Let me count the vastly more transformational and earlier quantitative funds just off the top of my head: Princeton Newport, Commodities Corporation, Tudor, RenTech, Chicago Research; hell even Soros and the Tigers were more influential and just as quantitative. DE Shaw was an early mover for certain kinds of automated trading, but if he had never met Nunzio Tartaglia (and basically stole his secret sauce -hey at least they mentioned Morgan Stanley), he'd still be writing shitty papers on parallel computing models at Columbia. He got lucky, and was able to take advantage of his luck, but he is also a garbage human being who has made the world worse[1][2]. His company once offered me a job: I told them to go fuck themselves, and the only better "no" decision I made was saying no to Bear Stearns in 2006.
I actually see shaw as a bit of a hero, since he basically made his money, said something along the lines of "finance is stupid", and then took all that money and started working on biochemical problems that actually solve real life medical issues. Is he eccentric? Sure but so are a lot of the other wall street elit types, many of which have much less real contributions to the world. So not sure where all this hate is coming from
> he is also a garbage human being who has made the world worse
His company went on to create Anton and actively pursues computational chemistry and drug design research. To me, that's an active (and expensive!) attempt to improve the world. The extent of your bitterness towards him seems wholly unjustified to me.
I suppose you could question how the current state of pharma is geared toward creating a better world beyond creating high quality well established products.
In my opinion drug design to treating illness ect will likely undergo multiple paragdim shifts that will shift beyond chemistry and blend into immunology, nanotech ect.
It's not clear to me how donating 10s of millions of dollars to prestigious universities in order to secure a grand total of 2 spots for his kids has made the world worse.
It’s clear to me that the message that a sufficient amount of money let’s you subvert the rules weakens trust in society and increases justification for an every man for himself strategy.
Subverting the rules doesn’t equate to making the world worse.
Assuming just $10m for 2 of his children to be admitted? That’s enough to fully fund the education of ~50 low-income students [1].
I personally believe we should turn these quiet donations into a public bidding process instead to maximize what colleges can receive and ensure it’s done in as fair of a way as possible, but that’s separate.
[1] It’s important to distinguish that the donations went to the university, not a corrupt official at the university. This is actually productive.
Maybe the universities could start offering to give rich people's kids automatic 4.0s, too, if they donate twice as much. Sure it undermines the system and acts as an insidious poison into the idea of meritocracy, but think of how many scholarships it could pay for!
It's a shame how easily the reputation of the US higher education is being ruined. If an entity that already has billions of dollars in endowments can be corrupted, what chance does society have?
>[1] It’s important to distinguish that the donations went to the university, not a corrupt official at the university. This is actually productive.
It's important to distinguish that these are not donations, they are payments in exchange for admission into the school. But good thing that they can be considered donations, so that it's gives the "donor" a tax benefit, another subversion of the rules available for those with money.
I think all donations should be anonymous, and there should be no tax benefit for donating. That's the only way to prevent quid pro quo and the inevitable plausible deniability defense. I don't see why anyone would have a problem with anonymous donations, unless they are intending to get something in return.
Those two spots could have gone to students who actually were more qualified and talented. If this is done on a large scale many gifted students cannot get the education they deserve and need, so the world loses out on lots of talents hence making the world worse.
Seems like it just weakens the reputation of these universities. It'd be nice if someone like US World and News Report made a public point of dinging schools doing some of these things.
The reputation of the top universities are already a place where the talented and motivated can mix with the well funded. All of this is well known in the circles that it matters in. You want your kids to mingle with the best and brightest, or the most well funded, as both traits provide enormous utility.
On the contrary, a donation of 10s of millions of dollars allows more people to go to those universities, not less, and actually helps reduce inequality, by increasing the amount of people who can go to these places.
Tangentially: I've heard that Nunzio Tartaglia -- despite the astrophysics background -- was basically a banker installed by MS to keep a leash on the quants at APT. He took over, pissed off Bamberger, and that set off the stat arb diaspora.
Is there a good book of history on this? I read a bit about it on the Barton Biggs' book Hedgehogging, but there were only two chapters. I feel like Process Driven Trading Partners must have some great stories that can fill multiple books.
