I find this stuff fascinating, and this article is way above average for online posts about proprietary/algorithmic/quantitative/low-latency trading (very leaky Venn diagram there). I have a few nitpicks but overall it's informative and it's an interesting format: viewing an industry through the lens of a particular firm, especially one as fascinating as Jane. Anything that develops literacy in modern finance amongst the lay public is a good thing in my book.
If this stuff floats your boat I'd also recommend any of Carl Cook's talks, e.g. https://www.youtube.com/watch?v=NH1Tta7purM. Optiver is AFAIK in a somewhat different business than Jane, but they're also players (or were last I had any inside baseball).
Too many people got their worldview on this industry from "Flash Boys", and I say this as a Lewis fan, is criminally stupid at best and in bad faith at worst (if you want a well-researched, accessible alternative: https://www.amazon.com/Trading-Speed-Light-Algorithms-Transf... is about a zillion times better).
It's a pretty short list of places I'd ever go through some grueling and semi-arbitrary gauntlet to work for, but Jane is on it for sure.
Medallion has probably gotten more scrutiny than any other fund, yet 3 decades later it's still as opaque as ever beyond vague 'statistical methods'. It makes a lot of money no matter what. It's more tight-lipped and exclusive than Jane Street. I don't even think anyone knows even if it's doing market making or not. Or if it's making short-term directional bets. You would think after 30 years stuff would leak and the edge would be gone. Employees are paid enough to not disclose, and likely are divulged only a small part of the overall method/system, so only a handful of employees will know how it works in its entirety. What it's doing has to be on a very large scale and in a big and liquid market to be so consistent and profitable.
Oh yeah, RenTech is just fascinating, and the opacity only lends to the mystique around it. People are talking a lot about how hard it is to get a gig at Jane, and AFAIK it's fucking hard, but one of the best mathematicians who was also a super-hacker I've ever met crushed the Jane interview and got bounced out in the RenTech screen.
Of course, the 30%+ annual returns almost every year for 30 years doesn't hurt the mystique either ;)
It's interesting that their other funds are far more mundane in terms of performance and last I heard Medallion can't hold much capital (~10B or so I've heard in whispers), but there is definitely something interesting as hell going on there.
Near as I can tell it's the hardest job to get on Earth. Rumor mill is that they pre-screen candidate based on their citation record in the literature, though that's obviously hearsay and I don't know if it's true.
Had "The Man Who Solved The Market: How Jim Simons Launched The Quant Revolution" on my shelf for several years as an out-of-the-blue birthday present but I finally got around to reading it earlier this year and I'd absolutely recommend it.
The emphasis on published work rang a bell, but thumbing through the book I can't find it off hand.
In addition to RenTech, TGS is another intriguing place that mostly flies under the radar and from all rumors seems to have been fantastically successful over 3 decades. It’d be very interesting to hear about other less known firms with stellar, albeit likely smaller in absolute terms, levels of success.
TGS is just weird. Friend of mine making very good money at staff level had them reach out to get him to come interview, saying they would at least double his comp.
Another friend at G said the “smartest person in the office was poached by this company TGS, have you heard of them?”
I would recommend the book The Man Who Solved the Market about Medallion founder Jim Simons. It doesn't go over the strategy extensively but goes through the history and culture of the firm. From reading it I would attribute their performance to execution. They have an incredible pipeline and hire almost entirely engineers and scientists. They have a rigorous scientific method in finding and executing on signals. And they've resisted taking more money and earning more on the management fee, opting for performance.
Everything about them is boring. They're well paid sure, but they're based in long island and hire mostly grey beards and don't overhire. Compare that to Jane Street hiring interns jumping through silly hoops like betting poker chips on puzzles. It's a bit of a farce.
Theoretically other firms could copy this, but the main goal of a hedge fund manager is keeping AUM. High AUM and poor performance is better than low AUM and strong performance. So its a lot easier to optimize on maximizing AUM and managing your brand. There aren't a lot of mathematicians that start hedge funds so the people starting them already seed the company with the wrong culture to replicate RenTech.
It's probably pretty easy to keep the returns on a pot as small as $10bn sweet if you just reserve all your best alphas for that fund. There are proprietary trading firms trading pots that size for a single shareholder.
What I've been told is that Rentech also effectively use their public funds as a source of revenue to juice development of proprietary platform, so some of it is business cunning rather than a hard technical edge.
To even have those ‘best alphas’ in the first place and then select them in advance for your best fund is the impressive part. The returns are insane even if the fund is capped.
RenTech is also a bit different than Jane Street. While smart people no doubt work at Jane Street, some very serious brains have worked at RenTech and contributed to Medallion, people like Elwyn Berlekamp.
+1 to Trading at the Speed of Light. A great read, particularly for any engineer curious about clinging to the limits of physics. An example: microwave towers are used to beam data from Chicago to New York because it's faster than fiber optic cables. Even crazier: these microwave towers have their repeater hardware at the top of the tower (microwave towers usually have it at the bottom) so that they don't lose time in wires going from the top to the bottom.
I'm not sure what's going on with this comment so let me make three observations:
The speed (latency) of the EM spectrum is the effective celerity of the medium: this doesn't differ in the air between microwave and shortwave in any meaningful way.
The speed (throughput) achievable on a given frequency is limited by the period of that frequence, high wavelengths can modulate more signal. Microwaves are higher frequency than radio by definition, so they have a higher throughput.
Neutrinos don't exceed the speed of light, and make a very bad medium of transmission given the near-complete lack of interaction with baryonic matter.
Shortwave radio can be transmitted around the curve of Earth by ionospheric reflection and refraction so fewer repeaters are needed. This allows crossing vast oceans where microwave infrastructure might not be possible.
As you say the downside is available bandwidth and throughput.
In theory having fewer repeaters improves latency, probably in the range of 100ns per repeater. I don't know how much of a practical effect that has, likely very minimal with modern implementations.
Either way it's more sensible to build high throughput microwave networks given the tiny amount of shortwave bandwidth we have.
Most markets, in terms of their daily volume, are open at night, but very thinly traded until EU hours, but some do see action in Asia hours. It’s just about liquidity.
Maybe you’re thinking of single name equity markets, which are a fraction of daily trading.
I think they’re probably asking about US markets. Afaik those do close at business hours and I’m not sure how after hours trading happens but it might not be available to most people.
I think the one of the main reasons is government concerns about shenanigans happen overnight without oversight / flash crash. That being said I presume all the breakers that would halt trading activity are probably automatic but potentially not all of them (I think the US did things like that during the housing collapse).
Neutrinos don’t need to go around the earth, so in theory you have a pi/2 advantage over an EM signal when sending to an antipodal location, for instance. In practice of course, throughput is utterly horrible for the reason you indicate.
Whenever the topic comes up, I throw out a reference to Hull's Futures, Options and other derivatives, Wilmott's Quantitative Finance, and possibly also Taleb's Dynamic Hedging.
That's more than enough on the instrument math side, most of what you'll see is pretty mundane stuff, unless you end up on an exotics structuring desk.
I'd also note that JS and other MMs mostly don't do anything requiring you to know the intimate details of these things, a lot of it is understanding how the market works rather than the deep instrument math. That might mean other kinds of math of course.
My writeup: https://keithalewis.github.io/math/um.html for modeling and https://keithalewis.github.io/math/uf.html on now to more accurately reflect the real world. I have taught Derivative Securities at NYU, Columbia, Cornell, and Rutgers over the past 14 years, but my day job is turning math into software that produces numbers people running a business will pay for. The textbooks are missing some important things.
Hull's Futures, Options and other derivatives was on the bookshelf of a friend who worked at JS - it was their bible.
I always throught market microstructure was more important, but they insisted a disciplined application of the maths (as per the bible of Hull) was where the magic really was.
If you come from a pure math theory first background I would advise starting out with Björks “Arbitrage theory in continuous time”, I personally found the lack of rigor and superfluous examples in Hull frustrating and found Björk much more approachable then you can look into Hull for real life practicalities like daycount conventions, etc. If you want to go into complex derivatives pricing I would advise looking at the Andersen and Piterbarg trilogy.
I would also suggest to forget about Hull and Wilmott and would suggest to start with the excellent book by Shreve: "Stochastic Calculus for Finance. Volume II: Continuous Time Models".
Then, you can quickly read Bjoerk, work through Brigo/Mercurio (if you like that style) or Andersen/Piterbarg. Alternatively, if you want to fully dive into into the subject after Shreve, Musiela/Rutkowski: "Martingale Methods in Financial Modelling" is wonderful.
I'd say that Shreve and Musiela lack rigour and are too focused on trivia, name-dropping and anecdotes. Jiao's "Infinite-dimensional methods in amassing vast bags of gold" is unsurpassed. For its coverage of Black-Scholes, I'd also recommend Schulz's "Good Grief, Charlie Brown". Sorry, everyone seemed to be doing this so I felt I should contribute too.
Thank you kindly for what looks like a great resource!
I've been trying to put myself through YouTube night school on some of this stuff, and MIT OCW has great resources as well at significantly less cost than going to MIT ;)
I'm fortunate enough to work with a person who actually understands derivatives trades with some sophistication, but that's a happy accident and the more people have access to good online resources the better!
Edit: I forgot to mention this book (https://www.amazon.com/Algorithmic-Trading-DMA-introduction-...) in the spirit of something more technical than the general-audience one I linked above. I have some nitpicks with it as well, but I've gotten value out of it.
Michael Lewis is a great writer, but the closer you are to the subject the more his shortcomings are exposed. I felt the same way about The Big Short and to some extent Liar’s Poker. He has an annoying tendency to assume that if he doesn’t understand something, either it’s completely inscrutable to everyone or simply BS.
(And to pile on, The Blind Side was the touching story of how Lewis’s prep school classmate, an Ole Miss booster, gamed the system to provide improper benefits to a high school recruit.)
I think it's probably because I was there for it. His construction of the narrative, while better than many (including many straight journalists) ends up sort of falsely casting people into hero/fool/villain roles that make the book work as an entertainment, but don't fully hold up.
It's a decent book, and a decent movie (kudos for one particular scene where I recognized data from the actual LoanPerformance database) I actually prefer the movie Margin Call for more accurately capturing the feel of the crisis from inside a bank.
But wasn't the point of the Big Short to show the perspective of people "outside" the mainstream who made big bets against the system/banks? Not surprising then that it didn't really show what was happening in the banks themselves.
No, the book is very different from the movie, I'd say it's almost the opposite in that it was mostly narrated from the perspective of the banks.
