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The faster metabolism of finance, as seen by a veteran broker

Prices are set at the margin. And the marginal trader is a hedge-fund manager A FEW YEARS ago a stranger sidled up to me at a conference. I had been introduced as an equity salesman with over 30 years of experience. “Success or failure?” he asked impishly. I laughed. When I started in stockbroking, anyone older than 50 carried an air of defeat. If they hadn’t made enough money to retire early, they were seen as losers. Well, I’m still here and I’m not the only one. There is a lot more grey hair on the sales desks these days. That is not the only change. Trading revenue is slimmer, because of regulation and new technology. The way sell-side analysts and salespeople are paid has changed. But the biggest difference is in the kinds of conversation I have and who I have them with. Twenty years ago, I hardly spoke to the fast-money crowd. Now most of my day is taken up with them. Share prices are set at the margin. And the marginal buyer and seller is a hedge-fund manager. Hedge funds are behind much of the recent market drama. The minutes of the Federal Reserve’s rate-setting meeting last week were a trigger. The immediate prospect of tighter monetary policy spurred hedge funds to sell expensive “growth” shares, notably those of technology companies, the profits of which are expected to last long into the future. Those distant earnings must now be discounted at a higher rate. So tech shares fell. At the same time, a lot of the funds bought cheap “value” stocks. I specialise in a sector that is seeing selling pressure. But most of my hedge-fund clients trade at a more granular level. They want to bet on the most resilient stocks on my patch and against those that will falter. What matters to such “long-short” traders is that their longs do better than their shorts. Their investment horizon is days and weeks, not months and years. There are lots of these hedge funds trading lots of stocks. That is why beneath the surface, the stockmarket is so noisy. Clients want to talk to me. I know my industry well. I have a good team of analysts behind me that is in regular contact with companies. And I talk to a lot of other investors. Everyone has the same hard data—the stock price, the financial statements, the consensus forecasts for earnings and the firm’s “guidance” around those numbers. But the hedge funds are trying to anticipate short-term shifts. They come to me for soft data. I get asked all sorts of questions. How confident does the finance director of firm X seem about making the numbers? How steely are the investors in the stock—are they committed holders or would they dump it on bad news? Is anyone thinking of buying burnt-out stock Y? Would firm X be open to acquiring firm Y or is it still digesting its latest purchase? No one asks about valuation anymore. When I hear a hedge-fund manager say a stock is cheap or dear, alarm bells ring. He is usually trying to “reverse-broke” me, ie, influence the market by swaying me. The buy-side used to reward us with fat commissions. Now the biggest brokers allow clients to use their systems to trade directly on the stock exchange at very low cost. Regulators insist that the buy-side pays directly for our advice. These clients agree to pay a fixed sum every year. My performance is measured by “interactions”: the phone calls I make, the meetings I arrange and the requests I respond to. The hedge funds are especially hungry for information. So they pay well. The buy-side was once a gentler place. Before passive investing put pressure on fees and performance, a dolt could make money in fund management. If you got the dolt drunk regularly, he would allocate you some commission. I still talk to clients whose investment horizon is five years and not five days. But the conversations are more serious. Boozy lunches have been regulated away. No one has the time for them anyway. The sell-side trader is a marker of cultural change. The old-school version was a red-faced bruiser called Fat Matt or Cardiac Kev. The new model is a triathlete. Improved health might explain why there are more near-sexagenarians like me around. It’s mainly a cohort effect, though. The City grew quickly in the 1990s. Anyone who read “Liar’s Poker” figured they’d get rich in sales. But the broking of listed stocks has since lost its mystique. Finance graduates now opt for jobs in private equity—or at hedge funds. My generation has stuck around. Success or failure? I’ve survived several rounds of cuts. I have a job that I enjoy. I am still pretty well-paid. I think that counts as success, don’t you?

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