February 22, 2013

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.

What Do You Think?

Do you think we should:
Make Ethics its own top level topic?
Keep it under Managing the Desk?
Add it to Regulation because that is where it belongs.
Add it to Regulation because that way people reading up on Regulations might stumble upon Ethics.
Drop Ethics as a topic; it doesn't belong here.



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.

ABOUT THE AUTHOR
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 ...