This weekly roundup thread is intended for all culture war posts. 'Culture war' is vaguely defined, but it basically means controversial issues that fall along set tribal lines. Arguments over culture war issues generate a lot of heat and little light, and few deeply entrenched people ever change their minds. This thread is for voicing opinions and analyzing the state of the discussion while trying to optimize for light over heat.
Optimistically, we think that engaging with people you disagree with is worth your time, and so is being nice! Pessimistically, there are many dynamics that can lead discussions on Culture War topics to become unproductive. There's a human tendency to divide along tribal lines, praising your ingroup and vilifying your outgroup - and if you think you find it easy to criticize your ingroup, then it may be that your outgroup is not who you think it is. Extremists with opposing positions can feed off each other, highlighting each other's worst points to justify their own angry rhetoric, which becomes in turn a new example of bad behavior for the other side to highlight.
We would like to avoid these negative dynamics. Accordingly, we ask that you do not use this thread for waging the Culture War. Examples of waging the Culture War:
-
Shaming.
-
Attempting to 'build consensus' or enforce ideological conformity.
-
Making sweeping generalizations to vilify a group you dislike.
-
Recruiting for a cause.
-
Posting links that could be summarized as 'Boo outgroup!' Basically, if your content is 'Can you believe what Those People did this week?' then you should either refrain from posting, or do some very patient work to contextualize and/or steel-man the relevant viewpoint.
In general, you should argue to understand, not to win. This thread is not territory to be claimed by one group or another; indeed, the aim is to have many different viewpoints represented here. Thus, we also ask that you follow some guidelines:
-
Speak plainly. Avoid sarcasm and mockery. When disagreeing with someone, state your objections explicitly.
-
Be as precise and charitable as you can. Don't paraphrase unflatteringly.
-
Don't imply that someone said something they did not say, even if you think it follows from what they said.
-
Write like everyone is reading and you want them to be included in the discussion.
On an ad hoc basis, the mods will try to compile a list of the best posts/comments from the previous week, posted in Quality Contribution threads and archived at /r/TheThread. You may nominate a comment for this list by clicking on 'report' at the bottom of the post and typing 'Actually a quality contribution' as the report reason.
Jump in the discussion.
No email address required.
Notes -
The trial of Sam Bankman-Fried begins tomorrow.
As a person that has worked in crypto quant trading[1], I have the tiniest slice of sympathy for him. He still seems like an unsympathetic freak overall, and has done some stuff that seems pretty unethical, and some of his actions are definitely criminal. He has given EA a bad name as well.
There are certainly a lot of process crimes he's guilty of. The fact that the US has pulled his international operations into US jurisdiction means he's in for a universe of pain and if they can't fight that he's going to jail for infinity years. I consider this legal theory a bit dubious but the US has taken the position that it can prosecute crimes that happen in the rest of the world if they even marginally involve US citizens[2]. Is everyone in the world really supposed to follow US laws? That strikes me as a bad precedent; on the other hand, I also do appreciate it sometimes that the US is an international law enforcer of last resort.
That's not really where my sympathy lies though. He knows he was playing a dangerous game. Pretty much everyone who works in quant finance occupies enough legal gray area to worry that they could all be shut down at any time and end up in court. This is even worse in the crypto era, as the position taken by the SEC and friends is shameful, giving very little guidance on new forms of financial technology and telling firms years later by indictment that they were frowning on their behavior all this time.
Many tradfi firms prostrate themselves before the SEC in the hopes of maintaining a good relationship. Even still, reputable firms who were attempting to operate outside of US jurisdiction have been caught with their pants down in the crypto era e.g. Trading Firm A, B and C in the recent Binance indictment: https://www.bloomberg.com/opinion/articles/2023-03-27/the-cftc-comes-for-binance (paywall bypass: https://archive.ph/aMi5Q )
It's still not clear to me that SBF and FTX spent user funds as a matter of course, or if it effectively became spending user funds because so much of their other assets imploded. Though, again, that's not necessarily a crime if you operate outside of US jurisdiction, which is what their international arm believed it was doing. But, that's also sort of secondary.
The primary question I keep coming back to, and I come to this every time there's a large corporate fraud scandal, is: what is fraud, actually? Because it seems indistinguishable from "I thought our business was legit and every indication I had was that it was legit and then it failed and it failed really hard and lots of people lost money".
