To trade or not to trade [ updated ]

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Back in around 2005, I took the first steps from moving away from a technical career to aspire towards a financial career. Back then I was working in one of those IT tender chasing sweat shops and I believe everybody back then was geared towards one of two projects, namely the computerization of the National Land Office or Jabatan Imigresen as the big ticket items. There were also rumblings about some highly connected companies landing some healthcare IT deals. There was also a lot of disquiet about Azalina’s Kementerian Belia dan Sukan (KBSM) forcing a whole bunch of vendors to perform a Le Tour of Malaysia by visiting every KBSM facility throughout the country in order to bid for a computerization project tender for a campus system. (The specs of which were lifted 100% from one company but in the end even those who used that company’s specs did not get the job. I believe an Oracle vendor got that.) **

I believe that was also the beginning of the hyping of this role called “the Investment banker.” Big CEOs of Wall Street banks were so egoistical that some of them had golden toilet bowls in their office and pandered to the idea of being considered as “Masters of the Universe.” Films like James Bond had them as villainous roles, other Hollywood films portrayed them as riding on motor bikes and then changing in to suits, dashing into private planes and creating money out of thin air.  Konon-nya.

Now before we go further, lets set something out real clear to everyone that the world has changed. 1 Microsoft is worth 3.7 JP Morgan’s or 15 Goldman Sachs.  In fact, pure software names you have never heard of like, Snowflake is worth almost 50% of 1 Goldman Sachs and even Data Dog is now worth 1/6th of Morgan Stanley.

Now both Snowflake and Data Dog are new companies compared to the storied more than a century old history of those Wall Street banksters. In fact Data Dog was only founded 10 years ago, back in the days when Najib was PM and 1MDB was re-writing the rules of money laundering. Snowflake was even more recent and formed 9 years ago.

So perhaps that maybe a reason why folk should give up trading and turun gelanggang to take on big tech. I guess.

Also make a guess on how much JP Morgan spent on IT in 2019?

Anyhow, back to the story about this Investment Bankers and how supposedly they are able to make money out of thin air.

Basically Investment Banking consists of 1 of 2 activities

  • Advisory, or, conning around.
  • Mergers and Acquisitions, or, convincing CEOs to embark on empire building by paying a lot of money to acquire another company. Hundreds of billions, or even trillions of dollars worth of transactions took place on the back of a well designed slide deck. In fact, junior investment bankers spend grueling hours trying to make that most amazing, bedazzling slide show. They should perhaps intern with Industrial Light and Magic and then go and work for Morgan Stanley.

For example, from the above 2 activities, JP Morgan had revenues of $7.5 billion in 2019, which seems a lot until you consider how much they made from trading, which was a whopping $14.0 billion, or nearly double the investment advisory side.

But what is this animal called “trading”?

So trading can best be described as the most glorified, most amazing Pasar Malam (“nightmarkets”) in the financial world. Literally, dozens of investment bankers set-up their warung, selling all manners of financial products to muppets all around the world. In fact, if you are like me who shop by starting out thinking to get 1 or 2 items but come back with 3 bags full of groceries – then you better stay away from these pasar malams.

In 2019, JP Morgan made trading profits of $14 billion, comprising mainly of $5.9 billion of Equity Risk (basically stocks, options and equity derivatives) , $3.2 billion of Forex risk (basically currency trading , currency forward, George Soros style speculation) and $2.5 billion of Interest rate products like Forward Rate Agreements, Interest Rate swaps, Interest rate options. (Actually there is a whole zoo of interest rate products).

Interestingly, commodities are out of flavor and only accounted for $1.1 billion of profit and credit risk products, which are insurance contracts bought and sold whether a company will go bankrupt and die (or an index tracking the financial health of those companies) amounted to $1.6 billion.

So I guess one perspective is  that if you are trading, it is most likely that the one you are trading against is one of those evil bankster traders. Unless you have a massive edge, that means you have a system which is more powerful than theirs, it may be that they are a better information advantage.

That’s just my thoughts.

Moral of the story

Better be a Data Dog and be worth $25 billion than be a trader and make a couple of bucks.

WOOF! WOOF!

 

Post-note:

Answer: How much did JP Morgan spend on IT in 2019?

a) US $3 billion

b) US $5 billion

c) And yes that is the right answer , US $ 10 billion

By the way, a fuller expansion of JP Morgan’s income statement on a consolidated basis (excluding its segments) yields 37 line items. It could easily be 50 if further expansion was done. 

** The toughest form of IT business is the service line business. This includes local entities who are systems integrators or global outsourcing giants like Wipro, Satyam or HCL. It is usually chasing tenders and then payments, which can take a long time and dealing with client project teams. Remember, not everybody on a client’s project team actually wanted to be involved as some were arrowed to be in the team! A product business is better but requires a product development and product marketing expertise.

 


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