"The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution" discusses the lineage of Shaw, Tartaglia, and his predecessors briefly. I think some more academic texts on Pairs Trading and Stat Arb will mention the PDT team as well.
> but if he had never met Nunzio Tartaglia (and basically stole his secret sauce -hey at least they mentioned Morgan Stanley)
I always have my skepticism when I heard of "he stole my source code" kind of complaints. If you were so good and you invented the whole thing, and he was so bad that he had to "steal your source code" in order to just get started at the time you were already ahead in the game, why can't you beat him?
Also remember that Shaw’s main metric for “elite” is one’s SAT scores, regardless of one’s age, skills, or experience. It’s sort of amazing that Bezos didn’t continue this at Amazon.
I still remember having to answer what my SAT scores for my DESCo job in 1997. It was odd, but I have to say that I loved working at DESCo and even our 10th percentile strongest colleagues would likely have been considered strong at most places. It is far and away the place where I had the most uniformly strong colleagues. Our receptionist, office manager, and lead recruiter (for a small satellite office) all had PhDs from very well-regarded universities. It was crazy.
I am happy to hear you enjoyed working there, but personally I consider it a failure of recruiting to hire PhDs for reception and office management. I can see a vague case for the lead recruiter to have one if they're recruiting PhDs, I guess, but even that seems like overkill.
It's a branding strategy. The psychology of Veblen goods is fascinating. See example below.
"Things changed in the 1960s, with McKinsey leading the way. In 1965 and 1966, the firm placed help-wanted ads in The New York Times and Time magazine, with the goal of generating applications that it could then reject, to establish its own eliteness."
If you need ads to attract applicants in the first place then you're the opposite of elite. Your lobby should be stocked 24/7 with hungry applicants without you even having a brand presence. That's elite.
That essay [0] was neat, wonder if there’s a database that keeps track of PR firms and the articles written from different journalists/newspapers to study marketing submarine?
Thanks, this seems like an important phenomenon, someone must be studying this somewhere, wonder if there are other terms or phrases used to explain this? Would this fall into puff pieces?
In 2016 there were 5 PR firms for every reporter [1]. Really that means there were 50 PR firms for every reporter (most of whom work for PR firms). Really, the easy thing to do is count the honest reporters using graph theory or whatnot. We can do this. There really are not that many.
If I am not for myself, who is for me? When I am for myself, what am I? If not now, when? (Pirkei Avot 1:14)
While I do understand why they are willing to shell out tens of millions for good spots for undergrad, it also makes me ask: Why not just let them to to wherever they can get, on their own accord, and then just help them to land whatever jobs they can.
Surely, if you're the kid of Shaw, you:
A) Are driven and disciplined enough to get into some Top 20 school on your own - especially with all the private tutoring and what not.
B) Will be able to land whatever prestigious white-collar job through connections. And from there, getting accepted to some prestigious B-School is a lot easier.
Sure, I understand that they want to minimize risks because they value education - but I also have a feeling that it comes down to bragging rights.
But still...you can do a LOT for that kind of money.
Is David Shaw brilliant? Absolutely. Has the quant/technology revolution been a positive development for financial markets? No doubt.
But secondary trading is still a zero-sum game. Firms like D.E. Shaw are profit maximizing and extract a huge amount of value from society. Probably less than the old boys club they replaced, but probably much more than necessary. There is a great deal of competition among quant trading firms overall, and their rise has coincided with electronification of markets, tighter spreads, lower commissions - all good things. But if the forces of capitalism are truly working, you have to wonder why so many firms like these continue to print money year after year (although there have been some new developments-- for example, stock exchanges have gotten much more effective at monetizing their access and data feeds, which has really put the squeeze HFT market makers; still, zero-sum game though).
There's no good reason we can't have it all: efficiently-priced modern-technology financial markets without these huge rents being pulled out. And I shouldn't pick on quant firms specifically - every layer of the system extracts its share, and I'd argue brokers and exchanges are much worse since they're fiduciaries and semi-regulatory entities, respectively, and riddled with conflicts of interest.
