April 7, 2011
I have a confession to make.
Over the past 18 months or so, I have attended a number of events in Brussels related to financial regulation. I even interviewed a number of the key players involved in influencing and writing the new sets of regulations. Broadly speaking, I understood almost none of what was said.
I know that is a terrible admission, but there is no point in being dishonest. The thing is, I am one of the most geeky finance people that you are likely to meet – unless you hang around the lobby of Goldman Sachs most days! I have a load of financial and investment qualifications and worked in finance for about fifteen years, but that has proved to be nowhere near enough.
I can recall attending a Deutche Bank event with a colleague and priming him with a short-course explanation of derivatives en route. We were both impressed with my level of explanation without any preparation. But within five minutes of the event starting he was checking messages on his iPhone because he didn’t understand a word. Within thirty minutes we left because I no longer understood it either…
The areas of trading that regulators are trying to investigate and bring into line are uber-profitable, highly secretive and involve very complex mathematics. In other words, outside of a small group of people (a few thousand worldwide), very few actually understand much of it – even though it accounts for hundreds of millions of pounds, dollars and euros of trades every second and billions under management.
This is certainly one of many problems that politicians have when they try and draft rules. They have no idea what is going on. That isn’t meant to be rude either. Virtually nobody does understand it. I am sure that these hedge funds can see the areas that look like they will be regulated and are already moving on to another more complex and less transparent environment for their alchemy.
Thus, my reading over the last week has been a real eye-opener. The Quants by Scott Patterson explains the vast majority of this shadowy world so that normal people can understand it – at least an overview of it anyway. And it isn’t a text book, so is actually readable.
If you don’t know your stat arbs from your dark pools, your high frequency trades from your carry trades or a mathematical model from a super model, this is a great way to learn more without the inconvenient problem of asking a financial policy expert at an event who may choose to belittle you for asking (I tried that one!).financialguy