Some say that Silicon Valley is the new Wall Street, but could there be deeper reasons why tech companies like Facebook compete with banks like Goldman Sachs for engineers? It used to be banks that attracted the brightest. Before the financial crisis of 2008, Wall Street loved to hire mathematicians, physicists, and even rocket scientists to create innovative – and often very complex – financial products. They would design new derivatives and investment strategies and run quantitative risk models to project how these instruments would perform into the future. This so-called ‘financial engineering’, — a near-scientific work — is something that we now like to blame as one of the reasons for the great financial crisis in 2007–2008. The engineers wouldn’t go to banks just for the money. It
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Some say that Silicon Valley is the new Wall Street, but could there be deeper reasons why tech companies like Facebook compete with banks like Goldman Sachs for engineers?
It used to be banks that attracted the brightest.
Before the financial crisis of 2008, Wall Street loved to hire mathematicians, physicists, and even rocket scientists to create innovative – and often very complex – financial products. They would design new derivatives and investment strategies and run quantitative risk models to project how these instruments would perform into the future. This so-called ‘financial engineering’, — a near-scientific work — is something that we now like to blame as one of the reasons for the great financial crisis in 2007–2008.
The engineers wouldn’t go to banks just for the money. It was interesting work, too. But, this ended in the years after 2008, when the aftermaths of the global financial crisis hit banks hard. They had to bow to regulators, and journalists would love to point out that the best and brightest now go to Silicon Valley startups, not banks.
But those startups have turned to giant multinationals with their own regulatory problems, and the backlash against Wall Street is beginning to ease under Trump.
And amid all of this, the race for the best talent seems to be very much on: who gets the best talent? The banks or the FAANG complex?
Facebook Pays Through the Teeth to Find the World’s Top Tech Talent
According to Bloomberg, Facebook is set for a clash with the largest of Wall Street giants — Goldman Sachs. And in order to win, Facebook doesn’t hesitate to go to New York, the home turf of world’s bankers. Nor does Facebook pause at the compensation. In fact, Facebook overpays banks by a wide margin (avg. salary of $150,000 for a software engineer vis-a-vis JPMorgan’s standard of $100,000 according to data compiled by LinkedIn).
It is not just Facebook, either. Other well-known giants of technology are boosting their NY presence as well. Alphabet has reportedly more than 8,000 and Amazon around 5,000 people employed in the Big Apple. The giants of banking, in the meantime, spend more than ever on technology (BoA has said it spends $10 billion per year on technology, and JPMorgan Chase & Co. $11 billion per year for around 50,000 technologists).
While all of this could seem like a contest for the coolest company, and banks are arguably losing on that front (no, bringing ping pong tables to the offices just won’t cut it), the reasons why banks are pursuing technology so fiercely may be much more strategic and profit-driven. There is only so much talent out there, and everyone has to make sure that they get the best. Recruiters say that engineers are overwhelmed by the choices they get.
For the tech giants, hiring the best and brightest is just part of the long-term play, as they continue conquering other industries. Most recently, Facebook has decided to enter the video streaming device market, sending Roku’s share price sharply lower, and let’s not even get started on Amazon’s terrorism of many industry segments.
And they have room to play too. Giants like Facebook don’t hire engineers based on some narrowly-defined job descriptions. Instead, they fight each other to get the best people and then try to find a role for them. Companies like Facebook and Amazon are constantly on the pursuit of AI technologies to improve how they do things, whether that be to stop malicious video postings or to replace human work in their operations more generally. They have to.
Tech giants have grown giant… literally. The FAANG complex turns billions in net income every year, while maintaining a staggering rate of growth at around 20% or more. But, given the extent of resentment that is rising against them, the Silicon Valley darlings are increasingly reminiscent of banks a decade ago, and they have to find clever ways to avoid falling into the same trap: structurally higher costs and lower profitability due to hostile regulation. Already, they’re paying billion-dollar fines on such a common basis that they may have to reclassify them as standard operating costs. So you see, tech giants need clever people.