Disclaimer: former co-founder/head quant at IEX (Flash Boys), current CEO of Proof Trading (YC S19)
How exactly do you decide how much is necessary?. And is there any reason to think that they are extracting value from society rather than other market participants?
And is there any evidence that having one company make a billion dollars from other market participants is somehow worse for the system than having a million companies make a thousand dollars each?
The low spreads and liquidity are not some fact of nature - I’m pretty sure that a lot of it comes as a result of many people competing with each other to try and make money. I agree there are lot of people trying to screw their clients to make money in both the retail and the institutional markets (I used to work in sales for an I-bank). And I agree that those areas with conflict of interest are badly policed and do NOT help market structure or society as a whole. But my impression is that DE Shaw is a prop trading firm - where is the conflict of interest?
It is hard to formulate a coherent opinion about the optimal level of activity $W without discussing the concrete details of activity $W.
There is a saying in the Beltway, "those who talk don't know and those who know don't talk." The same is probably true in this line of business.
It is hard to determine whether our financial markets do enough/too-much of whatever it is that tier-one liquid market buyside quants do. They probably do a lot more than you'd expect.
GP is in agreement with you on the last point, and the highlighted conflicts of interest are not related to DE Shaw:
"brokers and exchanges are much worse [than DE Shaw] since they're fiduciaries and semi-regulatory entities, respectively, and riddled with conflicts of interest."
I understand that - what I'm hoping is that dcaisen will clarify what exactly their concern is with DE Shaw. I'm claiming that other than conflict of interest, having firms like DE Shaw make lots of money is not a problem. I'm hoping that if there is some non-conflict-of-interest reason why it's harmful, they'll explain and I'll learn something useful
Oh I don't disagree with you, and I think your points are all very valid - a firm like DE Shaw is much less bad than the market participants with active conflicts of interest. Perhaps my rant is a bit misplaced on this thread.
Some basic arguments against are:
1. They are providing a service that adds no (or at least dubious) value to society. And again, I do think it's possible to have highly liquid, highly efficient markets where the amount extracted by prop trading firms is much smaller. But you're right that's an arbitrary statement, and who am I to say it's not already down to a reasonable level.
2. They do extract a lot of value. Maybe they're just siphoning it from banks and other hedge funds, in which case kudos (not to pick on hedge funds - they're just not a sympathetic victim). But probably at least some of it is extracted from mutual/index funds, pension funds, etc. Not the worst thing in the world and good on them for figuring out ways to make money, but it doesn't feel great.
3. Opportunity cost to society of the brilliant folks who wind up working there. Meh.
Way less bad than conflicted parties hurting their clients for their own gain. But I don't think they should be glorified either.
I'll let dcaisen speak for himself, but I don't get the impression that he believes DE Shaw is actively harmful; just that the service they provide (market liquidity, low spreads) comes at a relatively high cost. "How?" is a perfectly legitimate question, and it looks like a problem he's actively working on as the CEO of Proof Trading.
No, since stocks can uniformly rise. Thus I can trade a lower performing stock (which can still increase) for a higher performing one, so that was not zero sum for me. The buyer could have turned cash into those stocks, so he could have gained too.
So we both gained from the transaction didn't we? Doesn't seem zero sum while stocks grow, and there's no mathematical requirement them to return to those previous prices.
This also doesn't cover value for price signalling, the empirical fact these patterns have returned significant money to investors through lower spreads, or the fact that primary markets don't function without functioning secondary markets.
Calling it zero sum is a bit shortsighted I think.
> you have to wonder why so many firms like these continue to print money year after year
They haven't. A few have - most don't do so well. Buffet's hedge fund bet ended pretty spectacularly. As a group hedge funds have underperformed index funds for some time (if not always, net of costs), so they're not extracting money, except from investors.
Net gains from the top 20 or so funds are around $20B annually, while managing a few trillion in assets. This seems like an incredibly small amount of gain for the assets managed.
Higher frequency transactions between high frequency traders trends towards zero-sum, or at-least very-near-zero-sum. It's a bit of an edge-case, but relevant for what GP is talking about.
D.E. Shaw is not a high frequency shop. I would be very surprised if their daily transactions was more than 5% or so of their total book.
