Twenty Years Ago Today, I Started Working at Long-Term Capital Management

Not many individuals other than some of the partners from Long-Term Capital Management have spoken or written anything public about their experience. I happened to be up in Greenwich, Ct a couple of days ago to meet with one of the partners from LTCM and I realized that it’s almost 20 years since I started working there.

This isn’t a story of what happened at LTCM. This is a reflection on how I arrived at LTCM 20 years ago, some of what I did while I was there, and what I learned.

LTCM

The Liar’s Poker Influence

Upon graduating from NYU, there were only a few things most students from Stern did. We went to Wall Street, Madison Ave., or, at the time, the Big Six consulting firms. I chose Wall Street, primarily, because I read the book Liar’s Poker as a Sophomore in high school and was completely convinced I wanted to be a mortgage trader when I grew up.

Plans changed by the end of college. Kind of. While I was in college, I was lucky enough to get an unpaid internship at Merrill Lynch. I picked up writing Excel macros and working with Microsoft Access 1.0. That was my first real experience working with technology and I loved it. I decided to do a double major in Finance and Information Systems.

At the end of my junior year, a friend of mine, Anil, shared my resume with a recruiter at JP Morgan & Co. I got the paid internship. After the internship was over, my boss, Paul, asked me if I’d consider joining after graduating. I was ecstatic and agreed.

Job Hunting

Fast forward a few years and I decided it was time to move on from JP Morgan. I had interviewed at a few places before getting called into LTCM. Once the interview was over, I immediately decided that I wasn’t going to interview anywhere else. Working at LTCM would mean an opportunity to work with John Meriwether (someone I first read about in Liar’s Poker six or seven years prior) and some of the smartest people in finance. That’s where I wanted to be. If you’re in tech, it was the equivalent of getting a job at Google, Uber, 500 Startups, Facebook or Twitter when there were less than 50 employees.

Weeks went by and I hadn’t heard a thing. Weeks turned into over a month. I was sure that I didn’t get the job and it was probably time to start looking elsewhere. Before I started sending out my resume, I got a call. LTCM wanted to see me again. I was very surprised that when they told me I was being considered for an analyst position in the US fixed income risk management group. It was a Friday afternoon and I got a call giving with a verbal offer. A written offer would be faxed over to me shortly. I had to make a decision by the end of the day.

Here I was, twenty-two years old, excited but also scared about going to work for this company that no one had ever heard of. This up-start in finance. This startup. I laid out the pros and cons to my dad and he said to me, “I don’t know anything about your line of work. I’ve heard of and know what JP Morgan is but I can’t tell you what you should or shouldn’t do. You need to trust yourself and decide what you think is right.” I made a decision to take the job. After having been at JP Morgan for two years, Monday morning I handed in my resignation to my boss, Jack (who had been a lifer at JP Morgan).

Long-Term Capital Management

Two weeks later on June 10th, 1996 I started working at Long-Term Capital Management. I was now the youngest employee at the firm, much to Howard’s chagrin. Traveling for workUp until I came onboard, Howard had been the youngest employee at the firm. Being at LTCM was an incredible experience. It turned out to be a lot more than what I had expected. In good and bad ways. A few months after I had started working at LTCM, during the summer of 1996, I suggested to my boss, Lawrence, that we should consider evaluating technologies like the Netscape browser and a web server to build an Intranet. Back in 1996, not many knew what an Intranet or the Internet were. The few that did, mainly used it for email, Yahoo and a few other things. My boss was pretty excited at the prospect of bringing new consumer technologies into the firm. He spoke to two of the partners, Greg Hawkins and Eric Rosenfeld. Greg asked me some detailed questions about my suggestion. At the end of the conversation, he told me to get a prototype ready in a month. I was perplexed. I knew nothing about setting up and creating content for an Intranet. I just knew how to use Netscape (Thanks Marc)!

After work, I hit a few bookstores and tried to figure out whatever I could about  Intranets, HTML and CGI apps. Roughly a month later, with the help of our SysAdmin, Avi, we had the Netscape Suitespot web server in production, hosting all of our US fixed income risk reports. That set off a push over the next 18 months and the little proposal to create and Intranet turned into a team of people dubbed the “ATI” or “Advanced Technology Initiative” building a platform for all reporting and some applications being moved to the browser or Java.

LTCM office in Japan
LTCM office in Japan

In early 1998 I moved out of the fixed income research group and ATI into the “systems” group. Here, I took on more of an infrastructure role. My job would morph again to focus almost exclusively on data over the coming months. I had just been given a project that would essentially rip out the whole market data infrastructure of LTCM and replace it with a new PC product from Reuters called Kobra. Essentially, everything affecting trading, research, risk and operations that required prices for various securities would need to be replaced. Every Applix Spreadsheet macro, every Perl script and module, every C library, every MarketVision screen would need to be re-written by December 31st 1998 – the last date the existing MarketVision infrastructure would operate. Then August 1998 rolled around and Russia defaulted and all hell broke loose in every corner of global capital markets.

The Collapse

By September, an offer from Warren Buffet to buy the assets of LTCM had come and gone. The hemorrhaging continued unabated. I kept working on replacing the market data infrastructure, unsure if there would be a need for the infrastructure at the end of it all. The partners took steps to ensure that all of the employees would not need to worry about our salaries. All we needed to worry about was sticking together and getting thru this. Within a few weeks, fourteen of the largest banks on the Street bailed out LTCM. Tough decisions were made by the “Oversight Committee” which was comprised of representatives from each of the fourteen banks. LTCM was scaled back considerably but by December 31st, thanks to everyone pulling together, we had a new market data infrastructure running on Reuters Triarch and Kobra.

