Math prodigy runs market-making empire
bloomberg.com
bloomberg.com
those glossy photos taken by none other than Bloomberg (for the “article” perhaps?) just screams “unusually low profile.”
That’s not true, HFT firms like Citadel are required to improve on the national bid/ask spread. They are saving the consumers money compared to their orders being sent to NYSE or NASDAQ
FINRA requires reasonable effort, which is curious.
The reason for this is that they can give tighter fills to small scale (and presumably dumb) retail investors.
> and the Robinhood founders.
Do you mean the Robinhood shareholders?
Generally I was entering and exiting, not holding to expiry, so I had 0.65x4+fees = 2.70 in commissions for a given contract pair on Fidelity. Nowadays it'd often be about 2.05 on Fidelity because they let you close contracts under .65 for free. I didn't think to negotiate commissions, but I was surely too much of a small fry for that.
In case you’re wondering how this is even possible to be a win-win, it’s because retail order flow is considered non-toxic, roughly meaning it’s OK to market-make against because it’s roughly symmetric and not backed by a market moving signal. So creating an arena for retail orders to fill each others’ orders can allow for legitimately better fills because it’s safer for the market maker.
From what I understand PFOF is only problematically profitable in the options market where NBBO spreads can be quite wide, but I’m pretty sure Citadel is not even a major player there.
A quick sanity check suggests Vanguard[1], Fidelity[2], Schwab[3], and TD Ameritrade[4] disagree with your assertion.
[1] https://nms606.karngroup.com/vgrd/606a/2023Q1/588e3c62ff
[2] https://clearingcustody.fidelity.com/trade-execution-quality...
Not sure if it's the same niche but bloomberg quotes Citadel at 25% market share[0]
[0] https://www.bloomberg.com/news/articles/2020-02-25/citadel-s...
What’s an example?
If all the trade volume on an exchange moves to a private room, because the private room is cheaper, because its cheaper cuz of the volume, and it has the volume cuz everyone moved there, because its cheaper ...
Sure, they invested a lot of money to make technology that can beat the exchanges. But part of the reason they beat the exchanges is because they took all the trades and can match better not because of their tech but because of all the liquidity.
This is the essence of PROF price improvement.
From past threads this is exactly this kind of nonsense I expected: People with a tenuous grasp on reality chiming in with moronic conspiracy theories. WSB atleast acknowledges that they are a bunch of retards.
How would retail traders blame Pelosi (but I believe you that they would)? The Pelosi's are basically wealthy because they're in their 80s and Mr Pelosi bought early cheap stock in many successful Silicon Valley (then) startups.
https://www.barrons.com/articles/payment-for-order-flow-sec-...
> In an Aug. 13 working paper, five finance professors analyzed 85,000 stock trades they made through five leading retail brokers. They did get significantly different pricing through different brokers for identical orders to buy or sell at the current market price.
> But their best pricing came from a broker that takes payment for order flow, namely TD Ameritrade, now a unit of Charles Schwab. Fidelity, which takes no order payments, got worse prices on the professors’ trades than did TD Ameritrade. And its prices were no better than those from the E*Trade unit of Morgan Stanley, which does take payments. Robinhood, which used revenue from order-flow payments to subsidize the industry’s first commission-free trading, delivered middle-of-the-pack pricing.
First Citadel destroys lit markets by having the majority of US orders routed to them for dark execution using things like Citadel Connect (less regulated and worse than a dark pool, which they also love by the way) and then they scream "look we give you better prices than you can get at the lit markets that we just destroyed (after literally front-running you)". Please love us, we're doing god's work!
Sidenote: like Madoff there's a massive conflict of interest where Ken Griffin owns both a (huge) market maker business as well as a hedge fund (that had 64 billion in securities sold, not yet purchased "at fair value" on its balance sheet against some 4 billion in assets).
PS: I'm just going to call it. That CEO Zhang doesn't exist and is generated by AI, just to distract from all the massive Citadel crime. Maybe tin foil, maybe not.
PS PS: Citadel need to dissapear and Griffin needs to be in jail. He is Madoff 2.0 supercharged.
Anyone who thinks things were better for retail back in the day with at least $5+ per side and some guy in the middle in NY or Chicago making a market on a floor is a moron. There is just no other way to put it.
Markets in 2023 is an absolute dream for retail.
Enough said about the ethics of this guy.
If they want to rehab their image IMO they need to get KG out of the limelight (which I guess this puff piece does) but also fix their WLB reputation.
The idea that math can effectively be used to “beat the market” seems like a fascinating subject where few want to divulge the secrets. Math has been used for decades:
https://www.amazon.com/Beat-Market-Scientific-Stock-System/d...
https://www.amazon.com/Man-Who-Solved-Market-Revolution/dp/0...
One idea that does come up is reversion toward the mean, but few details are offered.
(That said, you need similar trading skills, otherwise the people "beating the market" will rip you off.)
The hedge fund quant arm is also extremely successful.
Given, within Citsec, the retail market making arm is fairly segregated for compliance reasons, but it’s far from the only market making activities they engage in.
Edit: you can downvote but this is literally what Madoff did – he had a market making business and an investment business. I'm not saying that Citadel is a scam at all, just commenting on the business structure.