More broadly, quant shops are not out to place bets on what they think will happen in the next few seconds. They're much more like traditional hedge funds than HFT firms in terms of their betting horizons. It's just that the trades they choose to make on those horizons are generated algorithmically.
So they’re both zero sum and extracting wealth from others? That’s a neat trick.
The firm under discussion isn’t HFT. But both HFT and the firm under discussion trade with everyone; they’re not in some walled off market. As such they provide liquidity, and participate in the same trades as the entire financial system. It’s hard to claim this is zero sum by any means.
With all these ruthless profit-maximizing firms on Wall Street, it's nice that Silicon Valley VCs have given up on maximizing profits since the early 2000s [0]. Gives them more opportunities to focus on making the world a better place.
The standard justification is that these firms provide market liquidity which lowers the cost of capital for all businesses, thus boosting economic growth. But I've never seen a rigorous quantitative analysis. How much growth do they actually cause in the real economy relative to the value they extract?
Being one microsecond faster is worth all the profit, but did the market gain as much with one microsecond less latency as with 1 second or one minute less latency? No. But the payoff for achieving it is just as high, winner takes all to whomever is fastest, so the market will put as much money into shaving off an additional microsecond as a minute, if it makes the difference on being first.
I can see where you're coming from, but it's important to remember that what they are competing on is not only time but also spreads. Spreads have tightened substantially over the past couple decades thanks to these firms [1], which means that the total amount to be made per trade has dropped significantly. On top of that, the landscape has become so competitive that trading firms are now purchasing order flow, which basically subsidizes broker commission fees for trading. This is a huge win for retail investors, as the cost of trading has made it much more accessible -- in the past you would have had to buy many more shares and make a much higher return to offset these additional costs of trading.
It's winner take all for whoever has the shortest path (for something like index arbitrage). There is no value added to anyone if another competitor invests millions in microwave relays or custom hardware parsing to snipe the previous low latency winner and beat them out. It's just wasted money, other than knock on effects of more demand for hardware growing the hardware industry faster.
Rents like 2 percent management fees and 20 percent incentive fees for private equity and hedge funds? Lack of antitrust enforcement of tech firms? Sell side firms and their business models are the least of our problems in my opinion.
You mentioned data in passing - middlemen who extract rents as data purveyors are extracting huge rents and it is largely unremarkable upon maybe because west coast people are the shadiest rent-seekers of all time. At least financial mstket data is mostly not acquired by surveillance of users, though that is changing with the advemt of "alternative" data.
I have heard that quant trading firms build software systems that have sub millisecond response times to data feeds.
Are the signals coming though these data feeds (reports by government agencies, news events, corporate filings) really occurring that fast? Or do the systems simply need to have low latency for responding to infrequent events (infrequent relative to the response time)? Or are the trading systems trading against each other in a kind of feedback loop long after a signal comes in over the wire?
This is a claim that I think you really need to back up with some kind of proof, because it is so central to your line of thinking. All the points in your comment follow if this is true, but they are also all questionable if this is not true.
> But if the forces of capitalism are truly working, you have to wonder why so many firms like these continue to print money year after year
Because so many other counterparties don't continue to print money year after year. An incredibly high number of funds isn't successful. I think you're ignoring survivorship bias.
Wondering what D.E. Shaw did after getting rich? He used his money for building a specialized super computer (https://en.wikipedia.org/wiki/Anton_(computer)) which runs molecular dynamics simulations for drug development. His 2008 computer still runs molecular dynamics simulations about an order of magnitude faster than general purpose super computers in 2020.
I passed a series of phone interviews with DE Shaw and they flew me to NY to interview on-site many years ago. It was for a statistician / machine learning role.
Once I arrived on site they asked me to write a program to rotate a matrix on the whiteboard. The catch was, it had to be in syntactically correct Tcl, a language I had never heard of, which was not on the job listing, not discussed in any of the phone interviews, and not on my resume.
I clarified that I had never heard of that language and no one gave me any information that I had to prepare to answer questions about it and the two interviewers in the room said it was required for the job. I offered to code it in Python but they said it had to be Tcl. I was freaking out at this point, sweating, wondering if I was mixed up with a different candidate.
