D.E. Shaw and how computer geeks and English majors transformed Wall St. (2018)
nymag.com
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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...
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.
Disclaimer: I worked at a DESCo company from 1997-1999
Money coming from that is still money.
And 10s of millions of dollars being paid to the university would still allow them to fund more things, and accept more people.
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.
https://www.latimes.com/california/story/2020-07-16/qatar-pr...
https://theunionjournal.com/qatar-prince-awarded-usc-masters...
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?
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.
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.
I don't know of any book.
"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."
https://www.theatlantic.com/ideas/archive/2020/02/how-mckins...
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)
[1] https://www.ragan.com/there-are-now-nearly-5-pr-pros-for-eve...
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?
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.
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.
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.
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)
https://www.modernmarketsinitiative.org/hft-provides-continu...
Note that the link looks like it's some kind of industry group, but the listed references look like a useful place to start if you want to read more
[1] https://awealthofcommonsense.com/2016/04/trading-costs-the-n...
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.
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.
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.
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?
"brokers and exchanges are much worse [than DE Shaw] since they're fiduciaries and semi-regulatory entities, respectively, and riddled with conflicts of interest."
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.
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.
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.
[0] https://blogs.cfainstitute.org/investor/2020/02/17/venture-c...
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.
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.
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?
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.
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 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.
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.
I'm not sure what that means, but there's no scenario in which you'd get a worse price. That would be illegal under the Reg NMS order protection rule.
https://www.investopedia.com/terms/o/order-protection-rule.a...
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.
Most quant strategies aren't really dependent on insanely fast execution. They may hold a position for weeks or months at a time.
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.
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.
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.
If this was actually how the world's biggest hedge funds work, somebody would have written a whistleblower article by now.
> 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
We don't know what we don't know. That having been said, I also believe that if what DES were doing were truly and obviously illegal, someone would have burst it by now. [0] https://www.propublica.org/article/hedge-fund-billionaires-d...
> 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.
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.
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.
Anyone making bets will eventually win big if there is no limit on credit, just by betting bigger and bigger until they catch a break.
But there's always a limit.
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 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.
But, hey, I'd bet on coin flips all day long if I was given favorable odds.
> They were always winning
Give me a break.
you'll inform the authorities to correct it
you'll make money out of this anomaly
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.
The book comes highly recommended.
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.
https://en.wikipedia.org/wiki/Elwyn_Berlekamp https://en.wikipedia.org/w/index.php?title=Axcom_Trading_Adv...
https://www.amazon.com/Winning-Ways-Your-Mathematical-Plays/...
Vol. 4 begins with the study of the solitaire game that is on every Cracker Barrel table.