My recent inactivity...

To those who have enjoyed reading what I'm reading: I'm sorry for not posting in quite a while. I have been interviewing for jobs and haven't had time to read as much news as I had been consuming previously. After next week, fingers crossed, I will be back and hopefully have an offer too.

Bad year for bonuses...

The WSJ is reporting on a story that isn't exactly news as much as a restatement of the obvious: traders are not making as much this past quarter as they did in the first half of the year.

From the article:

Wall Street's bonus-conscious bankers and traders are preparing for a pallid payday, in sharp contrast to messages they got from superiors at the beginning of the year. "This is going to be an interesting year, because the firms didn't manage expectations well," says Gary Goldstein, chief executive of Whitney Group, an executive-recruiting firm in New York. "Business is looking much more tenuous now, and people are cautious about next year, too."

And while the blogsphere is attacking the MSM, the following sentence should be removed on grounds of being stupid:

Pay scales and bonuses vary widely, based on specialties, individual abilities and geography.

Tell me about Wednesdays

Okay this comes via Chicago Boyz: The Chicago Sun Times has written a column about the University of Chicago’s undergraduate application which is famous for asking strange questions. I did not go here as an undergrad, only as a GSB student, so can’t speak to this directly. I did however have to answer Harvard’s exam questions and frankly find them easier that the question, “How do you fell about Wednesdays?” 

JPMorgan to buy a Hedge Fund

This article in today's WSJ discusses the purchase of Highbridge Capital by J.P. Morgan Chase & Co. The story says that the fund was valued at over $1 billion. That seems hard to imagine, but I guess possible. Figuring that their revenues are at least $140 (2% of funds under management) that's 5x revenues. But what are their costs? I would expect that they have to pay enormous bonuses to their PM's and analysts. In any case it is an interesting move...

Greenwich attacked in the courts again...

Okay so this isn't over Todd's Point, but it is Greenwich Town Hall being taken to court again. This time the flap is over the GIS (geographic information system) that the town maintains, presumably with information about town geography. Why is this important to us? Well for one, we will be able to study how land and geography affects returns to Greenwich hedge funds. For example, does the distance to the water have an effect on returns (thinking through LTCM the answer is yes)?

I also would have to believe that if terrorists had access to this information they would be able to assess ho steep my parents' back yard is and then plant a large boulder on top of the hill capable of flattening the house. For that reason alone I say keep this information secret. But that's just my opinion.

How do we measure success?

Here is an interesting article (WSJ Requires Subscription) on how we measure success in our 20's. As I'm about to turn 30, I'm starting to look back at what I've done with this past decade and thinking about all of the things that I've accomplished. I think that I rank okay according to their criteria. Everyone should check it out. However, it is probably best for your ego not to compare yourself with the 25 year old Yale law student with the perfect investment banking boyfriend mentioned.

Max Pain Theory Is True?

According to Allen Poteshman, assistant professor of finance at the University of Illinois at Urbana-Champaign, there might be some truth to max pain theory. I'm not going to even try to explain max pain theory. But I will try to summarize his interest in equity options and their trading leading up to expiration.

Poteshman says that options writers (sellers) will buy and sell the underlying so that the options will expire out of the money. This makes sense because it can cost the writers of options less to try to manipulate the stock price than they would pay to options holders. Of course this would not work for highly liquid stocks like an Intel or an IBM, but it would work for less liquid issues. Max pain theory tries to take all of the mixed incentives of all of the options writers and determine at what price they collectively would like to have the stock close at expiration to minimize their costs or extract the "max pain" from options holders.

The article (PDF File), co-authored with Sophie Xioyan Ni and Neil Pearson and will be published in the Journal of Financial Economics.

(Note: This is the first post I'm doing from the new Hyde Park Center! The building is great, although I think that everyone is still getting used to it. It is very difficult to orient yourself downstairs, but still it should be a great new home for the GSB.)