I said the role I was interviewing for and asked if it was possibly a mistake, they replied it was not and they expected me to write Tcl for that solution.
I thought maybe it was some kind of finance bluster sort of thing, like to test if I would stick up for myself or offer an outside the box idea.
I sat down from the whiteboard and said if they could explain to me the syntax of Tcl I would give it a try.
The interviewers both thanked me for my time and said the next interviewer would be in shortly (I had a printed sheet of a 9-5 full day of scheduled interviewers).
I sat and waited in that room for over 45 minutes, no one came to get me, nothing. Eventually I walked back to the main reception desk area and explained what happened, and the attendant person looked me up on a computer and said all my interviews were done for the day, I was free to go, and they would be in touch. The point of contact was someone named Isaac Torres. I went back to the hotel they put me in which was right across the street, feeling incredibly depressed, and just ordered food and stayed in. My flight was the next evening, but around 11 am before I even left the hotel, Isaac called me to say they were going to pass on me.
It was a weird thing. I wasn’t even mad because it was so absurd, like getting struck by lightning or something. It was like surrealism, irrational.
But I sure did walk away feeling like DE Shaw the company is absolutely fucked internally, and I would never in a million years consider working for them and would try to warn anyone I can away.
Among other things, this is exactly my experience. I was invited to virtual on-site interview earlier this year due to covid19. After the 3rd round, I was told to wait there and the next interviewer would come online soon. Two hours passed, no one showed up. That was it. No response or whatever ever since. And btw, no one communicated with me beforehand what the interview would look like. I asked the headhunter but they had no idea either.
It was really weird interview experience. They gave me the impression that they're really a group of "elite" engineers. It's a general SWE (not quant) interview but they asked quite a bit of mathematics and statistics questions. At some point I can feel arrogance from one of the interviewers.
I'm sorry that was your experience. If that's true it reflects really poorly on the firm. I have considered applying to DE Shaw in the past and I've heard a few stories like this, which have mostly made me stay away.
Wow. It seems kind of bizarre that they would waste their money by flying people in, only to impose hidden criteria later for no stated reason. That's a shame.
Yes they did that, but they had scheduled me for 9-5 on the day of the interview, which doesn’t entitle them to waste my time by having one unprofessional interview session followed by me sitting for 45 minutes and being told I can go. I could have scheduled other things or planned my time differently if I had known it would only last ~90 minutes, or even that it lasting less than the full 9-5 based on realtime decisions was a possibility (it was not described as a possibility).
I agree with you. For that kind of disrespect I would not only need to get paid for hotel and travel, but my time too. And waisting my time costs like 100x more per hour than my normal rate. Seeing as they cheapened out here by only paying hotel and travel, what does that say about how they treat their employees comp wise? Doesn't look good. For that alone I would avoid them like the plague.
I hate to rain on everyone's parade but no one transformed Wall Street. If you saw how most of the banks are run and who is in charge of these places up close there would be a run on the banks. Everyone would be withdrawing their cash and storing it under their mattress.
Because all the computer hocus pocus is obscuring how they make money: they launder arbitrage banks are not allowed to do to their own clients in exchange for a large fee.
There isn't going to be documentation out there, in some pithy Bloomberg article, "Banks have prized relationships with arbitrageurs that help them monetize opportunities that plainly violate fiduciary duty."
Information about how hedge funds work - like information about say how ad tech firms work - is incommensurable with HN's Reddit/Wiki-style way of disseminating knowledge. I hope that information without citations could be tolerated more, I have no dog in this race, I just like sharing knowledge.
Shaw and many hedge funds that have been around for decades acquire smaller arbitrage firms that can be thought of as having "licenses" to perform arbitrage. This portfolio of arb is how they scale to their AUM.
There is nothing actually secret or protectable about what an individual arb firm does to execute the trade. For example a particular HFT trading algorithm. Such firms that rely on actual secrets do not last long and so in a Darwinian way do not wind up in the portfolios of huge funds like DE Shaw.
