “toy” example, when they orchestrate a trade for/with a retirement fund, they help the fund improve its holdings at very low cost. That benefits everyone impacted by the retirement fund

[FabHK]

I think the liquidity argument is overrated.

The market has two functions:

1. Incentivizing convergence of the price towards fundamental value, to support proper asset allocation decisions.

2. Supporting buying and selling (ie "liquidity") to shift consumption in time (and enable productive investments with the delayed consumption).

Suppose a retirement fund holds their investments over a 20 year period on average, growing at a modest 4%. A 1% wider spread would reduce the return from 119% to 118%. I'm not sure avoiding that is worth the financial sector constituting 30% of GDP.

What would happen if equity markets were only open a very short period a day? Say you have one auction a day, or maybe two, and no continuous trading?

Everyone whose advantage is speed would lose out (HFT, some prop traders). Their current gain would instead accrue to those on the other side of the trades.

[throwaway2037]

This comment is weird to me. Are you saying that the "financial sector" (incredibly vague term) makes 30% of US GDP? Not even close. A trivial Google search proves that it is way off base.

According to this source: https://www.statista.com/statistics/248004/percentage-added-...

   > finance, insurance, real estate, rental, and leasing ... is 20.7% of US GDP.

Also, most of the GDP in the "financial sector" is in commercial banks and insurance companies. Yes, they take risk, but not the kind being discussed here.

Since the original article is about Jane Street's financial market making business, let's focus on investment banks. What percent of US GDP do you think that investment banks and trading hedge funds represent? It is tiny. I would be shocked if it is more than 5%.

    > What would happen if equity markets were only open a very short period a day? Say you have one auction a day, or maybe two, and no continuous trading?

This seems like a question from Econ 101. Let's expand that to all free markets in the US. What if homes could only be bought or sold once per month, instead of daily? How about agricultural products? Quickly this argument falls apart. Wholesale and financial markets with continuous trading have existed for centuries. The purpose of continuous trading (or very frequent auctions, like the agro auctions in the Netherlands) is price discovery. If you do it less frequently, then you have weaker price discovery and worse (less accurate) prices.

Finally, professional financial market makers have an important role to play in reducing the size of bid-ask spread. I recently bought some 1Y US Treasury bills using Interactive Brokers. I was stunned by how tight are the spreads, and I am a "Retail Normie/Nobody". Absolutely, this was not available to people like me 30 years ago. Who do you think is providing this liquidity that keeps bid-ask spreads so tight?

[FabHK]

The finance sector contributes only 7% of GDP, correct. One of the sources I had in mind [0] cites 31%, but that was revenue as a proportion of GDP, which doesn't really make sense. However, the financial sector takes about 30% of US profits [1].

With respect to trading only once a day, I don't think your ad absurdum counterarguments hold water.

The HK stock exchange used to trade 4.5 hours a day, from 10 to 12, and then after a generous 2 hour lunch break from 2 to 4:30. How is trading 8 or 12 hours a day better for pension funds?

Price discovery with a limit order book that's cleared once a day might work just as fine as when it's spread out over hours, maybe even better.

Think about some major event affecting a company happening on the weekend. Then everyone can put in buy/sell orders with adjusted prices, and they'll be cleared during the morning auction. How is that worse than if the event happens intraday, and only the most switched on automatic HFT will pick off people still quoting at the old price, then the professional traders in hedge funds will pick off people?

As I said, the difference would be that the gains of the fast movers would instead be distributed among those on the "wrong side" of the news. Why should price discovery be worse?

Finally, what makes you think that liquidity and bid-ask spread concentrated in a minute a day would be worse than spread out over many hours a day?

[0] https://www.investopedia.com/ask/answers/030515/what-percent...

[1] https://conversableeconomist.com/2022/09/13/financial-servic...

[throw-qqqqq]

> What would happen if equity markets were only open a very short period a day?

I think about it like this:

How stable are prices of low liquidity instruments compared to the most liquid instruments?

What happens in the first 10-15 mins after the markets open? EXTREME volatility.

Longer trading sessions, higher volume and more liquidity lowers volatility on average.

A hypothetical X percent worse spread on my mortgage bonds, means I have to borrow X% more to buy the house. That’s meaningful money for most people.

Market makers will still earn the spread. More trading just means it gets lowered because of competition and volume.

[Nursie]

I think the amount of money that is creamed off for this service is disproportionate, and the amount of benefit to wider society a case of diminishing returns.

Allocation of capital, market liquidity etc are useful, but the size of the financial sector and the rewards it gives out for this shuffling of money are insane.

[andrepd]

I.e., they work to increase the return on capital. Since I believe one of the biggest problems in the world today is economic inequality stemming from an increasing gulf in the remuneration of labour and the remuneration of capital, I don't think this is a good thing. Let alone a good use of stupendous amounts of talent and money.

[rangestransform]

The only reason software engineers are able to be paid so much at all is because of “capitalism” and “free trade” I.e. vacuuming up money from the rest of the world, we sell them ads and “SaaS” and “intellectual property” while they sell us food and clothes. Would be a bad day for me personally and our profession in the US when that stops

[andrepd]

My ethics is not defined by what is personally beneficial for me. I don't suddenly stop thinking something is wrong just because I benefit from it.

[rangestransform]

We’ve seen what happens when the price of eggs goes up a little bit, never before seen levels of prosperity seems to be the only way to convince Americans to treat each other kindly, pick your poison I guess

[elefanten]

I didn’t take that to be his point. I assume he says “economically efficient” because he means their strongest skillsets don’t have (m)any other uses and they wouldn’t be realizing their potential by leaving those skills unused.

He probably overstates that case, especially talking to early career interns that haven’t yet narrowed their specialization and could pivot to other highly quantitative roles that use other high level math.

He’s also probably flattering his audience, to whom “math research” is more likely to be status-bearing.

Doubt he’s saying they’d suck at anything else.

[alfiedotwtf]

I would rather people work in trading than for the NSA

[Grimblewald]

To build on / extend on this - quants / finance folks need to cultivate an image of only taking the very brightest, to justify the shit working conditions (even if pay is often decent) but honestly the brightest tend not to apply. Working in those environments is neither rewarding nor stimulating.

[owl_vision]

I plus-one the last paragraph, well explained.

[lysecret]

Do you have a link to this talk by any chance?

[bblcla]

Unfortunately, no. It was a private talk.

[cinntaile]

It sounds like something you would say to not upset your host.

[ackbar03]

Oof. Interesting take.