Another compounding factor is people often assume the message is "banks bad" but it's more "oh this system was so complex that any one individual did not understand the impact of their decision(s), much much more than everyone/anyone was playing super fast and loose from their particular perspective "
Tanta was the ABSOLUTE BEST writing on the financial crisis as it was happening. You've made it when Federal Reserve Bank of NY cites your blog in a footnote in their research report.
The Diff is easily one of the best value’s I get despite being >$200/year. I’m not sure how I’d rank it relative to Stratechery, I personally enjoy The Diff more but Stratechery is more relevant to my work and is also excellent. Byrne churns out an all-timer like this every other month or so, and his average posts still consistently include the best sentences I read of the day. It’s one of the only newsletters that, if I get behind on reading it, I make sure I catch up on every missed issue.
> It's a pretty short list of places I'd ever go through some grueling and semi-arbitrary gauntlet to work for, but Jane is on it for sure.
It certainly seems like an interesting place to work, but I find their hiring process as a bit of a red flag. Places that hire like that confuse me, because it seems it's going to apply a very selective filter to applicants that make it through. And I don't meant selective in the sense of technical ability but more emotional, social, and thinking styles. I get incredibly nervous in technical interviews and with a wide background, I don't always know certain bits of computer science. So, I do terrible in these style of interviews, because they do nothing to expose what I do know or how I really think on projects.
As another point of why I don't think they work, they almost are never two-way. And if they were, it would show the pointlessness of them. If I asked interviewers a bunch of questions about things that I know about, then we'd just be trading blows, which is pointless.
> I find their hiring process as a bit of a red flag
This is a bit like saying you find the hiring process at the NFL or for SEAL teams a red flag. You either fall through the selection sieve or you don't, that's the whole point. The filter has served its purpose, and they end up with the elite high-performing teams they desire. There's nothing wrong with you or the filter if you don't make it. The filter clearly does work because Jane St prints cash like the Fed and is one of the top MM firms out there.
I understand the perspective, although it's different and not really comparable to those other things you mentioned, especially since the NFL and the SEAL teams do not evaluate people solely based upon a few hours of tunnel-visioned interviews. They are primarily evaluated on their performance in real-life scenarios and training across a decent amount of time.
Of course Jane Street is successful! There's no question there. However, I don't think it's much of a question that they probably miss out on some great candidates that don't fit into that type of hiring process. It's possible they view those as acceptable losses.
I find the article to be a poorly written piece of propaganda for Jane Street as you could change "Jane Street" for "Citadel" for example and entire paragraphs would still be true.
> it's an interesting format: viewing an industry through the lens of a particular firm
What's interesting about that?
Almost every other article does that.
>the winners get a job from which people routinely retire rich in their 30s, and the losers... don't
Honestly, I find this ridiculous. Firstly, Yes, working at Jane Street is a well paying job and you'll do well out of it. No. People aren't routinely retiring in their 30s. I don't understand where this absurd idea comes from. Look at all the rich people in the world, look at how old they are, and ask, are they retired? No! People who are driven and smart don't suddenly earn their first $5m go off and buy an annuity. They're more likely to go off and found their own trading shop at 30 than they are to retire.
Secondly, you know what happens to people who don't get hired after their internship at Jane Street? They go to HRT, to G Research, to Jump, to Citadel, to Optiver, to IMC, to XTX, if they're really unsuccessful they'll go to Google, Microsoft, Amazon, Meta. These are not people desperate for a job.
I think the author meant "could retire very comfortably in their 30s", and you're correct to point out that's not what it literally says.
But as for "could"? Shit you can do that at Google, Microsoft, Amazon, Meta if you're in that league and start out of undergrad. In my experience (more than a few of my FAANG-era colleagues either came from or went to high-technology finance), people don't actually leave Google to go to Jane for the money (which is similar at the p99), if you're a baller willing to pull the hours you can make many millions a year in either place.
I think people go to high-technology finance because they want to test themselves against a harder class of problem in a more adversarial setting against people who feel the same.
That's anecdotal, but my sample size is more than two or three.
> I think people go to high-technology finance because they want to test themselves against a harder class of problem in a more adversarial setting against people who feel the same.
Maybe this is so at other finance firms, but my experience with developers who go to Jane Street is quite different. Because Jane Street heavily advertises OCaml as part of its recruiting strategy, I know many people who ended up there just because they wanted to program in OCaml while still getting FAANG comparable salaries. They don't care at all about finance (at least initially, maybe it becomes an acquired taste for some).
Allegedly they use it because it's "readable" by both tech and traders. I don't really buy that; I think the real reason is that one of the founders used it because they liked it, and now they have all this legacy stuff laying around that's too expensive/time consuming/risky to replace. I hear TGS is stuck with their Fortran stack precisely for this reason.
Esoteric languages is often a good screener for good devs.
A large talent pool isn't necessarily a positive if you don't spend a lot of effort on your recruiting (mostly filtering) process. It really just increases the risk of bad hires.
This. If you want really good devs, they tend to play around with all sorts of things that don't necessarily have economical value. This includes esoteric programming languages.
Languages large swaths of the industry know (Java, C#, JS, Python, etc) include a subset of people who learned it purely for the job opportunities but aren't competent developers. The number of people who learn more niche languages like an ML or Haskell has a far lower % of people of that type.
An example of a language that I could see shifting from one to the other pretty soon is Rust now that it could be a way in to many of the high paying big companies like Google, Amazon, etc.
I agree with this to some extent. However in case of firms like Jane or Citadel or Quadrature you have to have a well documented, long track record of accomplishments in various orgs before your CV lands on their desks.
These companies hire from a different pool than you described.
I don't know if that is true. As a new grad, I got invited to interview for Point72, Headlands Tech, HRT, Two Sigma. (although some of these are in a different "tier", and different business than Jane Street or Citadel).
I definitely didn't have more special accomplishments than 2 typical internships and both were not FAANG.
I should have been more specific in my trite original post.
I think at the college hire / intern level, its not quite as useful as everyone is so green .. so people screen based on college / attempts at raw brainpower games with brain teaser puzzles and stuff.
On the more experienced end of the scale, I'm often surprised to see how many resumes with 3-5 years experience are basically Python-only. This, in the absence of something else in the resume that speaks to domain expertise or something.. its definitely a less exciting prospect to me.
The 2000s version of this were Java-only devs and people who acted as though we didn't need to know how the hardware worked anymore because Java abstracted it away. You see this attitude with some cloud/k8s type dev today.
In both situations, naively.. yes you don't need to understand much about the hardware for your basic implementations.
Arguably once you get into moderate levels of complexity you actually have higher cognitive overhead because you need to understand how the underlying hardware behaves and how the abstraction layers between you & it interplay..
I'm going to venture a prediction that knowing how computers really work isn't every going to go completely out of style, or even decrease in utility in absolute terms. It's already decreasing in utility in relative terms as more and more useful stuff becomes possible without it, but someone will always write the thing underneath the thing underneath the thing.
The AGI/singularity conversation aside of course, which I am not at all interested in having. ;)
That makes sense to me. But, in light of that, the ones who do go to Jane Street are relatively more likely to be interested in their tech stack and OCaml, as opposed to wanting to "test themselves" in the "adversarial setting" that the post I quoted describes. In contrast, the couple of people I know who went to HRT or Jump Street are much more like that description. They deliberately targeted HFT work, whereas Jane Street has more people who "fell into it" because of this outside interest.
I mean, Yaron used to go around a lot and give guest lectures about OCaml programming "in industry" at all sorts of functional programming courses in universities. I have to imagine they thereby recruited people who would have never considered HFT shops otherwise.
Jane Street recruits silly hard from Cornell’s CS dept because part of our required curriculum is functional programming w OCaml. They definitely introduce a lot of math/cs kids to the idea that finance can be a meaningful technical challenge instead of just Dyson bros in spreadsheets.
Then again I think one of the founders or top execs is an alum, so it’s possible Cornell has that course in that language because of Jane Street
There are a lot of universities doing functional programming in either Haskell or OCaml as part of their curriculum right now, so I don't know if that's really the reason.
Every few months or so I run out of patience with C++ and wonder about the alternatives, of which there seem to be very few in HFT. Jane Street stands out for that reason. It's a smaller talent pool but I don't think it's a subset of those that the C++ shops can attract.
Rust is getting pretty popular among low latency firms. Many of my peers (myself included) would definitely show interest in a rust shop. OCaml - not so much.
> I think people go to high-technology finance because they want to test themselves against a harder class of problem in a more adversarial setting against people who feel the same.
That and among developers, I think Jane Street has hit "mythological status". I've known about Jane Street since I was an undergrad looking for internships and it was always talked about like: "oh yeah, that's where the REALLY smart people go to work". I think a little part of going to work there for everyone is figuratively one-upping your friends from college, you made to the place where geniuses worked.
Oh just to clarify, it was not my intention to put down Jane in the slightest. It's a fascinating firm in a fascinating field that is obviously full of elite mathematicians and technologists. I'd most likely be willing to work there.
> People who are driven and smart don't suddenly earn their first $5m go off and buy an annuity
I guess I must not be driven, because I would. Or at least something close enough to that.
$5m just earning interest at 5%ish is way more income than I need to live the lifestyle I want.
I'd buy a few acres in the middle of no where, build a nice house, grow a big garden, raise my daughter as a nice family man and never work again.
The thing is, if you end up in a job that pays this well it’s because you’re either very lucky (and congrats to you) or you’re very passionate. If you’re in the latter category why would you retire when you’re being paid to do what you love?
> it’s because you’re either very lucky (and congrats to you) or you’re very passionate.
It's never because you're very passionate. Passion has basically no correlation with financial success. Millions of passionate artists, musicians, writers, and all of them broke as can be, most working shit jobs to pay the bills wishing they could just be passionate and make money from that. Passion is bullshit.
The real path to financial success is a combination of: being born to parents with the means and motivation to see you well education; being born lucky enough to be a little bit clever; being lucky to pick a career that makes a lot of money, often only by ignoring idiots who say 'follow your passion; putting in a lot of hard work to get good at something that is in-demand.
Or the usual answer: just being born wealthy and wouldn't-you-know-it you wound up wealthy too.
> Passion has basically no correlation with financial success.
Have you got any evidence for this? I would expect that passion correlates with hard work, and hard work seems to be necessary for success. I agree that many artists are passionate, but surely people can also be passionate about doing things like writing software or other activities that are valued highly in the market.