FTX was a successful business. It was a high quality crypto exchange among many exchanges where the standard at the time was "complete clown show". They were probably the last people I would have bet on imploding and disappearing user funds. The failure is shocking. It's so shocking it's hard to believe.
One thing that's common to these frauds is that people always seem to have a moment of reckoning where they know they're fucked and they can either pack up and go home and face the consequences, or they double down and hope it'll all work out. Indeed, there are some legendary stories from doubling down: FedEx for example where the CEO literally doubled down with their last remaining $5000 in Las Vegas to turn it into a much needed $27,000 to keep the business alive. In this timeline FedEx is legitimate, but if it hadn't worked out he could've possibly gone to jail.
As far as I can tell Uber was based on complete fraud. Its business plan from day one appeared to be: completely ignore taxi laws the world over and just push out a product that was so much better than calling taxis that before jurisdictions knew what was happening they would have tons of passionate users that would be furious if Uber was taken away. This seems to be a resounding success. But it was very much organized crime? If Uber had failed their founder would have definitely gone to jail. In fact he was involved in so much other generally shady stuff that he was forced out. Yet he definitely moved the needle.
Anyway, this isn't meant to be an impassioned defense of SBF, more like my continuing fascination and horror at this alien thing we call modern business. Poor fool tried to play the game of changing the world and got burned. And in this case the burning is fantastic public spectacle.
EDIT: Matt Levine's newsletter today is about SBF's trial, which hit my inbox right after I submitted this comment. Amazing, as usual. https://www.bloomberg.com/opinion/articles/2023-10-02/sbf-s-defense-will-be-tough
EDIT2: As replies have pointed out, I am probably technically wrong for calling what Uber did fraud. Sorry to distract. I should've made my case that Uber was more like a plan to openly disregard and defy taxi regulations across many jurisdictions with the excuse that this isn't a taxi it's a "carpooling app" tee hee. I think this is an insane business plan and it depended on them delivering an amazingly useful app. And if they hadn't succeeded (by delivering an amazingly useful app) they would've all been busted for something rising to the level of organized crime.
Can you elaborate on this? I know a bunch of people who work in quant finance and while it seems completely socially useless it also seems perfectly legally legitimate.
For what?
No, he stole a bunch of money and got caught.
Every trader makes mistakes: around trading on what turned out to be material non-public information, or discussing business on non-recorded channels, or their company learns they've been failing to record chats (or emails) for months without noticing before, or due to a glitch they accidentally sold a ton of shit short they didn't have the right to short, etc.
All of these things are technically illegal but if you immediately reach out to the SEC (or whomever) and fess up they'll probably just slap you on the wrist. But it's completely at their discretion and they might bring serious charges. Or threaten licenses. Or jail. It very much depends on your relationship with the regulator. Woe is you if the SEC discovers these problems before you've noticed yourself and fessed up.
More options
Context Copy link
In HFT (which, admittedly, is not "pretty much everyone who works in quant finance"), the issue is that rules about market manipulation designed for humans operating over timescales of minutes become dangerously vague when applied to computers operating over timescales of hundredths of a second. The rules against spoofing and layering are fundamentally the application to modern markets of the rules against the tape manipulation frauds of the 1920's that were brought in by Joe Kennedy's SEC after the 1929 crash. But those rules define crimes based, at least in part, on dishonest intent (which experienced practitioners can infer from behaviour). Inferring intent from behaviour is harder when one computer is ripping off another computer in a novel way, so it is harder to enforce the rules fairly, and more opportunity for unfairness. There are plenty of people who think that the distinction between what Navinder Singh Sarao was jailed for doing and what Citadel and Renaissance do on a daily basis is Who?, Whom?
The other areas of quant finance (derivatives pricing, risk modelling, quant hedge funds other than HFTs) do not operate in legal grey areas. There are also HFT strategies which do not operate in legal grey areas, such as Jane Street's ETF business.
This seems largely correct.
The who/whom thing it always felt to me like they needed to hang someone and he was the easiest to hang. Citadel supposedly has been a big backer of anti spoofing prosecutions because it negates some of their speed advantages and models. But they get sued too they just have better lawyers and do a fine job getting out of trouble. Witness them refusing to pay a WhatsApp fine.
I also fine it funny that the whole GMC/AMC trades (no idea if they made internally) they did seem to lose some money investing in the fund that blew up. I’ve always thought the GMC/AMC longs were guilty of market manipulation. Basically organizing a group to manipulate shorts into trading (puking) their position. Which would be illegal if three people with big war chests organized the move together. But done in a distributed way is tough to nail any one person for.
