Cameron's Blog - Why Finance

Why Finance

Contents

Introduction

This coming fall, I will be a doctoral student at the University of Oregon. I wanted to get whatever thoughts I could ahead of my time there – to try and make a “before and after”. What will I think is interesting now, and what will I think is interesting when (or if) I graduate? Will I have achieved whatever goals I thought I wanted to?

To that end, I’ve collected some of my thoughts on finance, why I personally like it, and what I’m going to do after I graduate.

What is finance?

For posterity, here is my definition of finance:

Finance is a social science concerned with how and when people move, use, and consume financial assets.

Finance is a social science because finance would not exist without people. There would be nothing to pay for twinkies with, And no twinkies for that matter. no stocks to buy or sell, no bonds from sketchy south American countries.

It is concerned wth how and why because those are both critical components of a dynamic system. How a system works is a nontrivial factor in why anyone interacts with a financial markets. Financial markets that are complex and unpleasant to use don’t find many participants Complex financial markets also generate middlemen and arbitrage opportunities. . That why is important because finance is ultimately concerned with the timing, magnitude, and nature of financial market activity from humans, and humans do not make choices in a vacuum. They make choices when confronted with circumstance and context.

The financial activities that economic actors can take impact the entire system. For example, an elderly couple entering retirement has hopefully assembled a pool of assets they can rely upon for the rest of their lives. Over several decades, they will convert stocks and bonds to cash to meet liquidity needs using the financial markets. Selling those securities has a ripple effect throughout the market, though for most couples the selling of any single couple is unlikely to cause much change in the aggregate. But on this small scale there are numerous other entities who are impacted by those transactions:

  1. Brokers who negotiate the trades.
  2. Banks who might make markets in the sold securities.
  3. Clearinghouses who clear and settle the trades.
  4. Mutual funds, hedge funds, index funds, arbitrageurs, and speculators who might make decisions based on observed activity.

Finance is the study of the network of entities who exchange assets with one another. Neat stuff.

Why finance?

So why is finance something I’m into? My background would not indicate to anyone that finance is a lifelong passion of mine. I have a Bachelors of Science in Theater Arts. Not exactly finance.

I had been exposed to some interesting stuff during my MSc in Finance. The first thing to pique my interest was algorithmic trading, which is the study of how to trade in an algorithmic fashion so as to meet some requirement, such as limited market impact or limited cost uncertainty. This is a heavily automated process. People can perform algorithmic trading without computers, but it is a slow and unplesant process.

More broadly I came to notice a lot more of the curious ways in which technological systems impact financial markets. This isn’t even counting the number of orders placed and revoked, which is orders of magnitudes greater. Exchanges are heavily optimized for a tremendous amount of transactions. NASDAQ alone handled around 11.5 million trades on July 12th, 2018.

High frequency traders use incredibly sophisticated software and hardware My favorite thing among the HFT tricks is the use of FPGAs. to gain microseconds on their competitors. There’s some evidence to suggest that much of the “real” liqudity provided today comes from high frequency traders.

What about cryptocurrencies? Many financial economists I have spoken with are somewhere between dismissive and uninterested. But to me they appear to be the perfect distillation of my interests – sophisticated technological underpinnings, financial assets, and informational egalitarianism.

I am interested in finance because it is interesting. We all have money, sometimes however little, and we all use it. But more importantly, we are still in the midst of what may be the largest change in financial markets since fiat money. We are still trying to figure out how computational power can effect financial markets.

What are you going to do after you graduate?

Academia absolutely has it’s allure. In academia there is substantially less pressure to produce fiscally viable research – you can grind away on something merely because it is personally interesting or valuable in a nonmonetary sense either to your peers or to society’s understanding of financial markets. The resources you have access to are not small, but they are also not enormous like they might be in the private sector.

I say “right now” because everyone has informed me that my interests will change dramatically over the course of my studies.

As of right now, here are the broad interests I might like to work in:

  • Computational finance
  • Asset pricing
  • High-frequency, algorithmic, and systematic trading
  • Computational financial engineering See Composing contracts: An adventure in financial engineering by Jones, Eber, and Seward. This is not strictly finance, but it is something I am heavily interested in and would likely enjoy branching out into. I think my favorite thing about this paper is it was the first time I saw how Haskell could be unique and useful. Granted, I am still not a particularly talented Haskell programmer, but it is always nice to dream.

  • Cryptocurrencies

  • Blockchain technology

  • Fintech

What about the private sector? The allure there is strong too. In the private sector I could have the responsibility for a thing I worked on. If it was a portion of a pricing engine for a market making desk, I would have responsibility for making sure that it is accurate, timely, and faultless. That responsibility is something I don’t think people get in quite so direct a manner in academia. I think the problems would also tend to be a bit more focused and less nebulous which I’ve noticed tends to substantially focus my ability to work.

I suspect it might be fun to work for Jane Street, though I doubt I am smart enough to work there. Most everyone I’ve seen give talks from Jane Street is absolutely whip smart and quick. I like that they use OCaml for everything. I like that they are market makers, I like that they are problem solvers, and I like that they are technologists. There are a lot of people in finance as of 2018 who are very much rooted in the way finance worked in previous decades. It doesn’t work that way anymore. Markets are ever more automated and complex.

I guess I’ll just have to find out in a couple years, and see how I feel about how hard the PhD was for me. I suspect I’ll end up going for whatever is the most difficult thing to do.