We live in a culture that wishes passion lead to success. It's what we're taught as children here. It's what we want to be true.
And yet I find no strong evidence anywhere supporting the assertion that it does; just people claiming that it's up to those who doubt to disprove it.
Passion is a fairy tale adults tell each other because it's nicer than the reality that dumb luck and being born wealthy are the only real chances we have.
And those who were lucky or born on third base love to tell everyone it was because they were just so darned passionate.
A simple "no" would have been fine.... So, no strong evidence anywhere, huh? I'm gonna set myself a five-minute timer. "Passion" isn't well defined, so I'll look broadly. And I'll look for correlations rather than causation: it's hard to imagine a natural experiment that increased someone's passion. Let's hit G Scholar and search "passion and achievement".
> The present paper reports two studies designed to test the Dualistic Model of Passion with regard to performance attainment in two fields of expertise. Results from both studies supported the Passion Model. Harmonious passion was shown to be a positive source of activity investment in that it directly predicted deliberate practice (Study 1) and positively predicted mastery goals which in turn positively predicted deliberate practice (Study 2). In turn, deliberate practice had a direct positive impact on performance attainment.
> The major purpose of this study was to test the hypothesized paths from dualistic passions through achievement goals to subjective vitality and performance in sports. 645 high school athletes participated. The proposed structural equation model, with relationships between dualistic passions and subjective vitality and sports performance mediated by achievement goals, fit the data well, especially for mastery-approach and performance-approach goals.
Probably best because of its wide scope and broad sample:
> In three large-scale datasets representing adolescents from 59 societies across the globe, we find evidence of a systematic cultural variation in the relationship between passion and achievement. In individualistic societies, passion better predicts achievement and explains more variance in achievement outcomes. In collectivistic societies, passion still positively predicts achievement, but it is a much less powerful predictor.
This took me 3 minutes. I don't claim these studies are the last word on the subject. I just wish people were a bit more curious - passionate even - about checking their own beliefs.
Passions change. Also, I'd guess most CS grads going to work for JS aren't passionate about stock trading/market arbitrage - they're passionate about the pay or maybe OCaml, but the actual thing that JS does, probably not - it seems hard to be passionate about in and of itself (would someone work there for free because they were having so much fun?). And even if someone might be initially, they likely won't be after 5 years and enough money to retire on comfortably.
“ Look at all the rich people in the world, look at how old they are, and ask, are they retired? No! People who are driven and smart don't suddenly earn their first $5m go off and buy an annuity.”
No but having the freedom to start your own trading shop (or company) is hugely different than having to stick with a job you mostly don’t like to pay the bills
> Look at all the rich people in the world, look at how old they are, and ask, are they retired? No! People who are driven and smart don't suddenly earn their first $5m go off and buy an annuity. They're more likely to go off and found their own trading shop at 30 than they are to retire.
This kind of debate needs to be backed up by numbers or it won't be very productive. To get started we should know the percentage of millionaires in their 30s who are still working, and the ones who aren't working but are looking for a job.
Personally I can think of several things I would do with $5m other than buying an annuity. If you have that kind of money you are basically set for life if you make a few right choices.
Yes, all depends on how you spend your money. $5m will get you something decent in Manhattan, but you could live like a King somewhere else. I have a friend that retired off just over $1m as he moved back to his small hometown. House cost $30k, drives the same car for 15 years, lives frugally.
It is possible that people who chose to retire after they feel
they have enough people to do it, would not be noticeably visible.
Why spend time covering a guy who has retired and living a quiet life?
I think there is also a big question of what sort of spending habits these people have acquired. Their peers are making lot of money. And I doubt everyone is extremely frugal. Margin Call I think gave pretty good example how some in other firms might be spending their income.
Stepping down and just starting to live on annuity might not fit to what they have come to expect.
It's very, very common for rank and file prop traders to retire in their 30s. Some are ambitious and start their own firm or keep doing it, but many decide $10m/$50m/whatever is enough and leave the industry. They likely got into it just to make money, not because they loved it, so once you have enough, why keep going?
Generally good article that delves into how a market maker functions. Couple points:
Re EA: quoting my boss, EA isn't really a dominant thing in the market maker space, it's pretty much only espoused by a couple high profile individuals (mainly, SBF).
Re strategy: point about how there's little strategy involved in being a market maker is off-base. Everything is ultimately strategy: do I continue to pour resources into a strategy that is losing money in the hopes of eventually seeing pnl? What markets should I focus on? What is the best use of time for each employee that maximizes pnl/head? etc etc
One thing that I thought article got right is that most work involved in market making is about avoiding trades, not making them. Capturing the bid ask spread is conceptually easy. The hard part is avoiding trading with toxic counterparties.
Part about put options is especially apt. Market making during a crash / recession (like right now) is especially difficult because all the non-toxic counterparties have stopped trading as much (people like to trade a lot more during a bull market than a bear one). By setting up a structure such that you profit during a crash (either by buying puts, leaning net short, or through some other method), you introduce an uncorrelated return stream that can really help.
> EA isn't really a dominant thing in the market maker space
The article doesn't say it's dominant, it says "There is a weirdly high overlap between quant finance and Effective Altruism in general, and between Jane Street and EA in particular (it is emphatically not 100%)"
I know quite a few EAs who work or worked at Jane Street, much lower profile than SBF. What the article misses is that a lot of EAs specifically went into finance because if you're looking to earn money to donate it's one of the places you can earn the most, and not because of "where they advertise jobs" or "overlap in outlooks".
"Order flow toxicity is the measure of a trader's exposure to the risk that counterparties possess private information or other informational advantages."
Usually, flow from other MMs isn't toxic.
Toxic flow can also just be someone who's executing a very large order, even if that counterparty isn't informed. If you fill them as they are starting to work their order, you could get run over as they continue to finish that order and push the price against you.
Other market makers are often moving away from something they've seen but you haven't yet. When whatever that is hits you, the fills you got from the other market maker will look really bad.
Not aware of a market maker that also doesn't take liquidity as well. In fact, it probably would impossible to market make without also taking (you wouldn't be able to provide liquidity if your quotes were in cross with the market).
That said market makers do a lot more making than taking.
Usually too smart, on rare occasion they cheat. MMs inherently deal with information assymetry and adverse selection because they generally stand ready providing liquidity with quotes out in the world (though obviously width matters). Toxic counterparties are parties who decide to trade against you who have a better idea about “true” price than you. They might make or they might not, depends if the degree in which they’re right overcomes the spread they crossed. Other MMs can be (and often are) toxic.
). By setting up a structure such that you profit during a crash (either by selling puts, leaning net short, or through some other method), you introduce an uncorrelated return stream that can really help
isn't selling puts directional? One strategy could be something like trying to find a way to bet on volatility but without a negative carry or at least as small as possible...this is hard to do. Taleb's universa fund tries to do this.
Sorry I meant to say buying puts (and have edited comment). Buying puts is directional and has negative carry. That's often fine because when your puts aren't making money your market making strategies should be doing well and vice versa
> it's hard to argue with success: Jane Street earned $6.3bn in the first half of 2020, up more than 10x from the year before ($, FT).
It’s actually quite easy to argue with that. It’s 1 (or 2 at best) data points. 6.3bn is meaningless without knowing the capital put to work to achieve that. And finally if your 10x YoY it’s just as likely you had a bad year before as a good one this year.
Apparently most of that came from arbitraging bond ETFs and bonds. The spreads started to diverge in early 2020 when covid was just coming out, and Jane Street had the balls (and cash) to hold until the spreads converged. Helped significantly by the US fed pumping a bunch of money into the market.
Regarding the last point in working at Jane Street versus research on fusion/cancer:
You could maximise more good by first working at Jane Street in your 20s, retire by 30, and then set up your own smal fusion/cancer research lab where you can do research without being tied to government funding and politics. By 30, many cancer researchers have barely finished their PhDs, so you won’t actually be that far behind scientifically, but you’ll be far ahead financially.
That sounds as if you can jump into a field without spending 10-20 years of learning and do cutting-edge research. I'm not sure whether someone who has done quant finance can make meaningful contributions to the actual science. So if your role ends up spending money and doing top-level management, why not just fund companies that do and stay in finance?
[edit] To add one prominent example - it's doable, as Jeff Hawkins demonstrated. Founded Palm, made money, then created his own brain research lab. As far as I understand, the neurological community has not embraced his ideas with open arms, but they are at least intrigued by his universal computational model of the brain. So that's a pretty big accomplishment.
I think Hawkin's work (including things done at Numenta, his company) is highly controversial in neuroscience. I have read some of the articles and claims and the biggest issues is that he produces a lot of vision papers, that contain no actionable models and thus ultimately are useless.
So either he's withholding whatever concrete insight he found, or he hasn't found it yet - I believe the latter is more likely.
> as if you can jump into a field without spending 10-20 years of learning and do cutting-edge research.
I know multiple people who have done this.
If you want a famous person, look at Paul Erdős. Always jumping into new areas of mathematics and solving problems at the cutting edge.
Or, to get to the current subject, Taleb using his background as a trader to jump to a career in academia, where many consider(ed) his research cutting edge.
I agree that a smart, ambitious person can become expert in more than one field in their life — but jumping to a new area of mathematics is on an entirely lower level than jumping from algorithmic finance to cutting edge biomedical, especially at the time Erdős was working.
He already had a PhD so it's not surprising he was able to enter Academia. But outside his books I'm not aware of anyone talking about his Research much.
I spent most of my career in finance including a hedge fund and several international banks.
Personally I really enjoy his books and recommend them to my friends and family.
Professionally, I have never heard his name being mentioned.
You find the same 'fluffy' management books on trader desks (varies between firms).
- Some translation of "the art of war".
- Tribal leadership and their whole "Tribe of tribes" nonsense
- its name escapes me at the moment, but some leadership book written by a US marine? Because this maps directly to finance?
- six sigma
Usually they are "management" focused chanting type material.
I'm not away of Erdos being at the cutting edge. There are far better examples of people moving between fields and doing very high-level stuff. For example, David Mumford, who has a great blog by the way.
I can't judge that from an outside perspective, but to be fair, having nothing to show for two decades of work is an intrinsic occupational risk of science.
> I can't judge that from an outside perspective, but to be fair, having nothing to show for two decades of work is an intrinsic occupational risk of science.
How? In today's academic environment you won't survive even a few years without publishable research results.
Jeff Hawkins probably also had a several Hundred Million Dollar payout. That's in a totally different class than a Quant who cashes out at 30 with MAYBE $10M in the bank.
