Name the confounder: Bloomberg terminals and desk PnL

Question

A COO notices that across the firm's trading desks, desks with more market-data terminals tend to generate more PnL. She suggests buying every desk extra terminals to lift profits.

What third variable drives both the terminal count and the PnL, making the correlation misleading? Name it and explain.

Accepted Answer

The confounder is desk size, the number of traders and the capital allocated to the desk. A large desk has more traders (so more terminals, roughly one per seat) and deploys more capital, which produces more PnL. Desk size is a common cause of both. Terminals do not create profit on their own; both the terminal count and the PnL scale with how big the desk is. Why buying terminals will not help. Adding a second terminal to a trader who already has one does nothing for capital or headcount, so PnL will not move. The correlation runs through desk size, so it says nothing about the marginal valu…

Name the confounder: Bloomberg terminals and desk PnL

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