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Brooke Allen
Brooke Allen
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Can We Do Better? Ethics Needs to Come Out of Hiding

Do you think "Ethics" should be more ingrained in every part of the business, rather than just an afterthought, or separate HR course? And should it have its own category on this site, rather than bury it?

I love our markets but I hate what is happening to them, and I do not think our biggest problems have the slightest bit to do with fragmented exchanges, lack of computing power, insufficiently smart algos, or even bad regulation.

Our biggest problems are ones of Ethics.

I began my career on Wall Street in the 1980's in Fixed Income Research at Merrill Lynch.

I stumble upon what looks like a good stock trading strategy. I pitch it to Marty Kaplan, then head of equity trading, and I suggest he create a desk with two analysts, two computer programmers, and a head trader. I want to turn over my ideas and go back to research.

He says, "I think you have no idea what you are talking about and I am not about to risk anyone else's career on your cockamamie ideas. So here's the deal; you come down here and do all the analysis, programming, and trading by yourself so that I know who to fire if anything goes wrong. I'll make you only one promise: If you screw up you'll never work here again, and you cannot go back to research. Deal?"

I say, "Deal," we shake hands, and I begin my career as a trader. Usually I make money but sometimes I lose it. Marty is OK with me losing money because by "screw up" he does not mean "lose money." He means "do something wrong." There are ethical ways to lose money and unethical ways to make it. He knows that, and so do I.

De-Moralizing The Classroom
Fast forward to 2008. I am asked to talk to 70 students of quantitative trading at New York University, my alma mater. I tell the story of how I got into trading and then I ask the class, "What do Marty and I look for in a trader?" I collect more than 30 responses that include "balls," " and "intelligence," "gambling instincts," and "testosterone." Not one person gives the right answer -- not even the instructor. I say, "I want people to take responsibility for their actions."

The class looks befuddled. I ask rhetorically, "Who must take responsibility for their actions?" I answer, "Everyone." I ask, "When?" and answer, "All the time." After class the teacher says he does not moralize because the students don't like it. I have not been asked back. Without moral education no wonder we are in trouble.

Burying Ethics?
Today I go online to post my first piece on Ethics here at Advanced Trading, and I am asked to tag it with a category. The choices presented are: Algorithmic Trading, Crossing Networks/Dark Pools, Data & Infrastructure, EMS/OMS, Exchanges/ECNs, Managing the Desk, Regulation, TCA, Quant and HFT.

The list is obviously incomplete. They have forgotten Ethics. I write and ask them to correct their oversight. I receive this response from Greg MacSweeney, editorial director of Advanced Trading:

"We use 'Managing the Desk' for topics that include dealing with workplace issues, education, trader skills and ethics."

[Editor's Note: The categories/topics -- Asset Classes, Algos, HFT, Exchanges, Dark Pools, EMS/OMS, Data Infrastructure, Regulation, Managing the Desk and TCA -- are located at the top of the page and are designed to make searching the site easier for community members. The topics have been chosen based on the most common searches, most read articles and most popular topics on Advanced Trading.]

Excellent. An illustration of one of the problems I am talking about.

There is a notion that Ethics is an issue that management must "deal with." This is pervasive -- and evil. In many organizations the staff considers "ethics training" a joke because management treats it like a joke; something imposed by regulators and not to be taken seriously.

Ethics is not a problem you "deal with." Doing the wrong thing is the problem, and Ethics is how you deal with it. And it is not the exclusive responsibility of management but of us all.

Given the track record of our industry and the people who manage it, who would ever guess that Ethics is hiding on Advanced Trading under Managing the Desk? Perhaps you might want to lump Ethics in with Regulations, but these are very different things. "We comply with the law" is the weakest form of Ethics -- a hair above "We don't comply with the law." Ethics should be a separate topic out on top where everyone can see it.

Please join me in petitioning Advanced Trading to elevate Ethics to a top-level topic by completing the poll above.

Brooke Allen is a 30-year industry veteran who most recently founded a quantitative trading desk now celebrating its 17th year in continuous operation. For years he wrote a monthly piece for International Family Magazine, in 2009 he founded NoShortageOfWork.com to discuss ... View Full Bio
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Kent Converse
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Kent Converse,
User Rank: Apprentice
3/7/2013 | 6:37:28 PM
re: Can We Do Better? Ethics Needs to Come Out of Hiding
Way to go Brooke. You are right of course.
BrookeAllen
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BrookeAllen,
User Rank: Author
3/2/2013 | 8:01:05 PM
re: Can We Do Better? Ethics Needs to Come Out of Hiding
I have found that the best place for change to come from is wherever I am in the hierarchy. I take ethics seriously and I make sure the people below me know it and the people above know it too.

To imagine that change has to come from somewhere other than from me - be that the top, bottom, Washington, or Basel - is to absolve me of responsibility to change what I can.

It is not what other people do not do that counts.

What counts is what I do.
Paul Zak
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Paul Zak,
User Rank: Apprentice
3/1/2013 | 11:32:48 PM
re: Can We Do Better? Ethics Needs to Come Out of Hiding
Great piece Brooke. One of the major findings in the neuroscience of ethical behavior is the role of the neuropeptide oxytocin. The brain synthesizes oxytocin during positive social interactions and causes us to reciprocate kindness with kindness. But, this only happens at work when we put a human lens on behavior. Who will this hurt? Who will this help? A simple approach is the "do I sleep well" test. If you are perseverating about your decision and losing sleep, it is probably the wrong one. I agree with you that "ethical training" is almost an oxymoron. Everyone needs to be empowered to make good choices and call out those who are not.