You’re overestimating the technical skills needed to do cancer research: there’s a reason why many wet labs allow high school students to come and help with research. It’s mostly grunt work and whatever technical skills can be learned by a high school student over a summer.
I would venture to say the average Jane street worker has done more good for society than the average cancer researcher or Alzheimer’s researcher.
For fusion research, the quantitative skills from many Jane Street people can easily transfer to make meaningful contributions to fusion research.
I do cancer research. You're right, the technical skills for basic wet lab stuff are not hard to learn. The hard part of cancer research is not learning how to pipette, it's learning how to ask and investigate worthwhile questions. Experimental design is subtle and requires wide ranging knowledge of sources of biological and technical confounders. Growing cells might be easy, but do you know how to debug a fluorescence microscopy experiment; in fact, do you even know how to recognize that it needs to be debugged? This is stuff you can learn over the course of a few years in a phd program, but it takes longer to become a true expert. Finally, what do you investigate? Cancer? What tissue type, which cell type, which proteins, DNA structures, or RNA structures are most important and least understood? Just absorbing a small fraction of the literature so that you don't ask stupid or boring questions is a lifelong task.
So you can do break-through research after having done a little bit of wet work in a cancer research institute, as a 30-year old who has been coding quant systems for a decade, and then become equivalent to a PhD in the field?
Or you can take your ~10M or whatever in earnings during a decade as an OCaml programmer at Jane Street and fund a cutting-edge cancer research lab?
Also I said the average researcher, meaning taken from the global population, ie not from a top institute. Jane Street is highly concentrated in talent that produce real results in the world.
The average cancer researcher has probably done more good than the average trading firm worker though.
It's wildly inaccurate to say that much of Alzheimer's research has been shown to be fabricated. The article you link to is about one person's work. Even though he is a very influential researcher, there must be at least thousands of people doing research on Alzheimer's disease, if not more.
It seems none of the people that posted here understood the intention of my comment: The parent comment by ChadNauseam implies that Madagascar citizens somehow would not benefit from cancer research (they would!), which could only be true if they don't get cancer. In my comment I pointed out this last end of this logical chain of conclusions to show how ridiculous the parents' post was.
Nope, just no treatment (not fact checked of course, but it sounds likely that they wouldn't get top notch treatment that an average person say in Western Europe could expect)
> It’s mostly grunt work and whatever technical skills can be learned by a high school student over a summer.
Who do you think is supervising the high school student? Where does the idea for the project come from? Where does the money supporting the high school intern' experiments come from?
But that's not the interesting part, right? That would be like saying that tech is simply assembling prototypes. The really interesting decisions are the strategic ones that require both a high-level overview of the opportunity landscape and some foundational knowledge of its feasibility. Or am I mistaken and it's simply brute force trials?
Yeah you’re right. My point is that the technical bar for entry is low, and can be attained maybe by spending one year in a top lab. You then skip the hazing ritual that is the PhD and postdoc and directly start your own small lab.
Spend your money attending conferences to make connections and get yourself updated in the field.
Hire technicians to help with your grunt work. Spend your days reading research papers, discussing science at conferences, and setting up new experiments.
The bar for doing some experiments, in an environment with tons of logistical, technical, and intellectual support, is indeed pretty low. A high school student could certainly learn to run a gel in a week or two; patching a neuron might take a few months.However, the physical "act" of collecting data, especially in the happy case where all of the conditions have been worked out and the results look "as expected", is a very small part of being a scientist.
More often, you are trying something that hasn't been done before and you're getting results that don't quite make sense. Here, experience and background knowledge seem key, and I'm not sure that you'll pick up much of that in a year, even in a "top lab" because experiments are slow. On top of that, you'll need to learn how to design experiments and analyze/present their results in ways that your peers find convincing, which is in itself a non-trivial skill. All this presumes that you're even able to find your way into a "top lab", but that's not a foregone conclusion either: these places can be incredibly selective even among people with a decade of experience in the same field.
Put another way, your answer assumes there's a lot of fat to trim in the PhD/postdoc stages. What is it and can it really be cut down by 90% as you propose?
Long postdocs are a modern phenomenon due to the oversupply of biomedical researchers. Historically people did shorter PhDs and skipped postdocs. There are stories of old timers saying they got their faculty position based on just one or two papers, unthinkable these days.
If you’re independently wealthy, you don’t need to go through the modem hazing ritual and you can start your own lab much earlier.
I’m not saying you can start immediately and be an effective researcher, you will initially suck like everyone else. But you will have a better time learning how to fail if your career/livelihood is not on the line.
Not to mention that tightening spreads, deepening books, and equalizing prices across regulatory/financial/geographical regimes is a pretty serious social good in its own right.
I understand that (as the article mentions) these folks clean up when the wheels have already come off anyways, but day-in-day-out, the spread on AAPL is one tick ($0.01) nowadays, rather than the 1/8ths that you'd get quoted by some loud guy from Jersey 30 years ago.
Citations on this stuff are hard to come by, but it does seem at least directionally true that these advanced actors are making less money over time even as the problem becomes harder. If that's true, it's money not going into the pocket of a middle-man somewhere. Multiply that by everyone's retirement account and we're talking real money.
If you're going to hold AAPL longer than a quarter, then the tick vs. 1/8 doesn't matter, and if you're not, your trade doesn't need to happen to support the core goal of financial markets which is to finance companies.
You're the best kind of correct, which is technically correct. But what I said is that "multiplied by every retirement account we're talking real money". Which is no-qualifiers correct.
That ETF that you should have your roll in? It's buying and selling securities all the time, and encountering friction along the way. And whether people have ETFs or individual equities in their (hopefully tax-advantaged) retirement account, across everyone with a retirement account it adds up.
I know that people often have a low-key axe to grind about advanced market actors being "bad", and I know that politicians go to the well with this narrative all the time, but it's misleading at best and usually just demonstrably wrong. And with nothing but respect, I tend to bow out of conversations where people push the issue past a comment or two.
There are exceptions: Citadel paying 2x for PFOF on Robinhood vs. Schwab to get optionality on internalizing against dumb flow? Yeah, that's pretty iffy. But in general advanced actors are slicing strips of meat off of each other to the benefit of 401ks everywhere.
> That ETF that you should have your roll in? It's buying and selling securities all the time, and encountering friction along the way
I really hope it isn’t, or it would be making lots of tax events! I hope it’s doing in-kind transactions like all the normal ETFs.
> Citadel paying 2x for PFOF on Robinhood vs. Schwab to get optionality on internalizing against dumb flow? Yeah, that's pretty iffy. But in general advanced actors are slicing strips of meat off of each other to the benefit of 401ks everywhere.
No, robinhood average order is just smaller so less risk of adverse selection.
I didn't think that a digression about the tax optimization opportunities of in-kind securities swaps would be enlightening to a general audience.
As for your second point, I guess neither of us works at Citadel so we're both guessing, but if you agree that there is a market for order flow and that the most charitable interpretation of why that would be the case is because of the attached optionality for internal netting, then you're sort of making the assertion that all PFOF is equally valuable, which would be a hell of a coincidence.
As a sort of side note, I regard the cherry-pick the parent with ">" prefixes and go after snippets of what they posted as basically the lowest form of discourse on HN in spite of how popular it is, and I would encourage anyone to try to reply to someone's entire comment rather than just trying to find the weld points and lean on those spots. It's pretty weak.
> But in general advanced actors are slicing strips of meat off of each other to the benefit of 401ks everywhere.
I am not sure I understand. That would mean that the number of advanced actors would stay stable or go down over time (generally much research shows that markets tend to concentrate even in pure random trading, so the number of advanced actors should go down). Is that actually the case?
As I've mentioned elsewhere in the thread, it's notoriously difficult to get citations on this stuff so take with a grain of salt, but I've heard that in 2019 the "HFT" industry (defined some way) had cumulative annual profits in the US of somewhere between 2-4 billion dollars. That's a long holiday weekend for Google or FB. I've also heard that this (inflation-adjusted etc. etc.) this is down sharply from ten years before, when spreads were wide and undocumented order types were winked at.
To wildly oversimplify, market makers will tend to drive the spread down to the tick size, and arbitrageurs will tend to put themselves out of a job.
For the industry as a whole to be growing either in distinct actors or cumulative top-line, the number of markets and instruments and general financial activity has to be growing faster than the big dogs are eating each other. This is my (semi-informed) guess.
> HFT industry annual profits 2-4 billion. That's a long holiday weekend for Google or FB
Nitpick: that’s 10 to 37 days for Google or FB. 2B for Google is ~10 days, 4B for Meta is 37 days. Alphabet net income for 2021 was $76.033B, Meta Net income $39.370B.
Haha fair play, but to nitpick in return: when I worked on FB Ads, revenue was not even remotely uniformly distributed across days of the year, and Thanksgiving? Lots of family photos going up and being looked at relative to your typical Thursday.
Morbidly funny anecdote: when I first moved to the NYC office I obviously didn't have many friends, let alone a significant other. Myself and a few of the other sad saps who failed to notice the office clearing out a bit early around us were borderline freaking out over what looked like very anomalous behavior in the IG ranking system.
It wasn't until we raised it in a slack group that included some coupled folks that we realized it was Valentines day. Womp Womp. ;)
Is Citadel paying 2X for PFOF on Robinhood vs Schwab because it is dumb retail flow or due to increased optionality because it is inherently built in slow transmission flow to reach the execution platform?
You are really going to need a citation to back up that the core goal of financial markets is to finance companies.
That is, in my view, at best an ancillary goal (notice that most money in the markets doesn’t participate in buying shares from the company itself).
That may be what you want the markets to be about but every other participant has other desires from the markets and the great thing is they can all get what they want from them.
Markets in equities exist because companies want finance enough to be willing to sell the equity. Not sure why something that elementary needs a citation.
It's also true there are many other participants with many other strategies to extract that value created by the companies from acquiring and merging them to collecting dividends from a balanced portfolio to day trading, but the reason the market exists in the first place is because companies that create value need their capital in order to do it. As you correctly point out, most of the actual trades are secondary market ones involving companies not in the process of fundraising, but those trades are still positive sum inasmuch as without liquid secondary markets, companies that create the actual value might have found it too hard to raise funding. The difference between being able to sell TWTR on IPO day or shortly afterwards and being forced to hold it until an Elon Musk comes along and follows through with its existence has a huge impact on its ability to raise funds and grow. On the other hand reducing the time between trades down to smaller sub-second microsecond intervals is - whilst useful to people trying to win at essentially zero-sum trading games and inflating asset prices very slightly - going to have a pretty minimal impact on whether companies create more value by raising more funds.
