Trading Lineages

For about three years I have been looking at financial markets as part of a practice-based research program. This past week I honed in on some specific material for a longer-term project. I then realised that much of the research material is traceable to several key sources.

 

In the 1980s, Stephen Brill’s American Lawyer Magazine helped develop the careers of several financial investigative journalists. Connie Bruck (The Predators Ball) and James B. Stewart (Den of Thieves) documented the insider trading scandals involving Ivan Boesky and Michael Milken, who both influenced Michael Douglas’ portrayal of Gordon Gekko in Oliver Stone’s film Wall Street. I recently discovered that Jim Cramer (Confessions of a Street Addict) was briefly at American Lawyer Magazine at the same time as Bruck and Stewart: Cramer founded a hedge fund, was involved in TheStreet.com, and is now a high-profile CNBC presenter. Bruck and Stewart’s detailed reportage foreshadowed the recent insider trading cases involving the Galleon and SAC hedge funds. Cramer’s experience is far more cautionary.

 

Another personal influence is the work of performance psychologists who have worked with traders. Ari Kiev (The Mental Strategies of Top Traders) worked with SAC’s Steve A. Cohen. Brett N. Steenbarger (The Psychology of TradingEnhancing Trader Performance) has worked with several firms including SMB Capital, where Mike Bellafiore (One Good TradeThe Playbook) and Adam H. Grimes (The Art and Science of Technical Analysis) have influenced proprietary trading firms. I have found that performance psychology insights can be applied to other areas of my life.

 

Finally, I have picked up specific insights from Market Wizards traders like Linda RaschkeMichael Steinhardt, and Larry Williams, who each have lineages of hedge fund and trading students.

 

Collectively, this work from American Lawyer Magazine, performance psychologists, and specific traders continues to shape my on-going, practice-based research.

20th May 2010: On Michael Milken

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In November 2009, the Australian cultural policy author Ben Eltham and I published a conference paper and presentation on Twitter’s role in Iran’s 2009 election crisis. One of our conclusions was that as a social network platform Twitter can be prone to rumours and two dynamics: information cascades (people making the same choices) and rational herds (a form of social learning in which individuals self-organise into groups, usually on the basis of shared affinities, identity or preferences). We cited Christopher Chamley and Mark Schindler‘s work, whilst Cass Sunstein has written important work on how information cascades and rumours spread.

Collectively, these authors observe the tendency for people to forward and filter information without checking the pertinent facts, evaluating the motives of their source, personalising the ‘other’, and also not considering the original, appropriate context.

One of the best examples of this phenomenon is the pre-Twitter career of financier and philanthropist Michael Milken (personal site). In the early 1970s, as a young analyst at the leveraged buyout firm Drexel Burnham Lambert, Milken foresaw a new market in high-risk securities that blue-chip investment firms would not touch: high-yield or ‘junk’ bonds of debt-laden companies. As depicted in Connie Bruck’s excellent book The Predator’s Ball (New York: Penguin Books, 1989), a source for Adam Curtis‘ must-see documentary The Mayfair Set (BBC, 1999), Milken became a major driver of the 1980s private equity boom. Despite being implicated in the Ivan Boesky arbitrage case, and being barred for life from the securities industry, Milken has subsequently reinvented himself through the Milken Institute think-tank and other activities.

The power-users of social networks like Facebook and Twitter may joke about gaining ‘world domination’. As a self-styled ‘Master of the Universe’, Milken actually achieved this goal, if only for a brief time. Consider the strategic dimension of how Milken did so. As a true innovator, he foresaw new markets and macroeconomic trends a decade before others did. He developed powerful, financial innovations in debt securitisation, mergers and acquisitions, and risk arbitrage. He built a loyal and private network, together with the organisational capabilities to leverage deal-flow. He also controlled the public dissemination of market information through conferences and media interviews. He understood the subtle power of crafting and framing a media image around themes which appealed emotionally to people — entrepreneurship, freedom, and being the revolutionary vanguard — which Curtis argues was really a personal agenda to cement Milken’s influence, power and social status. Many of Milken’s strategies tapped the dynamics of rumours, information cascades and rational herds, apparent in the 1980s private equity boom.

Perhaps this is why Milken tried (unsuccessfully) to convince Bruck not to publish her book.