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I started my career in derivatives. Mostly vanilla, but I did have a look in the exotics. Intellectually, it's interesting when you start. There's all these we

I started my career in derivatives. Mostly vanilla, but I did have a look in the exotics. Intellectually, it's interesting when you start. There's all these weird payoffs that you are introduced to, and it feels like a game. The thing is, there's a limit to how exotic things can get. People have already figured out how to price most of the things you can imagine, including all the things that customers normally ask for. Most of the day goes on looking after your hedges, basically implementing the model. It's like a zoo. When you arrive there's a bunch of different, interesting animals. After a while, you've met them all. There's no new animals, just variations of existing ones. However the thing that is really an issue is how the business works. Over time I came to the conclusion that the quants in the derivs space are really secondary to the salespeople. How important is the quant who can get the price right to within 1%, when the sales guy can talk the customer into overpaying by 5%? Sometimes it feels like the customer is not even shopping the structure around at all, he just feels comfortable with his sales guy and is willing to hand over a few million bucks of customer money with barely any thought.

fancyfredbot 9mo ago
The salesman can't tell you how to hedge the product. If you can't hedge you will lose that 5% upfront pretty fast. You need quants and sales and trading. Which is why all banks have all three.
- lordnacho 9mo ago
  > The salesman can't tell you how to hedge the product. If you can't hedge you will lose that 5% upfront pretty fast. > You need quants and sales and trading. Which is why all banks have all three. I don't think anybody said you can just run without one of those. But it seems the magic is in spotting the fish, not hauling it in.
  - fancyfredbot 9mo ago
    Spotting fish who you can overcharge is not really a sustainable business model. You can do it once but your colleagues will find out, move to a competitor, and next time they'll rip them off a bit less than you did and you'll have to rip them off less than that. There is, eventually, a shortage of dumb money. The sustainable way of making money involves competition, and this involves knowing the "right" price within a tight tolerance.
    - lordnacho 9mo ago
      No, the feedback loop isn't closed. The fish customer just keeps handing his spread to his favourite sales guy. I've witnesses this several times, some trader always uses the same relationship, irrespective of cost. I've seen this both in terms of friends from a long time ago helping each other, family, or backhanders. And so the real winner is that sales guy. I've known people climb to the very top of well known institutions on the back of relationships with just one hedge fund. What you're describing is a sort of ideal market from an economics textbook.
      - fancyfredbot 9mo ago
        The situation you are describing definitely happens, people have their mates they like working with and a single relationship can make a whole career. Normally though, such relationships do not involve the sales person charging significantly above market rates. The client usually has very strong incentives to reduce costs. While a single salesperson might build a career on a chummy relationship this isn't a sustainable approach for an entire firm to take because it is too unusual. The majority of the revenue is coming from client/sales relationships where the client is at least somewhat price sensitive and sufficiently savvy to get more than one quote.
chaps 9mo ago
This matches my experiences as a non-quant, but havin done support work for quite a few of them. You can feel the novelty slough off of them as they get burned down into realizing they're just fitting curves.

fancyfredbot 9mo ago

The salesman can't tell you how to hedge the product. If you can't hedge you will lose that 5% upfront pretty fast. You need quants and sales and trading. Which is why all banks have all three.

lordnacho 9mo ago
> The salesman can't tell you how to hedge the product. If you can't hedge you will lose that 5% upfront pretty fast. > You need quants and sales and trading. Which is why all banks have all three. I don't think anybody said you can just run without one of those. But it seems the magic is in spotting the fish, not hauling it in.
- fancyfredbot 9mo ago
  Spotting fish who you can overcharge is not really a sustainable business model. You can do it once but your colleagues will find out, move to a competitor, and next time they'll rip them off a bit less than you did and you'll have to rip them off less than that. There is, eventually, a shortage of dumb money. The sustainable way of making money involves competition, and this involves knowing the "right" price within a tight tolerance.
  - lordnacho 9mo ago
    No, the feedback loop isn't closed. The fish customer just keeps handing his spread to his favourite sales guy. I've witnesses this several times, some trader always uses the same relationship, irrespective of cost. I've seen this both in terms of friends from a long time ago helping each other, family, or backhanders. And so the real winner is that sales guy. I've known people climb to the very top of well known institutions on the back of relationships with just one hedge fund. What you're describing is a sort of ideal market from an economics textbook.
    - fancyfredbot 9mo ago
      The situation you are describing definitely happens, people have their mates they like working with and a single relationship can make a whole career. Normally though, such relationships do not involve the sales person charging significantly above market rates. The client usually has very strong incentives to reduce costs. While a single salesperson might build a career on a chummy relationship this isn't a sustainable approach for an entire firm to take because it is too unusual. The majority of the revenue is coming from client/sales relationships where the client is at least somewhat price sensitive and sufficiently savvy to get more than one quote.

chaps 9mo ago

This matches my experiences as a non-quant, but havin done support work for quite a few of them. You can feel the novelty slough off of them as they get burned down into realizing they're just fitting curves.