I’m not sure you’re reading that correctly, since the response concerned the idea that the core goal of financial markets is X, and you respond with a statement on equities markets, which by definition only concern financing companies.
Equities markets are a piece of the pie. The largest, by far, for the kind of HFT we’re talking about, but a fraction of financial activity.
The core goal of financial markets is to gather and match prospective buyers and sellers so that trading can occur.
I was replying to a post talking about secondary market share trading replying to a post about the value of liquidity in AAPL, so in context it seemed clear equities were the market under discussion
Obviously true that financial markets for commodity futures etc have different functions, though a similar logic applies to them (the extra liquidity in commodities futures markets is useful to the extent it facilitates real world production decisions)
If the only people who trade AAPL plan on holding it for 10 years then by the time they want to sell it there will be no one to buy it from them, since the probability that someone else will want to make their once-every-10-years trade at the exact same time is zero. In order for long term investors to function they need liquidity to enter and exit positions.
Further: Suppose you had an auction on shares once an hour, or even once a day, but no continuous trading. Would that make the world any worse off? (except for high frequency shops?)
I mean, what you're describing is how to create a black market in securities for people who want to act on news, knowledge, or sentiment before tomorrow's auction.
Sooner or later (spoiler alert: sooner) someone would put it on the Internet, and it would be unregulated, at least at first, and the insiders would do even better than they are now.
You should read up on the early days of ECNs, Island and Archipelago and what not. Alternatively, you could look at this exact script being played out in crypto right now.
I doubt it. I've never heard a coherent explanation how liquidity on sub-second scale is a great social good, while at the same time the largest equity markets in the world are closed 2/3rd of the day, plus all weekends and holidays.
Because real world information has sub-second resolution and a healthy market should reflect that. It’s a continuous auction. Some markets are open longer such as FX.
The NYSE is closed between 16:00 and 9:30, plus all weekends and bank holidays. AFAICT real world information doesn't stop in the closed hours. So how is it credible that it's super valuable that trades can happen during the open hours at sub-second resolution, but we're suddenly ok at 16:00 with a 17.5 hour resolution?
You are begging the question. Why should a market reflect that? Why is that preferable to a daily auction (throw in a stochastic cut-off time to thwart HFT even more)?
Because you can’t make sure that all auctions happen at the same time. Consequently, news will disproportionately affect stocks having an earlier auction. That’s just one reason I’m mentioning.
I would suspect that almost zero people do this because working in an environment changes who you are as a person. If you spend a lot of time around cancer researchers you will think that cancer research is the most important thing in the world. You would need almost monastic mental compartmentalization to work at Jane Street for N years and remain singlemindedly focused on cancer research.
I thought about that often. Why are highly intelligent, passionate young activists not working into the industries they despise to change the system from within. But you're right that the system you're in changes you, corrupts you. You'd have to sacrifice a lot to climb the corporate ladder, doing things you despise, just for the chance to blow things up years, decades later. Your idealists friends would distance themselves from you. You'd have to constantly remind yourself that you're doing wrong things but that it's ok, because it is part of a bigger plan. It would be very isolating. You'd probably sacrifice your sanity for a foolish plan.
Most people think that their values come from some immanent "Self" but in reality our values mostly come from our surroundings. The same baby with the same genetics raised in Broken Arrow, Oklahoma vs. Upper West Side New York will have extremely different values, go farther than that and the difference in values is almost unrecognizable. If you or I grew up in wealthy families in ancient Greece, we would think NOT owning slaves was weird and suspicious.
Tangentially related is the movement of Effective Altruism, which is basically espousing taking a high paying job and then using the rewards to make a change.
The existence of a "movement" makes it much more likely to succeed. If you are working at Goldman Sachs during the day, you need to be talking to Effective Altruism friends at night, or you will almost certainly be washed away in the current of Goldman Sachs value systems.
By now, finance and FAANG have minted a very large number of tech millionaires. So, in practice, you have you ask yourself why ~nobody has actually done what you say. Personally I don't think it's because of a lack of funds.
>By 30, many cancer researchers have barely finished their PhDs, so you won’t actually be that far behind scientifically, but you’ll be far ahead financially.
A lot of people trying to change their careers would like to have a talk with you about this, I bet.
Ph.D in CS is 5-10 years ahead of newbie trying to learn computers
The article should not have delved into this as its a can of worms - stick with the industry, programming and math.
Its funny that the article uses a “chess champion” and a “concert pianist” as examples to to argue that you don’t question their occupations when it comes to being a benefit to mankind or not. I mean, the huge fucking salaries, where does the money come from? from fucking trees?
WTF! Seriously? I predict this will be one of the first article/HN post that has negative publicity for Jane Street .
For some reason articles on hedge funds bragging about intellectual abilities if their employees always seem to invoke these professions (chess champion, concert pianist).
I'm still waiting to see them bragging about having top proctologists in their team ;)
I think you are wildly underestimating the cost of running a world class lab.
Even if you retire with 10M by 30 you aren't going to run a world class research center with that kind of money for very long, or at all. Hell Land, buildings and equipment probably eat most of that right out of the gate. MIT's Plasma Science and Fusion Center had to shut down when their funding dropped from $28 to $14M per year. So at 10M you could Fund, forget about building, a center 1/3 the size of MIT's for 1 year.
I know we're supposed to assume the best interpretation, but I'm struggling to imagine how can someone think this is a reasonable comment other than through self-deception.
There's one thing that always baffles me about this kind of market work. Let's for the sake of argument assume that HFT and other sophisticated market making activities are crucial for price discovery and other great social benefits. Then why does this amazingly important social good get mostly turned off over 80% of the time[1]? Even as a retail buy-and-hold investor in boring ETFs not being able to trade outside normal office hours is an inconvenience. Surely the world economy has even more uses for trading at all hours than me?
Without arguing in favor or against the usefulness of HFT, the reason trading hours are limited is to increase liquidity during the specific hours that trading takes place. Liquidity is important for various reasons, in particular it helps reduce spread and thus there are better prices. Trading during other hours is possible, either during pre-market or after-hours, and there are even exchanges that enable trading on weekends, for example https://www.ls-tc.de/de/faq . During weekend trading, the spread is significantly higher.
I will say up front that I don't think the social good is worth what we are collectively paying for it, but I do think the market hours are a reasonable device. This is basically because there are humans involved and they need to sleep (Matt Levine has written about this).
If you want the best price, you need to have all of the market participants bidding together. Market hours serve as a coordinated period in which ~all market participants agree to be online and bidding.
Prices, thus, get stale overnight. But we assume that that is mostly okay, as business is normally conducted during business hours, and we assume that transactions can wait until the next day. ACH transfers take multiple days! (technically so do stocks, but that's mostly invisible to retail traders).
If you're a retail trader, I would caution you somewhat against trading after-hours; there is very little liquidity and it could cost you 100s of bps more.
You can trade outside of market hours just fine and many products (e.g. E-mini S&P 500) trade all night. It's just that a lot of companies publish news right after the market closes so prices are more volatile. And people sleep or play videogames at night so there's less liquidity.
It's trickle-down programming. They're inventing the next big database technology
or whatever by doing busy work and that will eventually enable somebody else to produce something of actual value to mankind.
Ignoring the fact that liquidity provisioning is a very valuable service (if it wasn't, people wouldn't pay for it), what are you doing that is so world changing?
The first argument made in favor OCaml is very similar to Paul Graham's Beating the average (http://www.paulgraham.com/avg.html), if anyone wants to read more about that kind of reasoning.
Most of this article is pretty interesting and unusually insightful about quant firms. But I find this sentence to be utterly disgusting.
> Trading is a lottery operated by market makers, and like the lottery its social function is to convert mass innumeracy into funding for better causes.
It’s basically saying “we should have your money because we know better than you”. Maybe true, but I find it a very weak argument for the social function of a quant firm. Especially when lotteries are essentially a form of regressive taxation.
Curious how people are so interested in Jane Street, ostensibly because they do technically challenging work, but much less so about other places where the work is at least just as challenging, but the money sucks.
You're curious about how people would choose between two equally interesting jobs where one pays a lot more? I'm curious about how anyone could be curious about that.
I mean stuff is either interesting for someone or it's not. Money is not relevant to being interested by something.
I think people want to convince themselves that they're interested in high paying jobs such as those at Jane Street because that would make their lifes much easier (they could go work there and make lots of money). Similarly, some women try to convince themselves that they love this well-off, solid guy who's courting them - marrying such guy would make their lives much easier and nicer.
Money does make some things easier. People make job choices based on:
- lifestyle - how much does this job affect my work/life balance? Do I have to travel far / work late?
- challenge - how hard is it? Will I enjoy the work?
- impact - what's the mission of the company? What am I contributing to?
- salary - how does the job fit with my financial goals?
- prestige - can I talk about / be celebrated for what I do?
Possibly other factors as well. But if everything is equal, but one job pays more than another (and if it's Jane Street, one year's work might be 3 years' work somewhere else) then it makes sense to take it.
I went through a relatively brief conspicuous consumption phase in my youth, but most of the people around me actually didn’t.
What money bought them, and why I now want more than I have, is the ability to delegate both tasks, but even more importantly worry, to others. If I have a brand-new car with a warranty, I spend zero worry that it’s going to break down. If I have a hot shit CPA and/or lawyers and stuff, I spend zero worry than I’m going to dick up my taxes or something. If I have a rhodium-plated health plan, I don’t worry (much) about getting sick. Ditto fitness trainer, ditto housekeeping service, ditto laundry service.
What this really buys a passionate hacker (really a passionate anything) is time unencumbered by stress, which is very different to just time. I can really focus on whatever I want to.
Usually this means I have to work hard and stress about technical stuff, but I far prefer, borderline like, being wrapped around the axle on technical stuff. I hate worrying about that other stuff.
How anyone could fail to consider this a reasonable tradeoff is beyond me.
> the winners get a job from which people routinely retire rich in their 30s
I'd love to know where this claim comes from! I'm not sure how much/what supporting evidence there is. It doesn't fit _my_ experience of people in Quant Finance. Of course, what does "routinely" mean here? 20%? More?