LTCM Tokyo Trading Floor
LTCM Tokyo Trading Floor

The Aftermath

All of us were in maintenance mode at LTCM for about a year. We were kept around by the OC to keep the place running and fix problems if they occurred.

My friend Ritesh and I caught the startup bug and began working on plans for world domination. I don’t remember what the idea was but we made a trip to Boston to meet with Perot Systems. It didn’t work out but I had my first taste of a tech startup. Looking back, it was convenient that in October 1999, I got laid off from Long-Term Capital Management. It bothered me. A lot. Fortunately, though before the end of the year, I was back to working with Hans, Tom, Ira, Jim, Ritesh, Peter, Nandini, Marek, Rob, Claudette, Kin, Graham and many others on GlobeOp Financial Services.

I frequently tell people that I’ve been very lucky and fortunate in my life. My time and experience at Long-Term Capital Management has a lot to do with it. I was privileged to work with some of the best and brightest in the industry and lucky to learn some very important values very early on in my career at LTCM – humility, integrity and most importantly loyalty.

As I continue working on 500 Kulfi, I hope to build something that embodies these values as well as our core values at 500 Startups with Dave, Christine, Bedy, Khailee, Soaib, Shalini and everyone else in the #500STRONG family.

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The Financial Crisis and India

BarCamp Delhi has been going on this weekend. I don’t think anyone took any video of the presentation but I turned into a bit of a pig and took up three speaking slots.

Sorry to Netra, Sukhdeep and every one else for taking up their slots!

The presentation is available as a download below as well as on Slideshare.

So far, there are posts on BarCampDelhi5 coverage on Webyantra and the BarCampDelhi Blog.

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Come Back in 20 Minutes for the Price Right Now

I never thought I would be posting something about the pricing of financial instruments but it’s something I know a little bit about. I spent around 8 years managing market data systems in the financial industry. For about 6 years I was responsible for “negotiating” with the various exchanges around the world, including the NYSE, NASDAQ, CME, and CBOT (it was more like being on the receiving end of a DWI pullover). Google recently announced that they would be providing real-time prices for Chinese stocks traded on Shanghai and Shenzhen stock exchanges. What about the NYSE, NASDAQ, AMEX, London Stock Exchange, and other major world exchanges?

Don’t hold your breath to know the current price of Google, right now. Most likely you’ll have to come back in twenty minutes to know that the price is right now, not twenty minutes from now. It isn’t like going to the grocery store and seeing that a can of soup is $1.99 and it will stay that way, at least for a week. What most people don’t realize is that each exchange is a monopoly. If you want to know the current price of Google, the price has to come from NASDAQ because that’s where GOOG has been listed and it’s where the most liquidity will most likely be for the stock. If Google, Yahoo, Charles Schwab, Morgan Stanley or any other providers of financial information want to use the pricing data of a security such as the stock price of Google, for their internal use, there’s the end-user price that these companies must pay to each exchange for each individual that would be seeing or using the prices for any purposes. For the Nasdaq, that’s $20/month/user for real-time prices. No charge for delayed pricing. However, if any of these companies want to provide pricing information to their clients or anyone outside their organization, they must contact the respective exchange and become a distributor of real-time pricing or delayed pricing data.

Companies like Reuters, Thomson Financial, and Bloomberg are distributors because they resell real-time and delayed data as well as full infrastructures to manage this data for almost all the exchanges around the world. However, Google and Yahoo are also distributors of pricing data since they provide stock quotes on their websites. Being reseller of real-time data requires paying some fairly hefty fees to the exchange (hefty for a startup but not really for these monsters) just for the right to provide the prices to a party outside of their organization. On top of that, the exchange requires payment for each user that has access to the real-time data. This can become pretty expensive when you have to pay the NYSE $127/month for the first user and then a discounted rate for each additional user/month.

There’s a very expensive infrastructure that exchanges must maintain for routing of orders, matching orders, and disseminating pricing information. However, in today’s day and age of freedom of information, the exchanges actually make it cost prohibitive for non-professional traders and investors to know that YHOO is exactly $28.50 at 14:45:05pm. Most of the brokerage companies have become distributors of pricing data just so they can provide a PnL or position value to clients trading with them.

Day trading isn’t as popular of a career choice as it was in the late 90’s but nonetheless, more and more non-professional investors are trading, and trading more frequently. Whether you are trading or investing, one thing that’s critical is data. If the data that you’re trading off is stale, you could very easily make a bad decision. On the other end, the steep fees that the exchanges extort for use of their pricing data means that it is very difficult for startups to use the data to build products and services providing this data, and hence, marketing the stocks listed on the respective exchange.

All and all, it’s a side of the financial industry that remains ignored. Too bad Elliot Spitzer didn’t take a look at this while he was AG of NY State. Maybe as Governor, he can persuade Andrew Cuomo, the current Attorney General of NY State or the SEC to look at this unnoticed monopoly. Till then, charge on Yahoo and Google!

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Indian Plan to Freely Float the Rupee

The SS Tarapore committee on fuller capital account convertibility has recommended loosening of controls on capital flows in three phases, over a five-year period ending 2010-11.

India nears free float of rupee

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Tips are for waiters

A great friend of mine just started his own blog yesterday. He’s a oney manager who’s seen a lot of ups and downs. He’s sharing his experiences and expertise with all of us. Here’s a snippet from his second blog posting.

Earnings season, which started last week, goes into full swing tomorrow. This reporting period should be a very interesting one in particular with all the cross currents swirling around us. It seems to me that most people are expecting second quarter earnings to come in just fine. It’s the guidance going forward that has the folks on wall street aflutter these past ten weeks. They seem to be pricing in the “foreseeable” negatives into today’s pricing. Whether these prices are a fire sale or not remains to be determined.

Reade more about the market at Tips are for waiters

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