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Daniel Nadler is a Ph.D. candidate at Harvard University and co-founder of Kensho, a provider of user-friendly analytics software for capital markets, in partnership with Nasdaq OMX FinQloud.

Follow Daniel and his company on Twitter at @DanielNadler and @Kensho.

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Trading Bonuses for Bytes: The Wall Street Brain Drain

December 05, 2013 at 6:00 AM EST

The young man sitting across from me at the desk opposite mine had what many of his classmates wanted. Twenty-two years old, a fresh graduate of Princeton University in economics, he had worked as an analyst for Goldman Sachs Group by day and was living its charmingly attendant party life by night. Midwestern-born and now a denizen of a Manhattan apartment, he happily thought himself a sort of pilgrim come to his modern Babylon, a glass island audibly humming with all the imagined sensual pleasures of drink and companionship that the glow over its stalagmite towers — still visible from his kitchen in the earliest hours of the morning — promised.

Why did he want to throw it all away and work at my Cambridge, Massachusetts–based start-up? The town has seen few succulent scandals since John F. Kennedy graduated Harvard College, and the only place a Gatsby might presently be found is in the local movie theater — were it not recently closed for lack of demand for contemporary cinema. (Another theater down the street, specializing in Casablanca and It’s a Wonderful Life reruns, is still open and thriving — you can’t make this stuff up.)

Wall Street is undergoing a brain drain to tech start-ups as it struggles to retain top talent. In the past the financial industry attracted the best and brightest from among the Ivy League and other top-tier institutions. According to a September Wall Street Journal op-ed by CME Group executive chairman and president Terry Duffy, in 2008 40 percent of Princeton’s, 28 percent of Harvard’s and 26 percent of Yale’s graduating classes headed to Wall Street. Since the financial crisis, however, those numbers have dropped considerably across each institution, with graduates often opting for the technology sector instead. Recent graduates are flocking to start-ups in particular. “Historically, Wall Street has been a haven for young people who are passionate about changing the world with a powerful idea,” writes Duffy. “Now it seems that those young people are much more likely to head for Silicon Valley.”

The trend has now spread to MBAs: In the past year — even as Wall Street saw one of its best bull runs in history — elite business schools have also seen their graduates migrating out of finance, trading bonuses for bytes. According to another Wall Street Journal article: “Just 27 percent of Harvard Business School graduates took jobs in finance this year [2013], down from 35 percent last year. That figure dropped to 16 percent from 27 percent at the MIT Sloan School of Management. And at Stanford Graduate School of Business, historically a haven for digitally minded graduates, tech companies overtook financial services for the first time this year, with 32 percent of the class accepting tech jobs and just 26 percent heading into finance. Two years ago, those figures were 13 percent and 36 percent, respectively.”

CME’s Duffy attributes some of this migration out of the financial sector to the damage Wall Street’s reputation sustained during and after the financial crisis. With more and more graduates heading to Silicon Valley, Duffy fears the financial industry has lost the ability to connect with young talent. “Those of us who work in finance should try to show students that the financial-services industry offers meaningful work, with tangible benefits for society, in addition to the possibility of a good career,” he wrote. “We have to make the case to young people that if you want a remarkable career at a company with integrity that helps people and influences the world, then come to Wall Street.”

Financial institutions’ losing some of their best brains to Silicon Valley is nothing new. After graduating from Princeton in 1986, Amazon founder Jeff Bezos worked as a computer programmer for D.E. Shaw & Co., arbitraging his way up to a cushy vice president title at the elite hedge fund firm, only to abruptly depart in 1994, free-shipping himself and his wife to the West Coast (he took a cross-country drive from New York to Seattle, writing up the Amazon business plan on the way). Jimmy Wales, co-founder of Wikipedia, started his career at a Chicago-based futures and options trading firm (after beginning a Ph.D. program in finance). He published academic papers in “option pricing theory” before leaving finance for good during the 1990s tech boom to start an Internet web portal and later Wikipedia.

But despite efforts to lure graduates back to Wall Street, the brain drain from finance to tech is accelerating, and if present trends continue, the future Amazon and Wikipedia founders of the world will likely not even begin their careers or do brief stints in the financial sector. Start-ups allure elite graduates with a logic indigenous to Wall Street but perhaps less applicable to it today than to Silicon Valley: risk-adjusted returns. The country’s most sought after graduates can put in two to five years at a start-up after graduation, and if it does not turn into the next Amazon, Facebook or Twitter, a tier-1 bank will still welcome them — with all their additional entrepreneurial experience, risk inclination and demonstration of intrinsic motivation.