The arb shops that last a while have permission, from a bank, that depends on a relationship with a real human being, that is exclusive to the firm granted, to launder a particular form of arb the bank would like to do but could not.
For example you're allowed to take a spread as a bond trading desk, but wouldn't you like to sell the bank's bonds instead of its competitors bonds? That's plainly against fiduciary so it "doesn't happen." Instead you go to an anonymous arb firm, for $1m in bonds, and you say, "okay we're going to sell you the bond that is actually ours, you will sell it back to us, here is your fee, now we can sell this bond back to the client and wash the fact that it is ours." Nobody says that! But that is the economics of the trade, why the arb firm can make money for so long, why banks work with them despite seeming to be "parasites," etc. The computers are just part of the hocus pocus of laundering that arb.
Shaw doesn't actually come up with this arb or necessarily source the relationship. Instead it finds the little anonymous arb firm and buys it, and carefully scales the relationship for $1m of bonds with 1 bank to $1b in bonds with 10 banks. The risks in Shaw's business are that you lose the license to arb. The upside is from investors persistently underpricing the ability for Shaw to scale this arb from $1m to $1b. No, they basically pull a rabbit out of a hat every year and continue to scale a particular arb further than people thought was possible.
Also, nobody is going to want to just give Shaw, a bunch of rich people, a bunch of free money. But you can't fight their ability to acquire little arb firms. This is the way.
> Instead you [the bank] go to an anonymous arb firm, for $1m in bonds, and you say, "okay we're going to sell you the bond that is actually ours, you will sell it back to us, here is your fee, now we can sell this bond back to the client and wash the fact that it is ours."
How does the bank make money doing this? Routing the sale of this bond through the "anonymous arb firm" doesn't do anything to the price. If the bank's competitor is selling their bond at 1.00, the bank could directly offer their bond at 0.99 without getting "anonymous arb firm" involved. If the bank routes the trade through the "anonymous arb firm"... what difference does that make? If it shows up on the market at 1.01, the bank still has to give the client the 1.00 bond first, and if it shows up on the market at 0.99, the bank could have just done that itself.
> Instead you go to an anonymous arb firm, for $1m in bonds, and you say, "okay we're going to sell you the bond that is actually ours, you will sell it back to us, here is your fee, now we can sell this bond back to the client and wash the fact that it is ours."
If this was actually how the world's biggest hedge funds work, somebody would have written a whistleblower article by now.
Somebody did write a whistleblower article about D.E. Shaw, it was just about other aspects of their business/affairs [0]
> As soon as most applicants arrived at their first interview, they signed nondisclosure agreements. If hired, they signed more, which may be why former employees spoke with us anonymously
From a skim, that article doesn't seem to suggest that DE Shaw has done anything illegal. In fact, the paragraph after the one you quoted from makes it look like they work hard to stay within the bounds of the law:
> This secrecy and vigilance extended to the company’s extreme caution on legal and compliance issues. One of Shaw’s common sayings, repeated at an annual training session by a compliance officer, was that it was important to avoid risks and legal trouble because Shaw wanted to make sure that his kids could go to college.
You are right, the article didn't suggest anything illegal. It suggested instead a strong culture of NDAs. But again, I think something as illegal as the OP post in this thread suggested would have gotten some folks to whistleblow nonetheless.
Most if not all the highly successful and most secretive quant funds execute hundreds of thousands trades per day...while not considered to be "HFT"...the idea of trading hundreds or thousands positions per second is quite a high frequency.
Most quant shops are not turning over thousands of positions everyday, the trading costs alone would be ridiculous.
But regardless, HFT usually means latency arb, not just trading a lot. There's a misperception that quant funds are making money on slight mispricings, but while I can't speak for all funds of course, this isn't generally true. Quant funds are much closer to buy and hold long term investors than they are to HFT firms.
They aren't measuring the market / order book and then reacting at high frequency. They are reacting at low frequency and then the execution is optimized to minimize losses caused by market feedback.
This is a very important distinction if you hold the view that HFT risks destabilizing markets.
Order flow has been sold for much longer than the more recent commission-free trading trend, which was primarily driven by Robinhood. Robinhood just decided they'd sell order flow without also taking commission.