Why do all these companies with pretentious attitudes exist when the average* software still takes 30 seconds to show a paragraph of text? Ironically whenever these companies take the security test, they not only fall flat on their face, but are proven to not have the slightest clue how to do basic stuff like string escaping. I actually looked at the code for one of the top Haskell companies with the same attitude, and the story I just wrote is precisely what happened. Jane street sounds like a level 2 company like these Haskell companies and Cloudflare: They can escape strings, but only in places that have been famously exploited thousands of times, like SQL; they don't know how to actually know when the problem presents itself in a different unusual context, which they may have made themselves. It seems you need a million dollar employee income to reach level 3, and for level 4+ you simply need to be someone who is genuinely interested in the topic (as there is no monetary incentive) and have spent 10 years reaching it. Also, this applies to all aspects of tech, not just software security.
* not even average, this describes almost all software made in the last 20 years.
-- only managed to make it half way through the article so apologies if this was covered later - re: the intern game - if the game is confidence in the probability of your answers - couldn't you deliberately get the answers wrong and just bet low confidence in your answers? - this seems like a really stupid comment on my part so I presume I'm missing something important --
You only get more tokens when you're right. So to "win" you have to bet high when you know you'll be right, so you get the most tokens, and bet low when you're not sure so you don't lose too many. Getting it wrong only loses you tokens.
No context around Jane Street, but I'd expect the goal to still be maximising your return / value. The people who are better at assessing probability and risk will have a higher value in aggregate.
Filter out those who made bets too big to avoid outliers.
Presumably the goal is to have a lot of chips at the end (more than you started with?). I would assume if you bet 10 chips, you get 10 for being right, and zero for not. So betting 0 chips all the time probably won't get you the job!
> One example of this is NAV trading (Jane Street has a paper here), where an investor wants to place a large trade in an ETF and agrees to buy it at some future point at whatever its net asset value is, less some small fee.
Should this say "agrees to buy it at some future point at whatever its net asset value is *NOW*"? Otherwise, I'm confused, why wouldn't the investor just buy it later?
Edit: if you remove the second 'at' it makes sense.
I think they mean that the buyer will agree to pay $5000 now for say 10 shares (close to current valuation), and get it in a week regardless if they will be worth $0, $5000 or $100000 at that point. They would prefer to buy it now, but can't, and thus are willing to pay a fee to make it happen.
However, the motivation (and pricing) is different from futures trading: here the buyer would prefer to buy the asset immediately, but because of market inefficiencies or unavailability it's not possible. So some dealer figures he can make that happen in a week, takes a small fee, and agrees to the trade. In the meantime, the dealer might want to buy something that correlates with the value of the actual asset to cover his bet -- e.g. they might be able to buy most of the stocks in the ETF in roughly the same amounts, and just accept the remaining risk.
There is however a chance that they will not be able to complete the transaction.
Yes, they pay short term capital gains taxed as ordinary income for equities. For futures they pay a blended 60/40 long-term/short-term rate, since all the futures trading is taxed that way (including for retail)
They'll have their cost centers in places like NY and London incorporated separately, making consistent losses, and then the arm doing actual trading will be in Bermuda or somewhere with 0% business tax.
Why haven’t their gains been arbitraged away? Conceptually what they do seems simple enough; and presumably you just need capital to do it. Hell, their own former employees could theoretically compete against them - as could many traders who would pay to learn those strategies.
So why are they still making so much? I don’t understand why their “advantage” hasn’t been arbitrated away into a commodity business.
I worked in High Frequency Trading over a decade ago (not Jane Street) so I have some insight into this. In general, markets are always evolving. I've seen a team of four traders that make $500k/day go down to $0/day over the course of 6 months.
So you're actually right more than you think. Plenty of teams that make money do stop making money over time (or make less). I'm sure there were teams at Jane Street over the years that have folded or dissolved because they stopped making money. But as a firm, they may be making more money.
In the HFT firm I used to work for, that one team went from making $500k/day to $0/day. But another team went from making $30k/day to $2M/day. That's right, a team of 12 people making $2M/day. They probably ate most of the former team's lunch. That's how it goes, survival of the smartest and fastest.
So why hasn't Jane Street's edge been arbitraged away? Some of it has, probably by people within Jane Street who found even more edge. When you have hundreds of the brightest minds in the world, who's going to eat your lunch but yourself (and a few other high quality trading firms)?
But ultimately your assumption is wrong. What they do is not simple at all. It is not like building a simple CRUD application. Throwing money at the problem does not mean you will succeed. You will most likely fail. Strategies that used to work may no longer work when markets change, and markets are always changing. So some traders may try to take their ideas and apply them elsewhere, and they may have some limited success (not to mention the high quality speed and infrastructure you need to win), but when the market changes in 6 months, are you smart enough to keep up?
> They probably ate most of the former team's lunch.
Are you able to elaborate on this?
I’m assuming that teams wouldn’t be sharing strategies with other teams. Is that accurate?
Would these other teams be independently finding some strategy that is either directly better than another internal team or is having some indirect impacts on other teams?
> I’m assuming that teams wouldn’t be sharing strategies with other teams. Is that accurate?
Correct. At least at this firm I was at (different firms have different org setups and therefore incentive structures), each team was a silo. All the teams shared the common core infrastructure to talk to exchanges, but that was it.
Teams have negative incentives to help each other.
> Would these other teams be independently finding some strategy that is either directly better than another internal team or is having some indirect impacts on other teams?
Exactly. You have no idea who you're trading with. It could be against other teams in the company or other players in the market (probably a mix of both).
Imagine someone outside of the tech community thinking along this line...
"Making high performance CPUs that are also highly power efficient should make a ton of money. Why isn't everyone doing it?"
Well, turns out that isn't exactly something that a small group of engineers can whip up in a garage anymore. Same goes for highly efficient market making systems.
CPUs operate due to quantified phenomenon. They're well understood. They've been refined over nearly 100 years.
HFTs came into their own over the past decade or so -- during a time of falling interest rates, unprecedented growth, and notable lack of regulation in financial markets.
One of these things is not like the other. I'd be entirely unsurprised to see most HFTs turn out like Lehman Brothers, Enron, or AIG. They all lasted more than a decade or so. But their gains were fraudulent and they failed spectacularly.
A recounting of the recent history of US financial markets suggests, at least to me, that these firms have the burden of proof. If they haven't proven legitimacy and societal benefit, assuming fraud is a pretty safe bet. I honestly can't name any investment firm with double digit returns YoY for more than a decade or two that doesn't have bodies in the closet. Even Berkshire Hathaway pretty much tracks the S&P500 these days. And as for hand wavy platitudes about price discovery, I don't understand them in the least.
Occam's razor is all I'm saying: What's the simplest answer to the question, why aren't large HFTs with high overheads being eaten alive as technology decentralizes access to trading? Wouldn't we expect types like Burry -- self-driven, confident financial geniuses -- to be equally decentralized? Wouldn't we expect returns to become equally decentralized?
Fraud is the simplest answer. Maybe that comes in the form of market coercion, regulatory capture, negligence, or any other plain old market manipulation. Look back at Enron: The Smartest Guys in the Room. It's all much too similar for my tastes. Time will tell.
> If they haven't proven legitimacy and societal benefit, assuming fraud is a pretty safe bet.
This is absurd reasoning. It's like saying Apple has such large profit margins on their iPhones that they must be either cooking their books or in cahoots with someone somewhere. It's just a phone! How hard is it for a competitor to make a comparable phone?! They've had 15 years to copy them!
> I honestly can't name any investment firm with double digit returns YoY for more than a decade or two that doesn't have bodies in the closet.
It's clear you have literally zero idea what HFT actually does, yet you don't hesitate to call them frauds. HFT firms do not "invest" like traditional investment firms or hedge funds. They provide liquidity and sometimes take liquidity but only tend to hold those positions for seconds or minutes. At the end of every day, most HFT firms have zero position (some might hold some spreads or hedged positions overnight but those are generally less risky).
> why aren't large HFTs with high overheads being eaten alive as technology decentralizes access to trading?
HFT firms don't compete against each other on pure "technology", but more so on mathematical models or what you could call intelligence. Intelligence is not simply arbitraged away over time, although it does happen to some extent. My comment earlier discusses some of this [0]. Technology has little to do with their success. By the same reasoning, why hasn't Apple's margins been eaten over time?
> Fraud is the simplest answer.
The ancient Greeks thought that Zeus was the simplest answer for lightning, but clearly we know that not to be the case.
> Time will tell.
We do not need time. We already know. That you personally don't know doesn't change the fact that nothing illegal or wrong is going on.
As mentioned earlier: phones and financial services are not similar. The market for consumer electronics hasn't fundamentally threatened the stability of the US government every decade for the past 5 decades. I can pick up an iPhone and use its features. It's clearly a complicated device with years of widely publicized, widely understood iterations. Renaissance Technologies Medallion fund may as well be an insider trading scheme for all the public can tell. We have no ability to introspect it. It's a complete black box. And the other financial services provided by Renaissance are garbage.
> They provide liquidity and sometimes take liquidity but only tend to hold those positions for seconds or minutes.
Do HFTs issue or purchase billions of dollars of debt with the express goal of market liquidity? No? So why do you use the term "providing liquidity?" You know "providing liquidity" isn't the same thing as "frenetically purchasing and selling derivatives," right? If these funds didn't exist, I've seen no compelling evidence markets would so much as hiccup. I've seen plenty of compelling evidence that much of financial services in this country are a net drain on its productive capacity.
> We do not need time. We already know.
We'll have to agree to disagree. I think far too much activity happens in financial services, that they aren't nearly boring enough. I harken back to the 70s/80s back before massive deregulation in financial markets, when financiers had to get two jobs just to tread water. I suggest we might revisit such a time. Time will tell!
It's hard to continue this conversation in good faith without pointing out that you literally have no idea what you're talking about. You don't know what HFT firms or what market making actually is, yet you don't mind throwing out outrageous accusations of fraud and illegal activities with zero evidence to back it up.
Your entire argument is "I don't know what they do, and they make money in finance, so they must be doing it illegally." The burden is on you to provide evidence to back up your claim. That's how things work. I could claim that HN user rgifford is the Zodiac Killer, and my evidence is "I don't know him but if you rearrange some subset of the letters of words he's typed in the past, they spell out 'I am the Zodiac Killer'". Whether you realize it or not, your reasoning is that specious at best.
> The market for consumer electronics hasn't fundamentally threatened the stability of the US government every decade for the past 5 decades.
Nothing HFT has ever done has come within even 0.000001% to threatening the stability of the US government. Period.
