Math Whiz Trades Without Humans

Lots of exchanges now capture that themselves.

It means that it’s no longer profitable for the vast majority of firms that used to do latency arb. Most of those firms have either gone out of business or managed to discover less obvious signals

Impossible to really say without splitting RenTech into its different funds (you're probably referring to Medallion) and knowing what the underlying strats are. But at a high level the difference between MMs and quant funds are AUM which means different time horizons. An MM might have a time horizon measured in mics to seconds, and might be focused on micro market analysis like the balance of order book over the next 1,000 microseconds. RenTech (likely) can't deploy all of their capital in these types of strategies so they focus on strats with better liquidity and almost certainly longer time horizons (minutes to hours and days, possibly weeks for more CTA style strats). And at the opposite end of the spectrum, Berkshire can deploy tens of billions in a single trade, but that means an investment horizon of years to decades.

At that point SEBI (SEC equivalent) didn't permit exchanges to do it and were in the process of forming co-location guidelines, but this exchange went ahead and gave preferential treatment to few traders.

Well if we’re averaging, sure. But that’s not what the parent is talking about. Moreover, what you’re describing isn’t a HFT strategy, it’s an investment strategy.

As I explained, he said it was none of this.

Just my 2c but I think RenTech's edge is hiring.

I think people assume that because you hire all these brilliant people that their domain knowledge is the reason you are hiring them (which usually plays into most people's understanding that what you need is the secret knowledge, and once you have your piece of paper then life is over, you have won).

An alternate hypothesis is that RenTech looks for people who have good domain knowledge AND have proven analytical ability translating that knowledge into practical results. Example: Nick Patterson is clearly a genius, he clearly has immense knowledge about stats/probability but he also seems like a very practical guy who has built a reputation on getting things done. It seems like RenTech hire smart people but also people who get things done.

I worked in fundamental equity research. Latency or tech is definitely an advantage but hiring/training processes can be very powerful too (it is often impossible for some firms to replicate at all). I have no idea if it is true here but given the focus RenTech place on hiring, it seems logical that is where their edge is.

They're not exactly forthcoming, but it's not the hyperbolic mystery the mythos would have you believe. You can piece together what matters to them - in the abstract - by searching MathSciNet for papers published by their researchers prior to joining. For example, it's pretty easy to see they hired an information theorist away from Princeton in 2017.

But obviously that's not enough to reproduce everything they do, or else they wouldn't still be legendary. As it happens a lot of what makes them successful is not the sophistication of their trading algorithms and research, but also the sophistication of the execution and reliability.

As an aside, from friends there Renaissance hires researchers in three primary ways:

1. They have a small network of professors who they solicit for promising new PhDs willing to leave academia each year.

2. They watch professors and postdocs in specific specializations, and reach out to those whose research meaningfully interacts with a thesis they're interested in internally.

3. They send small groups to conferences to poach people working elsewhere in industry (particularly tech) whose work is applicable to their own.

They also do hire people who directly apply of course, but most hires are reactive. They especially like to hire people whose work or research looks like it might begin to encroach on their own, or is just notable and impressive. The math is certainly important to them, but that's just one dimension of it.

I would be surprised if rentech's profits are based purely on algorithmic advantages. More likely, IMO, is they've curated some really good sources of alternative data and combined it with otherwise standard mathematical and technical trading techniques. They’ve probably also got a well-engineered pipeline for identifying that data, systematically evaluating it, and bringing it to production.

This is of course pure speculation. But I doubt all that alpha would come from mathematical differences alone. The market isn’t magic... it’s just a question of having access to the right information and the ability to capitalize on it.

Which still leaves a non-sequiter in saying the sophisticated methods led to the high returns. It is more likely to be some form of 'cheating' where they are actually making the money off something that isn't normal trading. Or even corruption in the worst case.

Beating the market by very large margins is a suspicious activity. If raw mathematical insight is enough to get a 66% return then there are a lot of mathematicians out thereto figure out what is happening. If that is the secret sauce it would be extraordinary in a history littered with best performers who were just flat out frauds.