More to the point: the primary consumer of order flow is market making HFTs, which DE Shaw is not. Stat arb/quant trading firms don't rely on market making rebates for trading profits.
This isn’t true for every firm, but a lot of them do it.
I think it’s bad (it’s weird/unfair), but on the other hand I am happy not paying commission/getting orders filled at prices often a bit better than advertised on my broker’s app, so maybe it’s ok? Idk.
I’d argue it’s not bad at all. It very cleanly aligns incentives in a way that benefits both sides.
Another way to look at it is that there’s an “implied commission”, paid in the form of a perhaps slightly inflated purchase price, that largely doesn’t affect retail investors. And this all works out for quant firms because they make money off this at volume, at near zero marginal cost.
In fact, it’s odd that commission free trading didn’t happen a lot sooner. Etrade, Schwab, etc were rent seekers.
How is it bad or unfair? Everybody wins: you get a better price, the market maker does a trade they're happy with, and your broker gets a little bit of money.
Well “the price” might be totally different if there were no off-exchange orders. But I’m sort of being a devil’s advocate... I agree with your argument in practice since I don’t expect to see such open exchanges anytime soon
You won’t get a worse price than what the exchange says is the price, but that price Is a moving target; if all competitors could see all orders, the price would move. Idk if it makes a difference on average but it is a difference
Amazing book. Truly astounding sequence of events.
Greatest irony of all, they named their firm "Long-term Capital Management", while taking hugely leveraged short-term positions ($1 trillion dollars worth of derivatives backed by about $100 billion or so assets) that were beyond the understanding of anyone else. Didn't last 4 years before they blew. They did show 40% annual returns when they started and I guess that's what kept them going without much regulation. But man, did they crash hard. Investors who were returned their money after a year or 2, and those who were turned down from even investing must have thanked their Gods for saving them from absolute destruction.
There is another book by Michael Lewis (who also wrote "The Big Short") called "The Liar's Poker", where he talks about his time at Salomon Brothers and how they collapsed in a very similar fashion. Highly levered derivatives with a magic formula that has worked well (so far..). It's fascinating how they were allowed to do what they did. Open gambling with client's money, and no repercussions on loosing it all. "Blowing up a customer" was apparently common and chalked up to a rookie's mistake. "Baptism by fire". How did the rookies even get access to millions of dollars of money to bet on crazy derivatives!!
I feel that every time a major upset in the financial markets lands on us, it is because some group of really talented people managed to convince everyone that they discovered something that no one else has and have "cracked the market" by showing consistently high returns for a period of time, and gain access to huge pools of capital. Only, after a few years the market turns around, showing a side of things that they did not take into account and the whole thing goes belly up, market crashes, loads of people loose money, mostly its everyone else but that group (leverage, borrowing, access to someone else's capital etc).
And because everyone who was supposed to keep them in check did not do it because despite it being their job not to, they did take them for their word, they try to cover it all up by paying the very people who caused all the trouble and who were supposed to watch out for all this.
Banking world seems to have a lot of conflict of interest all around. It is much better now, with lots more rules and regulations, but it is still there.
There have been perhaps a few. One obvious one is LTCM whose board of directors included the mathematical creators of a highly used option pricing theory..
LTCM is example of hubris, not failed mathematical models. If LTCM was given enough credit to stick it out, they would have made a killing. Of course, they didn't last that long, but it's not like their models were completely wrong.
That's mischaracterizing what happened. They were always winning, but hugely over-leveraged (they practically dictated the terms of their credit), and couldn't weather a regime change (LB).
I'm not quite sure what you mean, but if you can't reduce the size of your position without losing your shirt, you're not really winning; and if staying in your position requires you to put up more money than you can raise, you've hit the limit I was referring to. No one can expect to keep finding money to support their trades until they turn profitable.
EDIT: Maybe you mean that they didn't try to make a larger bet after they got in trouble? But whether they needed to make a bigger bet or whether their existing bet was already too big, it's still the same issue; the only way to avoid liquidation is to expand the use of credit, which hits a limit at some point.