And if, on the other hand, the new venture does work out? Whereas Bezos was surely taking home a plump yearly bonus from D.E. Shaw, his current personal stake in Amazon is a little bit ahead of the entire value of assets under management by all of D.E. Shaw — hard to take that home as a Wall Street bonus. And even if you don’t go from the trading floor to founding the next Amazon, or even founding any start-up at all, simply being an early employee at a tech start-up can come with a higher probability of a “life-changing exit” (as it is called in Silicon Valley) than the year-to-year bonus routine at Wall Street’s largest banks: The first 1,000 employees at Facebook became millionaires (including a lucky painter who crafted the mural in the company’s first offices and took compensation in options as opposed to cash). In the 1990s Silicon Valley was famous for its janitors driving Ferraris.

The brain drain from finance to start-ups might thus be impossible to truly limit or reverse, as it forms part of a deeper sociohistorical structural trend. Finance attracts and rewards intelligent risk-taking and hedging; in terms of our current global macrohistorical cycle, there are perhaps few better examples of that strategy than leaving New York City to drive across the country to stake a claim in the Wild West that is still the Internet. As Bezos remembered asking himself before leaving D.E. Shaw, according to a 1999 profile in Wired magazine, “When I’m 80, am I going to regret leaving Wall Street? No. Will I regret missing a chance to be there at the beginning of the Internet? Yes.” Today one does not even need to leave the East Coast, as thriving tech scenes in New York and Boston have shown.

As the social-cultural-political-technological revolution of our era, the Internet is still the nebulous economic star that might someday make the Industrial Revolution and the railroads seem like mere overtures. For an industry that teaches its best and brightest to hedge, finance will continue to have a hard time persuading sharp young graduates not to purchase the ultimate put protection of this professional generation: time with technology, and a stint at a start-up.

The financial services industry must convince the next generation of technically and entrepreneurially oriented young professionals that speedboats of experimentation, innovation and disruption have a home within its slow-moving fleet. Some of the oldest and most established firms in the industry are at least trying: Just last year the New York Stock Exchange launched Big StartUp, an initiative designed to connect young companies and entrepreneurs with corporate America, and Jeffrey Sprecher, the CEO of the IntercontinentalExchange, which just bought NYSE Euronext, said the 221-year-old exchange itself “must act like start-up.”

But what about striking directly at the need for large financial institutions to act as a platform for emerging technology companies to build upon? In Silicon Valley they call it an ecosystem, and it’s the most important and powerful thing you can build (think Facebook and Twitter, upon which so many other companies, such as Zynga and Datamnir, respectively, have built their entire businesses). A good platform allows new companies to emerge by leveraging the advantages of the host institution’s software environment, to the mutual benefit of both companies (Zynga was made possible by Facebook, but Facebook benefited by having so many people remain engaged for longer on its platform as they played Zynga games within Facebook).

Nasdaq OMX is building just such an ecosystem, having launched FinQloud last year, a secure cloud computing platform designed exclusively for the financial services sector that helps firms — such as start-ups — reduce the costs and complexities associated with the stringent infrastructure management, regulatory and security requirements of the financial industry. In other words, Nasdaq is removing what was previously a major barrier to entry for start-ups in the financial services industry: the inability to make the expensive up-front fixed-cost investments in the security and compliance of their system, such that it could actually be used within the highly regulated walls of financial institutions.

Although surely first steps and early starts, industry initiatives such as these — which take meaningful steps to convince young entrepreneurs that innovation and disruption have a home within financial services — should be not only welcomed but also saluted. They are veritable buoys upon which the world’s most axiomatic industry can stay afloat of technological change and generational social transformation.

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Nothing new here; it's typical cyclicality. Happened in the late 90s tech boom. This phenomenon also coincides with tech IPO riches, which have seen a resurgence in recent years with FB, TWTR, FEYE, TRLA, etc. The moment the ability to get extremely wealthy "overnight" becomes a lot harder, Wall Street will once again regain hiring share.

Jan 17 2014 at 1:31 PM EST

EG