21-year-olds making 7 figures on a W2
Burn it all down, hooray, or something else?
Friends,
I saw a (now deleted) thread on twitter a few days ago where 2 people relayed stories of people they knew getting low 7-figure comp deals from Citadel Securities out of undergrad. Base salary in both cases was said to be $600k and the candidates were types that if it weren’t for opportunities like this would be PhD-bound (I believe one of them was an IMO finalist).
When I hear this stuff I think of Naval Ravikant wordsmithing the implications of a power law world:
Being at the extreme of your craft is very important in the age of infinite leverage, which is what we live in. The person that is the best in the world gets to do that for everyone
The combination of leverage and industry consolidation in trading can explain how paying a 21-year-old who doesn’t have a dead-eye jumper can make sense.
Invariably, many people will find that offensive on normative grounds — should we be concerned that geniuses are being bribed to join a machine whose prosocial byproduct is to make the price of SPY 10⁻⁶ more accurate? If it outbids the Bond Villain’s attempt to outfit sharks with laserbeams on their fins then maybe.
[Tbh the picture of prop firm bosses as Bond Villains seems a bit too on the nose these days…I’m a little concerned that my resume will confer Monsanto or Phillip Morris vibes based on the political winds]
I’m sure you can find at least 50 nerdstacks that are happy to laboriously engineer a model to answer questions about what is society optimal but this is not one of them. This is not to say it’s not an important problem to consider. It’s really a policy/legal nudge question that private enterprise has no incentive to study. Kinda like intermittent fasting — the only cash profit in studying it comes from being a health influencer which is small potatoes in the grand scheme.
The societal optimal amount of liquidity is an academic and ultimately political question about the right mix of values on our socioeconomic frontier. Liquidity and its cousin efficiency are valuable but scope-dependent. The larger question of society-optimal has to do with how we weigh the significance of the scopes.
Such questions are also measurement problems. For example, if BTC fulfilled the mandates of broad money, store of wealth, and censorship resistance then how much electricity allotment as a society are we comfortable with? It clearly shouldn’t be zero. Is it “as much CO2 as we allow for transport?”. What is the cost of the infrastructure to maintain current payment rails? If that was re-allocated to carbon capture does that count as our 30 Hail Marys penance? These aren’t matters that can be reduced to slogans and memes.
The strong-form market-maxi position is untenably porous. There are organizational holes. For example, markets follow rules that are downstream of non-market design — the democratic and legislative process. If we blindly paperclip maximize our way to oblivion it will be because we let the market-maxis influence that process. Imagine a world where the top option traders are also the biggest customers of the option exchanges and therefore have influence over say the crossing rules or how matching engines allocate fills. Oh wait, you don’t have to imagine. Free markets for me but not for thee.
There are also technical holes in the market maxi-position. Consider Byrne Hobart’s market subsidy problem which highlights both the value of markets and their technical limits.
Prediction markets are much, much better at giving people precise answers. They're also good at conditional answers: a hypothetically valuable set of prediction markets would have included questions like "Conditional on oil going to $x, what are the odds that Russia invades Ukraine in 2023."…
But part of the trouble with prediction markets is that very precision. There really isn't much interest, especially for obscure issues; how much organic demand is there to punt on the question of which board member of Texas' energy grid will step down next? The other, subtler problem is that when someone does have an interest, it's usually because they have information…
Uninformed traders are existing markets' answer to this subsidy problem. And these traders are "uninformed" in different ways and to varying degrees. Some of them are literally gambling, in a way that's random in the aggregate, but sometimes decidedly non-random, as during the meme stock era. It could also be a portfolio manager passively moving asset allocations around, or it could be the company itself, issuing stock because it needs to pay expenses, or mechanically buying back stock because it's a tax-efficient way to return capital to shareholders. In short: if you're making a market in a liquid financial product, you can expect many of the traders you interact with to trade fairly randomly, and for few of them to have strong information about the immediate direction of the stock.
That combination results in low transaction costs, and that amounts to a subsidy for time and money spent gathering information. It's worth figuring out what will move shares of Apple or Nvidia 5%, or even 1%, because the cost of getting in and out is so low. For less liquid assets, the cost of trading essentially represents a tax on informed views. If shares of a company can be sold at $9.50 and bought at $10.50, you can correctly predict a 20% move but only break even after those transaction costs.
[For many important matters that we’d like a market to decide] a shortage of noise traders is a tricky issue.
These questions are as current as ever. Who is round-the-clock trading good for? The answer is not everyone and it’s also not no one.
I’ve carried a flag for this invisible thing called liquidity because it is easy to take for granted in general layperson discourse. Liquidity lowers the cost of capital for enterprise. It’s a beautiful emergent property of transparency and competition. The dual quests for profit and safety meet in a transaction that places risk in the hands of its most efficient holder. This is undeniably good.
But I don’t know where the diminishing returns start. And that’s a conversation that is approachable in a forum where those present already understand its value.
[I feel like your willingness to wholly support or even-hand a topic depending on the audience is a meta-concept that needs a name. Like “debate curve-grading”. Doesn’t exactly roll off the tongue. There’s probably a lawyer out here who knows what to call it.]
Related:
🌷Appreciative reasons (Moontower)
😔Finance Guilt (Moontower)
Related thoughts on RE, NAR lawsuit and liquidity
In the settlement of a broad anti-trust case, the National Association of Realtors has released its grip on 6% commissions. There are hundreds of commentary pieces about this since it affects the largest asset in America — our homes.
I have a smattering of thoughts and personal anecdotes rooted in this context of liquidity.