I interpreted your comment as an allusion to the probablistic fact that, given an infinite bankroll, you can exceed any profit, in time, betting on coin flips.
I tried to point out that LTCM had a very reliable and profitable trade on the basis anomalies they identified, which, combined with their imprimatur and aggressiveness, enabled the leverage that enabled them to dig their own grave (they ended up with nearly the same leverage as Lehman).
I worked on a team with OG LTCM and Lehman MBS quants, and they had some very interesting stories parallel to the standard narratives you hear about these events.
Seeing that he worked with some LTCM quants, I would imagine he knows more about the situation than you do. The kinds of ineffiencies LTCM were exploiting made sense, it's just during times of stress the historical correlations between pairs start to break.
But, hey, I'd bet on coin flips all day long if I was given favorable odds.
I don't know, the "it's just" part kind of indicates that the real probability of things remaining correlated were not what LTCM thought they were, to the point where they couldn't afford to stay in the position long enough for things to snap back. I don't buy that as "always winning".
No, he's right. The problem with taking huge spread positions is that mark-to-market p&l can be volatile and illogical, and if you can't recapitalize, you won't be able to hang on until the spread goes your way.
Highly recommend Poundstone’s Fortune’s Formula. Claude Shannon and Ed Thorp. This is the book (along with A Non-Random Walk Down Wall Street by Lo and MacKinlay) that got me interested in finance.
Rather more precisely, Simons hired Ax to pursue a dream he'd first had with Baum in the 70s, using math to predict markets. Ax had some success, but the Medallion Fund didn't take off until after he left. Berlekamp gets a little credit, but wasn't really there long enough to have major impact. If you want to know who did the real work, figure out who Simons paid the most.
Yeah, came hear to post this. Recently read his autobiography "A Man For All Markets." Simply an incredible and creative man. From beating blackjack to roulette, to discovering Black Scholes before Black and Sholes.
PNP changed the game like no other. Really sad Giuliani and his thugs took him down.
Thorpe is epitome of the best of humanity: creative, fearless, and tenacious. His life story was really inspiring to me.
> Thorpe is epitome of the best of humanity: creative, fearless, and tenacious.
I guess we see what we want to see.
There are a lot of little red flags littered throughout the book. One thing that rankled me was his assertion that he independently discovered Black-Scholes before Merton/Black/Scholes and offered as evidence a chart that post-dated the original paper. There's a lot of stuff like that in the book.
Don't get me wrong, this is a person with many admirable characteristics. Just don't drink the Kool-Aid.
Ed Thorp's "Beat the Dealer: A Winning Strategy for the Game of Twenty-One" is one of the best books ever written about quant trading...despite not being about quant trading.
I am confused. This article is very positive about DE Shaw. Nonetheless, it says DE Shaw is a "$47 billion firm [assets underlying management (AUM)], earning its investors more than $25 billion". That is a return of 53% which sounds good until you consider the firm was started 32 years ago - at which point the compound interest rate is less than 1% a year. I realise the AUM has likely grown over time, but this rate of return is less than inflation at a time when the market has grown considerably. This is a negative return while, per the article, many employees have become millionaires and Shaw himself a multi billionaire. From the article it appears that DE Shaw is good at is attracting assets underlying management and paying themselves well without providing value to their customers. What have I missed?
Let me count the vastly more transformational and earlier quantitative funds just off the top of my head: Princeton Newport, Commodities Corporation, Tudor, RenTech, Chicago Research; hell even Soros and the Tigers were more influential and just as quantitative. DE Shaw was an early mover for certain kinds of automated trading, but if he had never met Nunzio Tartaglia (and basically stole his secret sauce -hey at least they mentioned Morgan Stanley), he'd still be writing shitty papers on parallel computing models at Columbia. He got lucky, and was able to take advantage of his luck, but he is also a garbage human being who has made the world worse[1][2]. His company once offered me a job: I told them to go fuck themselves, and the only better "no" decision I made was saying no to Bear Stearns in 2006.
[0] http://paulgraham.com/submarine.html
[1]https://nymag.com/intelligencer/2019/09/david-e-shaw-college...
[2]https://www.propublica.org/article/hedge-fund-billionaires-d...