Morning Coffee: The young hedge fund traders who made $150m in three months, or not. The new hottest market to make money as a banker

efinancialcareers.com:

It’s an unfortunate secret of the trading world that accounting for profitability is rathe more of an art than a science.  Trades happen as part of portfolios, they have funding costs and collateral requirements, and recognition of the P&L is only rarely a straightforward matter of selling the position and counting the cash.  There’s always scope for “Hollywood accounting”, under which the question of whether something made a load of money or barely broke even depends on who’s asking.

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It's rare to see quite as big a gap as the one evident in the current Jane Street litigation, though.  According to Jane Street, two young traders, Douglas Schadewald and Daniel Spottiswood cost them $150m in lost profits for the months of February and March alone when they went to Millennium.  The 26- and 30-year old prodigies regard this as “reckless speculation” and “not only wrong but impossible” and say that for the year to April, they’ve only made $4m, actually.

Obviously one side has the incentive to maximize the pair’s profitability, while the other has the immediate incentive to minimize it.  But it’s possible that they might be more consistent than they look. Simply by adding a bit of price competition, it’s possible that the trade itself has become much less profitable now that it’s no longer a monopoly.  So it might be the case that the main effect of Schadewald and Spottiswood’s move has been to hand $146m back to Indian retail options traders....

Separately, if you want to know where banks are really making money now, don’t listen to what they say, watch what they do.  In particular, look for the places where banks are doing things which they usually really don’t like to