Why “Best” Doesn’t Mean Anything
One thing I fixate on is finding “the best” something. In finance, however, I have to radically adjust my thinking. “Best” is meaningless–albeit for unintuitive reasons. I always thought that to put together the “best” trading desk, one only needs to go out and get the “best” traders. Well, along what dimensions does one judge a trader? Risk management? Percentage of trades that are profitable? Overall P&L? Ability as a manager?
Let me give two examples that show why “best” is a meaningless term. First, consider a trader who is senior and runs a trading desk. This trader still has a trading book, though, and is given a lot of balance sheet to use and take risk with. This trader has many trades on at once and, in general, they go in his favor (say 60-75%). He/she has demonstrated a consistent ability to generate positive P&L, and with more resources generally generates more P&L. He/she is a very hands-off manager, however, and his/her subordinates go to him/her only with specific issues. This trader goes home earlier than the rest of the desk and pushes off as many outside obligations as possible to others. He/she knows most major players in the business and will have some email or IM conversations frequently and shares information with others on his/her desk.
Second, consider another senior trader who runs a trading desk. This trader is involved with a trading book, but has a subordinate to take over the day-to-day trading responsibilities. He/she is very focused on being a good manager and making his subordinates feel like their voices are heard. This trader has been around for a long while and dictates the overall risk positions of the desk, but not necessarily specific trades. He/she will take a view on, for example, the shape of the yield curve, risk/reward in the marketplace, and where supply and demand are headed and then recommend his/her desk to position themselves accordingly. This trader commits sizable amounts of capital to trades, but has been working in an environment where balance sheet is constrained. He/she is very focused on maintaining good relations with major market participants and is pro-active about setting up and attending events outside the office with important accounts. This trader, due to the focus on relationships, is able to source very large “franchise trades” that allow the desk to control billions of dollars in supply and/or demand in various securities–these lead to large positive P&L for the desk.
Now, which is better? See? Completely different people. Completely different styles. The first probably is a great person to have at a shop that takes a lot of proprietary risk. The second is most likely a terrific fit for a business that focuses on secondary trading and being in the flow of big customers. But, which is better to build a trading business from scratch? Which is a better fit to take over a desk that has just lost a lot of money and had several traders fired? Which of the two traders described above is better for a nascent hedge fund? These questions are much more complex and multi-faceted than I would have believed just a short time ago.
Perhaps I’ve just taken 653 words to say something obvious, but it’s always been counter-intuitive to me that one can’t just take a list of traders, sort them by the revenue they generated, or some other number, and interview them from top to bottom to find the best trader for the job.