Much more on this in my book The Moral Molecule http://www.amazon.com/The-Mora...
Gourav
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Gourav,
User Rank: Apprentice
3/1/2013 | 3:08:08 PM
re: Can We Do Better? Ethics Needs to Come Out of Hiding
Brooke This is Truly an Amazing Article. There was Something in Particular that interested me " In many organizations the staff considers "ethics training" a joke because management treats it like a joke; something imposed by regulators and not to be taken seriously. I feel that the change has to come from the Top and not from the bottom of any Hirerarchy.
bnewton926
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bnewton926,
User Rank: Apprentice
2/23/2013 | 3:09:55 PM
re: Can We Do Better? Ethics Needs to Come Out of Hiding
I should have added a point to my comment yesterday. While working in the UK the FSA was established and attempted to operate using a Principles Based ethos. Firms had to meet a set of principles and senior individuals that were approved for their positions by the FSA, based on the recommendations of their firms as well as their CVs, also were held to a separate set of principles. Meeting these "Principles" amounted to doing the right thing for your customer. If the FSA's rules or guidance were not in the interest of your customer, you were to apply judgment, not apply the rule or guidance, document your decision, and when the FSA conducted a regulatory visit, they would either agree with your assessment, or disagree and work with you to find the appropriate way forward. What was done had to be in the interest of the customer, and not detrimental simply because there was a mistake in a rule or guidance note, or it was not appropriate in the particular market setting.

Individuals or firms could be sanctioned if they did things that were not in the customer's interest, and indeed, some individuals were banned for life from holding an approved person role at a regulated institution. But now the UK is changing their regulatory approach as the "light touch," principles based approach relying on individuals and firms to do the right thing for their clients was not sufficient. Really, it failed due to a lack of ethics on the part of many individuals enticed by the huge rewards and relatively low probability of being caught and held to account.
PhillyTrader
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PhillyTrader,
User Rank: Apprentice
2/23/2013 | 2:19:36 AM
re: Can We Do Better? Ethics Needs to Come Out of Hiding
Excellent Article ! Bravo ! Since we are all hypocrites I may as well say it. There is plenty to be made from the markets and good solid business. If you have to cheat in order to compete, you either don't belong in the business, or you don't work hard or smart enough. True players don't have to cheat, they have the game to play the "game". The pretenders cheat, and cheaters don't win in the long run anyway. Just look at all the insider trading cases over the past couple of years. Even with all the money,technology, resources, and relationships....they still had to cheat to win. Oh btw, they still got caught. Nuff said.....
AnthODonnell
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AnthODonnell,
User Rank: Apprentice
2/22/2013 | 10:02:58 PM
re: Can We Do Better? Ethics Needs to Come Out of Hiding
Excellent comment! I've often thought that it might be interesting to do studies of national character based solely on prevalent styles of hypocrisy. Haidt's work is fascinating,
BrookeAllen
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BrookeAllen,
User Rank: Author
2/22/2013 | 9:19:37 PM
re: Can We Do Better? Ethics Needs to Come Out of Hiding
I have just begun reading The Righteous Mind: Why Good People are Divided by Politics and Religion (By Jonathan Haidt). In the introduction he says that the take-home message of the book is that we are all self-righteous hypocrites.

I agree, and I am no exception. I realize that I've become more self-righteous in my old age. My sons call me a hypocrite because I am far from perfect. They suggest I keep my mouth shut about "doing the right thing."

I tell them, "That is the point. By going on the record I hold myself out to a charge of hypocrisy, and that helps keep me close to the path."

There is something else going on. The regulations in our industry are preposterously convoluted and the temptations legion. There are many times when the only thing that saved me from doing the wrong thing was not a rule, a manager, or a compliance officer, but the imagined voice of my father saying, "I am ashamed of you." He was never shy about talking about right, wrong, good and evil, and when I was young I hated it. But now I am sincerely grateful. My sons might hate me for it now, but I bet some day they too will be thankful.

A friend is a psychotherapist. Patients come complaining of depression and sleeplessness, but after getting a load of the lying, cheating, and stealing they are up to, her honest response is, "You don't have a sleep disorder; you have the vestigial remnants of a conscience. You don't need a pill. You need to do the right thing."
AnthODonnell
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AnthODonnell,
User Rank: Apprentice
2/22/2013 | 8:08:12 PM
re: Can We Do Better? Ethics Needs to Come Out of Hiding
Seems a bit histrionic to insist that ethics be so explicit a topic. Being implicit doesn't mean unimportant. But there's no doubt the author has a point. The financial services industry's reputation has suffered immensely because of matters of ethics, real and perceived. The real ones have to do with conducting commerce in a way that doesn't aim at mutual benefit. This has been true in spades in the consumer credit industry, where banks set snares for their customers as a way of boosting profits. In an industry driven in significant measure by the greater fool principle, it's a little different, but the gaming part should happen in a very defined space, and there should be very high ethical standards and transparency otherwise. Ultimately business depends on trust, so sharp practice will harm business sooner or later.
bnewton926
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bnewton926,
User Rank: Apprentice
2/22/2013 | 7:11:57 PM
re: Can We Do Better? Ethics Needs to Come Out of Hiding
Brooke is someone I first met in NY when he was in fixed income research at Merrill and I was in fixed income research at BARRA. His comments could not be more accurate -- too many automatons measured internally and externally only by P&L. If it's a P, anything is acceptable. An L, you look for another place to shoot for P. And the results to which he alludes result in serious collateral damage.
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