Who Makes Money in Wall Street and How

It is interesting to see the diversity of methods aimed to generate income in the trading scene. Whether it’s mathematical trading or value investing, there are countless methods out there. This post aims to review some of the most common methods used in each area, and it’s most well known earners.

Mathematical Trading

What is it: After Black and Scholes found the formula for pricing an option, it was becoming clear that mathematical trading will become a major influence in the financial scene. What is known now as Financial Engineering, has become very popular among university students. The mathematical sophistication is constantly increasing, and people who work in this industry are known as “quants”. The most famous “quant” is probably Emanuel Derman, who also published a book titled “My Life as a Quant: Reflections on Physics and Finance”. In these days, most of the financial firms hire quants.

Notable Quant Oriented Firms

D.E Shaw

Founded by David E. Shaw. Having a Ph.d in Computer Science could not have hurt Shaw. He made a fortune building automated trading systems which exploited anomalies in the stock market. Fortune magazine referred to him as “King Quant”. The firm manages approximately US $29 billion in aggregate capital.

Employment opportunities at D. E. Shaw are known to be extremely competitive. A notable past worker at D.E Shaw is Jeff Bezos, the founder of Amazon.

LTCM

Long Term Capital Market was a hedge fund founded in 1994 by John Meriwether. It had Myron Scholes and Robert Merton on its board, two Nobel Prize Winners! At its peak, it made about 40% return for its investors. After being heavily leveraged, it went bankrupt.

The LTCM example teaches you that no matter how smart you are, there are some things that are out of our reach. A good book on LTCM is “When Genius Failed: The Rise and Fall of Long-Term Capital Management”

Speculating

What is it: Speculating is simply having a philosophy about the market, and acting accordingly.

Notable Speculators