> Renaissance Technologies Medallion fund may as well be an insider trading scheme for all the public can tell.
Again, claims require evidence. You need to provide that evidence. But more importantly, the fact that you compare RenTech's Medallion Fund to HFT again demonstrates your complete ignorance on the topic. The Medallion Fund isn't powered by high frequency trading. It started decades before HFT ever existed.
> Do HFTs issue or purchase billions of dollars of debt with the express goal of market liquidity? No? So why do you use the term "providing liquidity?" You know "providing liquidity" isn't the same thing as "frenetically purchasing and selling derivatives," right?
You don't know what providing liquidity means. When you place an order to buy or sell 100 shares of MSFT in the market, who is taking the other side of your order? The vast majority of the time, it's an HFT firm.
> If these funds didn't exist, I've seen no compelling evidence markets would so much as hiccup.
I'm sure if you took all of the grease out of your car engine, it would continue to operate without a hiccup.
> I've seen plenty of compelling evidence that much of financial services in this country are a net drain on its productive capacity.
Another false comparison. HFT is not a standard "financial service" that is provided to consumers.
> We'll have to agree to disagree [...] Time will tell!
Flat earthers also ignore reality and disagree, but that doesn't make their perspective equally as valid as those who look at pictures of the earth and conclude it's spherical. Time has already told us, but whether or not you want to look at facts or educate yourself on even the basics of what you think you're talking about is a different question.
Almost every sentence you said in your post contained some flat out false or wrong statements. Your unfounded arrogance is matched only by your ignorance on this topic. You have not made a single concrete or factual point about how HFT might be fraudulent, yet you seem to hold this worldview with the same conviction that the sun rises in the east.
Literally anyone. Literally any other market participant with interest in longterm ownership.
> Your entire argument is "I don't know what they do, and they make money in finance, so they must be doing it illegally." The burden is on you to provide evidence to back up your claim.
That's not my argument. Snakes bite. Highly profitable, speculative, and complicated US financial firms have consistently grown to threaten the stability of US financial systems before collapsing. Precedent matters. When an assertion violates a precedent, it's what must be proven. Your assertion has the burden of proof, and it's an incredibly high one at that.
> ...the fact that you compare RenTech's Medallion Fund to HFT again demonstrates your complete ignorance on the topic
Medallion is one of the most well regarded and profitable hedge funds in modern American history. It's a grandfather to modern HFTs. Even its sterling record is highly suspect.
I sincerely hope the American public doubles short term capital gains taxes and regulates financial markets back to the stone age. Smart people need to spend their time on engineering, medicine, and research. The amount of human capital wasted on silly little financial machinations these days sickens me. I go back and read about financiers jumping from building back in the 20s and I understand completely. Our best and brightest, so confident of what they had to gain, traded their potential in pursuit of Alchemy only to be left with nothing. And who can blame them? Newton fell for the same.
> Literally anyone. Literally any other market participant with interest in longterm ownership.
You don't know what you're talking about. If there were no market makers, your orders probably wouldn't execute within any reasonable time frame.
> That's not my argument. Snakes bite. Highly profitable, speculative, and complicated US financial firms have consistently grown to threaten the stability of US financial systems before collapsing. Precedent matters. When an assertion violates a precedent, it's what must be proven. Your assertion has the burden of proof, and it's an incredibly high one at that.
That is your argument. Snakes bite? So, therefore, what? Financial companies commit fraud as their primary form of operation? What kind of argument is that? It's ludicrous.
> complicated US financial firms have consistently grown to threaten the stability of US financial systems before collapsing
I cannot emphasize this enough. You literally have zero idea what HFT firms actually do day-to-day. Many people use the word literally when they mean figuratively. I actually mean literally in this case. Comparing HFT firms to banks selling mortgage-backed securities is like comparing your local florist to a drug cartel. In fact, it's probably more like comparing a piece of wood to drug cartel. They're entirely different things. HFT firms don't even sell anything.
> Precedent matters. When an assertion violates a precedent, it's what must be proven.
The precedent you name is totally irrelevant. It's like saying since drug cartels do illegal things (they do), then this piece of wood lying on the ground in the forest is also breaking the law by existing. That's how disconnected the two things you're comparing are, but, again, since you literally have no clue what HFT firms do, you don't even understand that.
> Your assertion has the burden of proof, and it's an incredibly high one at that.
Wrong. You can claim that, but like all of your other claims, it's entirely false.
> Medallion is one of the most well regarded and profitable hedge funds in modern American history. It's a grandfather to modern HFTs. Even its sterling record is highly suspect.
I truly don't think you're even reading what I'm writing, or if you do, you keep moving the goalposts (not that it helps your case--you're still 100% wrong regardless of how much further you try to move it). HFT firms are not hedge funds. Stop comparing them to hedge funds, unless you think comparing a piece of a wood to a drug cartel is a useful comparison, in which case there's no point in talking anymore.
Also, "The Medallion fund [...] is a grandfather to modern HFTs" is such a vague and meaningless statement. Sure they have some algorithms, but lots of investment firms do. So what?
But if we follow this absurd line of reasoning, if your grandfather committed a crime (which even in this analogy, they didn't), does that mean that their grandchildren do also? Of course not.
> Smart people need to spend their time on engineering, medicine, and research. The amount of human capital wasted on silly little financial machinations these days sickens me. I go back and read about financiers jumping from building back in the 20s and I understand it completely.
This is a totally reasonable opinion, but entirely divorced from the question of whether or not HFT commits fraud. Again you have provided literally (not figuratively, but literally) zero evidence to back up your claim.
Your entire argument seems to be:
- Some financial firms have done bad stuff in the past
- HFTs are financial firms (sort of, but whatever)
- Therefore HFTs must be committing fraud
That's literally your argument as far as I can parse it. If you read that, that's just so patently absurd that I don't think I can do anything more to highlight how absurd it is. Its absurdity stands on its own. Maybe something like:
How exactly would this fraud work? Most HFT firms only trade their own capital and distribute gains internally, there’s no one to defraud. Also it’s been going on a lot longer than a decade.
Market coercion, regulatory capture, negligence, or any other plain old market manipulation like pump and dump or insider trading or bear raiding, etc.
Enron straight up lied to regulators, many of their employees were also plain negligent. HFTs will probably find their own flavor of fraud given a few more years, if they haven't already.
> HFTs will probably find their own flavor of fraud given a few more years, if they haven't already.
This is what psychics call a "cold reading" - a statement that is bound to be true eventually! At some point in the future HFTs will "find" (?) something approximating fraud. That almost can't not be true. But I don't see how it relates to your statement that Jane Street's reported profits are fraudulent.
Sure, that statement is a bit of a non sequitur. Here's one that isn't:
Highly profitable, speculative, and complicated US financial firms have consistently grown to threaten the stability of US financial systems before collapsing. As such, these types of firms have a high burden of proof for legitimacy. If that hasn't been met, betting on fraudulence is pretty safe given historical context.
Fair. I disagree with "consistent". Some highly profitable, speculative, and complicated US financial firms have done this, but others haven't. E.g. insurance firms.
{x} came into their own over the past decade or so, during a time of falling interest rates, unprecedented growth, and notable lack of regulation in {x's field}.
Context matters. We were speaking in the the context of financial services. In that context, the past decade has been shooting fish in a barrel. You had to be an idiot to lose money with how index funds performed.
Point me to three funds that have maintained greater than 20% YoY profits for more than 20 years. I would be floored if you could do it. Apple, arguably the best and most profitable business in the world, manages between 20-30% YoY profit. They're the largest contributor to world financial markets rather than operating only on derivatives. I can not imagine a world in which the largest trading firms can outperform that without fraud of some kind. In my mind, it's like gravity. Little rocks rotate around bigger rocks.
Devil in the details. MMing is conceptually simplistic but the operational costs are huge and are generally getting worse. Making while fighting these costs against competition playing the same game as you turns non trivial real quick.
That said MMs have mostly consolidated heavily over the last decade (due to many firms collapsing against competitors) so in some ways the business has been commoditized. Not sure if true of MMing ETFs as an authorized participant (JS bread and butter) though, idk much about the logistics there.
It's not just like you can just have a few hundred lines of secret sauce implemented in Python and then go and fill your boots.
The costs of maintaining a trading platform are very high. You have to be colocated with brokers/exchanges, and have a full market data and trading platform optimized down to microseconds. You need a large data and processing farm to backtest your algos. You need the legal structure to dodge all the tax. You need access to lots of GPUs and FPGAs to train your models and execute fast.
At least on the quant side, I think the typical sentiment is that most researchers aren't interested in ops / developing infrastructure / curating datasets.
I think he's saying that a quant can work for a few years and retire unreasonably rich, or keep working at a place where they are well rewarded and everything works.
Or they can take a strategy built on advantageous relationships with banks providing credit for leverage, an accurate and clean history of the markets and prior data to feed models, all run by teams who know what they're doing and who are constantly working to improve the edge the entire firm has, and try to do it all themselves after only really working in one small area.
Like other investment options ... we tend to look at the successful few and assume that they know something special, or have something special. But over time, a few are just lucky and most are not, and we have no way of predicting luck :)
Because they are the ones arbitraging the gains away. That's why there's no opportunity left for you average punter to just start his own little script that take orders from one market and put them on another.
All the players that are left are highly sophisticated technologically, but also in terms of ecological position. For instance you have Citadel doing PFOF with Robinhood. Once you lock in a deal like that, you have a special position in the market. Having access to lower fees is also an important part of the game, and it only happens for players who are already in the game.
Lone wolf traders are satisfied in income in hundreds of thousands of dollars per year, while a large company wants millions or billions. There are way, way more opportunities on the market to make just a couple hundred k than to make a billion. In other words, a lot of the opportunities do not scale well.
I first heard about Jane Street taking the first computational linguistics course that used OCaml. I followed them over the next decade, every couple years seeing them pop up.
The given reasons for using Ocaml outlined in this article is interesting. It makes reasoning about complex systems easier. And making an "esoteric choice" earlier has advantages in hiring.
Assuming you give back to keep it going.
I don't have the advantage of secrecy where I'm at. But I'd be willing to guess that strategy could apply to other languages and markets.
Quite a few inaccuracies in there. The ones that jump at me:
- OCaml does type inference, so you don't actually declare the types and have the compiler check them, as stated in the article.
- Investors are not market-makers, the two words actually refer to the two types of opposed participants in the market.