But what’s in it for the banks? Why do they scramble to hire expensive engineers and computer scientists? After all, the age of financial engineering is over, right?
Well, no. Let’s look at Goldman as the antithesis of Facebook, since we focused on that company in the previous part of the article.
Revenge of the Banks
Goldman’s trading division is planning its biggest hiring spree in years, and most of the new hires should be coders. Many analysts would complain about the underperformance of banks’ trading divisions after 2008, but things have been evolving, and rather in the same direction that the tech companies are heading, it seems. Human traders are being replaced with automated solutions on a large scale.
Marty Chavez, co-head of securities at Goldman, spoke about how things are changing in his recent interview. He thinks that many roles are simply going away as multiple tasks will be performed by a single person and a computer, or just the computer. The challenge (and opportunity) is how to make everything programmable. He also didn’t avoid speaking about blockchain, saying that ‘digital assets are a place we all go’.
Blockchain could have easily been a much larger part of that interview because ultimately it is this technology that allows us to create ‘programmable’ securities — stocks and bonds that have inbuilt rules and actions = security tokens. The first phase of the automation on Wall Street was about replacing people with computer programs. The second could be about reinventing complexity.
Think about it. When Wall Street reaches the point that human factor is reduced to an absolute minimum because computers perform most of the work, hundreds of million dollars of trades will become (and to a large extent already are) razor-thin margin transactions executed for clients, who will be choosing ‘shops’ based exclusively on price.
And yet, a lot of the profit will continue to be lost on the old infrastructure supporting how financial markets work today — the convoluted network of brokers, exchanges, central security depositories, clearinghouses, and custodians. When someone buys or sells a stock, that order is executed through a long sequence of steps managed (although somewhat chaotically) by middlemen and third parties.
Each step of the stock transaction, from trade (sending order to the exchange), through clearing (moving stock from one custodian to another) and settlement (cash transfer) to stock servicing (safekeeping, dividends, voting) involves multiple parties, each of which has to communicate with another in a complex network. Each party maintains its own version of truth in its own ledger.
Securities issued on blockchain are, in contrast, computer code that can automate away a lot of the functions of the middlemen. Imagine a stock with automated dividends. Sounds good, right?
Now let’s take this thought a step further.
Security Tokens Aren’t Just a Gimmick
The complexity that securities built on blockchain could accommodate is immense. The pre-2008 era saw the rise of financial derivatives — financial products that derived their value from an underlying asset and a relationship or an optionality built on top of it. This level of complexity means that they are difficult to evaluate and understand, but also that they are not transparent — it is not easy to immediately see ‘who owes who’. Derivatives are the apotheosis of financial innovation: they are an excellent vehicle for speculation, but just as importantly, they are an important instrument for businesses of all sizes to hedge their financial risks (FX, counterparty, elements, etc.).
Programmable securities are an ideal basis for derivatives. Imagine encoding elements of a financial derivative into security token so that execution of complicated contractual arrangements on top of a stock or a bond can be fully automated. The ‘manual’ work involved in managing instruments like options or swaps (exchange of cash flows, legal contract review to fulfill obligations) could be entirely removed.
Financial innovation will never stop, and it may soon enter its next phase. Security tokens are not a gimmick. It will take years before the existing historic infrastructure supporting financial markets gets updated (or replaced) to facilitate programmable securities — security tokens. In the short-term, it can be expected that the industry will undergo a risky phase of duplicate infrastructure when blockchain elements will be built into existing processes and institutional steps to conform to the existing regulatory framework.
Even now, however, security tokens are a powerful tool to enable the opening of private markets and assets to a much larger audience of investors.
About the author: George Salapa is the co-founder of bardicredit (BC), a Swiss turnkey tokenization service. BC is helping fund managers and entrepreneurs to use tokenization for easier capital formation. Before BC, George was in consulting (PwC), banking (Sberbank), and tech (smart data Braintribe). In the past, he co-founded a smart city App (Shout Platform Ltd) and wrote for Forbes US as a contributor.