Do you mean GME (Gamestop) or GMC (Post-BK General Motors)?
I agree with you that the SEC could have got a conviction for market manipulation against DeepFuckingValue if they wanted it, but equity short sellers are even less popular than market manipulators, so nailing a short seller is safe politically. Both the 1920 Stutz and 2008 Volkswagen corners nailed some of the biggest, best connected players in the market, but there was no interference by the authorities. In both cases the longs ended up running out of cash because in the process of executing the corner they bought the target company for more than it was worth.
Doing that in a commodity futures market, where the shorts include non-financial end users hedging their real-world risk, will get you hauled off in handcuffs.
Ya of course.
I mean the law should be the law. I don’t know if deepvalue crossed the line. I know chamath tweeted short squeeze and encouraged people to play which might cross the line. And he’s lost a lot of people money with his promotions.
Short sellers might not be popular but the fund that blew up does provide a real service. They keep retail losses lower by shorting.
I guess that’s a who/whom case but maybe the distributed nature of it protected him. I tend to think not.
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
All the libor manipulation convictions I believe got over turned a decade later. And supposedly the desks had official pressure to manipulate libor lower. A lot of the issues is there wasn’t a true market there.
Spoofing is now illegal. It wasn’t a decade ago until they invented it and started prosecuting people for it.
WhatsApp convos just got Banks fined a ton.
I don't think the Libor manipulation was being done by quants. The false numbers were being submitted by banks' treasury markets desks The pressure to submit the false numbers was coming from the interest rate derivatives desks (or, in the case of Barclays in 2008, the Bank of England). Both desks employ desk quants to babysit derivatives pricing models (and, increasingly, risk models) but aren't run by quants. (Tom Hayes has the classic quant background, but he was working as a flow trader, not a quant).
The US convictions got overturned on appeal, the UK ones did not. The difference is that the UK appeals court ruled that "What rate can your bank borrow at under the standard LIBOR terms?" is a question with (in principle) a single correct answer, and therefore changing your submission based on pressure from another trading desk implies that you were not submitting your best estimate of the true answer, hence per se fraud. The US appeals court said that there is necessary a range of reasonable answers, that choosing one answer within this range as opposed to another based on pressure from another trading desk is not fraudulent, and that the prosecution did not prove that the rigged LIBOR submissions were outside the reasonable range. I am with the Brits on this - everyone involved in LIBOR rigging knew that what they were doing was wrong (both by conventional ethics and by the situational ethics of well-run financial markets). I expect that they also knew that the market for LIBOR-linked interest rate derivatives could not survive their behaviour being exposed (because clients don't want to be ripped off).
All the crooks are now out of jail having served their sentences. Tom Hayes is still trying to clear his name, but there isn't much sympathy for him among London bankers - even if it is technically not a crime, rigging benchmark interest rates is the sort of thing we need to be seen not to do in order to retain the trust of our clients. London as a centre of interest rate derivative trading is weaker because LIBOR has been discontinued.
The people who I do have some sympathy with (and I note that they were not prosecuted) were the people who made optimistic submissions in 2008 in order to contain the financial crisis. You can argue about whether they were cheating according to conventional ethics, but their behaviour made LIBOR (which was used by the industry as a risk-free rate) closer to what everyone expected it to be, helped preserve financial stability in a crisis, and was what the regulators were fairly clear they wanted to see.
I don’t disagree with your analysis. Though flow trader versus quant are fairly adjacent plus as you said he looks like a typical quant. The reason I mentioned libor is it’s a prime example of mixed regulatory messaging and then they ended up in jail.
I remember when Zerohedge use to run articles on things like some stocks were getting so many order messages the system was breaking. That does sound like purposefully manipulating markets to break the system for edge. I would assume there are plenty of things like that of quants pushing the line to gain an edge.
There were, in effect, two separate Libor-rigging scandals. There was no regulatory mixed messaging about the Libor-rigging-for-profit that Tom Hayes et al were engaged in - even if you accept the 2nd Circuit's argument that it wasn't fraud, it was clearly a violation of market norms about treating customers fairly. The regulatory mixed messaging was about Libor-rigging-to-prevent-bank-runs in 2008.
Still think that ties into his quant concerns. No doubt many push the line for edge. So same thing mixed message.
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link