7 reasons why you shouldn’t trust Wall St

2 May

1. Investment banks are positive carry, that being, they have a bias to go long. Generally, more money is made going long than short. They have significantly more investments that are successful if markets perform than when markets falter.

2. They garner the bid ask spread as market makers so are on both sides of the trade.

3.  Sales teams are interested in deal quantity, more trading and more products=more money. This can compromise quality and increase risk profiles despite mitigation tools and offsetting trades that are intended to hedge.

4. Many financial products are warehoused so marks-to-market are disproportionate to reality, in order to favour the bank (in the event of a resale), as far as is reasonably possible, and beyond.

5. Different units within the banks have competing interests which results in unintended consequences.

6. Employee compensation is still directed towards short-term performance and end-of-year bonuses; the fear of staff exits reinforces this culture.

7. Performance is measured on a quarterly basis which drives a very short-term phenomenon and encourages the rampant usage of asymmetric information i.e. fraud.

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