They're connected, but Ken Griffin is focused on Citadel and Peng Zhao runs CitSec.
They're connected, but Sam Bankman-Fried is focused on FTX and Caroline Ellison runs Alameda.
But that's not what the original comment[1] was doing. It was just saying, the roles are nominally separate, therefore there can't be collusion, which is a hasty inference I was right to call out. I completely agree that a different argument, one not made in the comment I was replying to, might not be so bad!
The most interesting exchange I had was with some derivatives traders, and I asked broadly what kind of math was being used at their bank. Was it graduate level, was any of it novel, and was it within the reach of programmers. The answer was "no, no, yes" and they wouldn't say anything else. I suspect the secrecy is creating an intellectual mean reversion, where you do a thing that works and run it until it is traded out, and then never say anything about it so you can cost your competitors the time thinking about it.
However if none of the math is novel, then current strategies are not information problems that need new science, they are work problems that piece together solved ones, and whose efficiencies come from competency in related domains. I could see how one could become seized by markets like that.
But theoretically if the share is expected to go up at faster than the rate of compounded interest at the current interest rate, then it's a better deal for the seller to instead take out a loan using the share as collateral. And if the share is not expected to go up at faster than the rate of compounded interest at the current interest rate, then it might be a better deal for the buyer to loan out their money instead. The only thing that would make this a worse decision than the share trade are middleman costs.
Foreclosing on an asset doesn't happen in my example, but regardless is not a cost, but a risk, which the interest rate should be accounting for.
Longterm lockup of capital is not a problem, as either party in my example are financially gaining regardless.
And I granted you the other uses for shares, which technically can be done without buying the share, but at a middleman cost (renting the share).
I really don't care to continue this. Mine was just a hypothetical in favor of the idea that there's always a "loser" (when compared to all possible financial alternatives) in stock trades, even if everyone ends up happy with the trade. Sure, there are holes in the hypothetical, which is why I said I agreed with the comment I was replying to.
It’s just numbers. The labels are arbitrary. A lot of hallucinated money is spent on paying people to recite the correct tags and labels.
Banks are intermediaries. They are not in the business of doing anything sophisticated.
No serious financial professional would expect their strategy or any strategy in existence to be 100% correct. A strategy that is correct 51% of the time is more than good enough. You diversify and hedge, and build up an uncorrelated portfolio. Suppose you've honed in on alpha strategy. You probably don't even want to optimize and fit in further, with past data. Instead, you find a beta strategy that is uncorrelated and run those two together. With the amount of capital firms the likes of Citadel are working with, it's impossible to trade in a single product, and so scaling up, in the case of an MM, is to trade everything all at once.
This is also repeated in the article. "[CitSec CEO] diversifies the firm’s earnings so it can better stomach an occasional loss in any part of its business"
> current strategies are not information problems that need new science, they are work problems that piece together solved ones, and whose efficiencies come from competency in related domains
Applied math is not about pushing mathematical theory, necessarily. Then there is a difference between theory and practice, and there is a difference between practice and sizing trades with this scale of AUM. Academics can talk and write papers about LLMs or CRDTs, but they aren't going to be the ones who will be affective at bringing it to market.
But, I typically hear of the other extreme these days - child prodigies that struggle to fit into society and end up underemployed and neurotic. Maybe its just a selection bias (its not newsworthy to report on fufilled, grown-up child-prodigies doing their 10th postdoc in knot theory)...
Terence Tao is a bit of an exception because he is genuinely a far outlier in talent, and he also got a lot of direct tutoring from world-leading mathematicians (like historical prodigies). Like historical prodigies his achievements spoke for themselves, he may have had an accelerated academic career, but it was not the acceleration itself that was noteworthy.
There are plenty of prodigy-level children you never hear about in the news who don’t have parents working the system on their behalf. IMO the news articles like “tested out of HS via GED at 14 and enrolled in local commuter college” is the 30 under 30 of prodigies. Many children could do that, and it’s not even really an indicator of prodigy as much as it is being maybe at the 99%ile.
The movie is lots of fun though, Ryan Gosling’s character is hilarious.
Grigori Perelman is a better role model.
It’s not hard to dupe the majority into believing BS… see religion.
This math guy is just a guy taking advantage of the notion no one can disprove their divinity.
Its a nice paid piece by Citadel, but really what do we know about what this person's contributions have been?
From what I've heard, you don't make it very far in China without going through some form of struggle session at some point.
The article doesn't even address the elephant in the room (which is China). Making this soft propaganda.
This line of thought makes one wonder if the word prodigy aptly describes his capabilities (or maybe its something else). This is all speculation of course, but it makes you wonder given how egregious China has been about violating sovereignty and laws lately.
I mean opening up a clandestine police station on US soil in NY for the purpose of going after Chinese dissidents and other US Citizens of Chinese descent? You can't be much more egregious in violating sovereignty.
What kind of risk is there to the financial system if Citadel, overnight, could no longer transact business because the keys of the kingdom were given to a prodigy to make money.
Sleeper agents are not an unknown thing in clandestine services. I seriously hope the guy was properly vetted for what its worth.
[Ref Link for NY Police Station](https://www.justice.gov/opa/pr/40-officers-china-s-national-...).
https://www.justice.gov/opa/pr/two-arrested-operating-illega...