- OCaml is the language used for research, but they actually have a lot of developers working on the compiler and on libraries for OCaml which are themselves implemented in C or C++.
- Jane Street is hiring massively and not nearly as exclusive as advertised here, though they do indeed pay slightly above the average. Most likely they had a few good years and are investing the cash they made into hiring expensive staff.
Downvoted because I feel this is nitpicking for nitpicking's sake, and it gets more things wrong than right.
> OCaml does type inference
This is an uncharitable interpretation of the author's intent.
> Investors are not market-makers
This is a very uncharitable interpretation of the source:
"In one sense, every investor is a market maker and the only difference is their timeline. Jane Street is far along the continuum towards strict market-making: being willing to buy and sell assets at a price close to, but not exactly at, the market price."
> they actually have a lot of developers working on the compiler and on libraries for OCaml [..] in C or C++
Yes, and? The author still makes the correct point that they gambled hard on OCaml.
> Jane Street is hiring massively and not nearly as exclusive as advertised here
I bet they're hiring very selectively for the high value core jobs discussed, even if they have a large support staff that does things like writing OCaml infrastructure in C/C++ and gets paid much closer to non-hedge-fund rates.
Yes, it uses ML-style type inference, but that doesn't mean you are literally unable to annotate types, and the compiler is absolutely still doing type checking. I'm sure people like Jane Street annotate everything.
In addition, perhaps a small point relative to the first, but in Ocaml, the arithmetic operators perform no type inference; there's a separate operator for float-addition versus int-addition, and so on. This somewhat limits your exposure to potential automatic type conversions.
At least in similar languages like Haskell, what you do is let the compiler infer types and then press an IDE key combination to write out those inferred types as part of your code so you would get an error if you ever accidentally change the types.
In Ocaml-world it is customary to write .mli files that specify the types of exported functions and modules. Those are then checked by the compiler against the .ml file with the implementation. In the .ml file you indeed use type inference over annotations almost all of the time.
The Ocaml compiler is largely written in Ocaml.
C and C++ are not used very much at Jane Street as far as I know.
This reads like a very rosy picture of what these firms actually do. Surely they are secretive and tight lipped about all the money being made in low risk trades.
There are known loopholes that market makers get to exploit since they help keep the casino going. No need to make its a noble profession or compare to impact to actual economy or mankind.
These are the worst of the worst when its comes to exploitative and manipulative behavior to make money over retail trades just as a Hedge fund selling CDO's to pension funds.
Front running is illegal. However, making a better price prediction than the rest of the market and trading on it is not the same thing as front running.
Generally, illegal trading resolves around the idea of trading on non-public information. And front running falls under that category (access to order data that other participants do not).
However, HFT's do not trade on non-public information. Every participant has access to the same market data. I could start my own "HFT firm" tomorrow; I would just be incredibly unsuccessful at it because I don't have the finances or computing resources to execute.
This is a pretty widely discussed question, and while I think the empirical evidence is so far unclear, there are some obvious theoretical models where costs for large institutional investors (like pension funds) go up. E.g. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2238516.
There are a bunch of these firms. And when you pass the gauntlet, you realize that the people are smart but no smarter than at other firms. At some point, the strict hiring filter just produces noise.
If anything, having that many achievers results in bored people doing things that are suboptimal for the performance of the firm as a whole. Whole divisions of wasted talent spawn and self perpetuate.
It's the hiring process hazing ritual that sets the allure, there's not much else to it.
Don’t mean to hijack this thread but seeing as you have a background in the industry I was hoping you could answer a couple questions I had:
1. What do these firms typically look for in support staff? I’m asking about non trading/quant roles like recruiting/ops/facilities management?
2. What’s the potential upside, not specifically financial, but more along career growth and opportunities for different roles within the firm if you join in a support function?
I've spent time at a very large and well known hedge fund and I also have family at JS.
Regardless of what the individual you responded to thinks.. Firms like this have very difficult interview processes. They are looking for something "Special" and this excludes the vast majority of applications.
I took a taxi to my interview, and the taxi driver himself told me he drives many people to the location for interviews, and drives a lot of unhappy people back (failed the interview).
It should tell you something when even a local taxi driver knows how difficult it is to get into these places.
I will try to answer your questions as well:
1) I did support work when i was at "hedge fund" - They want people who can think outside the box and be a culture fit. their culture is well known, and you either fit in or you don't. There is no "faking it".
They generally hire fresh grades from ivy league schools. This way they can indoctrinate the culture. This is not always the case, but probably 70% of their employees were done this way.
2) Many of my former coworkers are now CEO's, COO's etc. Besides the money the culture encourages you to push past your limits and grow. One guy was a developer, he's now the CIO for an international makeup company..
At the firm I worked at, it did not matter what your role was. If you wanted to change groups, you would be given a fair chance to take the tests. if you passed, you were in the new role. The tests were INTENSE... but many "techs" moved to business roles over the years.
You might have a focus-in ability to grind on details - that will play.
There are many support roles, one is research, and that can mean sorting through a daily pile of a few thousand "documents" (ranging from a single paragraph to a thousand pages) and sorting them into groups, and then being able to rapidly summerise the salient features.
This bleeds into training AI to do the same .. while remaining aware of the nature of the material to be a human check on the AI.
There are also roles for people that can map or otherwise visualise data, pander to the needs of the core earners so that they never need reach far for what food, drink, personal life support they need, etc.
If you're aiming for support you likely want to present your discretion and ability to seamlessly play well with others as dynamics and demands change.
Often a background or a degree from a prestigious university in the arts. Bringing culture and energy to the office that focuses on people and humanity instead of competitive math type geeks. Some firms like to feel like patrons of the arts giving writers actors poets etc a better job than waiting tables while exposing the firm to there influences.
Very much appreciate the insight. I don’t have good odds as a formerly homeless high school graduate, then again I wouldn’t have seen myself in my current job 5 years ago, so will most likely give it a try anyway.
>> I don’t have good odds as a formerly homeless high school graduate, then again I wouldn’t have seen myself in my current job 5 years ago
Shows that you are both courageous and smart with a positive, vibrant attitude. Thanks for sharing your positivity, much appreciated and more likely than not you will succeed in your try. Good luck :-)
I wouldn't say most of these roles are anything different than you'd expect at most tech companies unless you are involved in the production trading/tech activity (trading-related ops, recruiting for traders/devs). Helpdesk/facilities usually isn't anything special.
I don't know why you think that. Not everyone who makes in to these places comes out wildly rich. I know a smart guy from college who spent years as a team lead at a top HFT firm and wound up making less than most junior-level software engineers. You make what you kill, and not everyone is killing a lot.
Fifteen years ago I had a job offer from Jane St sitting in my inbox, and I turned it down to work in tech.
Could I have made more money at Jane St? No idea. Probably? But money isn't exactly holding me back right now.
Would I have felt like I was working on interesting problems? For me, personally, I don't think so. I don't find abstract problems as interesting as I do practical ones, and, practically, working at Jane St is working to make a few rich guys incrementally richer. Not really a problem I'm interested in, I guess.
(As an aside, it seems to me retention is much higher in tech than it is on Wall St. The rosy view of this seems to be that Wall St pays so well that everyone retires early, but then again, there's a reason they call it "compensation.")
You have to make your own choices. Jane St has a gleaming reputation--and maybe, for you, it would have been a perfect match!--but not getting hired there seems to me to be a strange thing to consider a "greatest regret."
I don't feel it's primarily about the money (but it helps). If it was about the money, it'd be the uncertainty of the bonus, rather than the wage itself.
I interviewed at Jane Street a long time ago. Halfway thru they gave me an office tour. All employees were packed together on one side of the floor, screens everywhere, no personal space at all. I couldn’t see myself sitting there for 10 hrs/day. I limped thru the rest of the interview. Other firms and banks pay well too. The work is always boring though.
So you didn't get as rich as you could have and might not get to retire at 30, go live your life. A friend of mine and I both applied for a HFT firm out of university, he got in and I didn't, but based on how he described it over about 18 months working there, my greatest regret would have been taking that job, it sounded like a dismal place to work (with platinum handcuffs).
> The other mitigation strategy is: just buy some puts.
I wonder who are the counterparties selling puts to Jane Street. My cynical view is that they are losing overall but the traders don't care because they are winning in short term (when nothing happens) and may have already changed their job when the market crashes.
They don’t really have to be losing in the long term, being short deep out-of-the-money puts nets you an option premium if the underlying never crashes, and once you delta-hedge that position, you can remove the tail risk from your portfolio
It sounds like you aren't really interested in a rational discussion by the second half of your post, but the typical arguments (incl in the post) for are that market makers reduce inefficiencies in the market & provide liquidity that significantly reduces the bar (i.e. make trading cheaper) for retail investors (like you or me) to trade.
I think it is generally accepted that society does benefit from a modern and efficiently run market. Whether or not automated market makers contribute to this could be up for debate, I guess.
I don't do stock market trading, but even those who do that I know of, are doing so via companies such as: Robin Hood, E-Trade, Fidelity, Charles Schwab, Vanguard...
Are these "market makers" working behind the scenes to facilitate the operation of those retail facing companies? Is Black Rock buying all the real estate also good for (potential) retail investors like me? Because it's starting to feel like we're being told to cheer for those faciliting the ever-increasing wealth disparity of society.
>Are these "market makers" working behind the scenes to facilitate the operation of those retail facing companies
Yes. Brokers like Fidelity have no idea how to price things, and even when they do, they don't know know how to manage the risk. Marker makers quote at the tightest prices they can offer and you trade against them, through your broker, on or off-exchange.
Market makers are often much more efficient and automated than brokers, but have similar or lower margins as a business and take a lot more risk. There's a misguided anger directed to electronic market makers, but it's in fact brokers that've been ripping you off all along.
You probably do, indirectly through an agency agreement, for example a pension fund that manages your money. Or even whenever you just buy an ETF to invest. The costs you're indirectly paying are lower due to the newer generation of market makers that have reduced transaction costs for you.
> Is Black Rock buying all the real estate also good for (potential) retail investors like me?
Investing in real estate for years is not related to market making stocks with a holding period of 5 minutes.
I don't have a pension, or a 401k if that is what you are implying. I do have social security deducted from my paycheck. Is that money getting invested into the stock market on my behalf?
Sorry I'm not in the elite income class, I'm not directly familiar with the nuances of all these financial companies, or what they do. I understand risk. I understand lending money to pursue a risky venture. I understand time-value of money. I don't understand higher-order financial engineering except as presented in pop culture references such as wolf of wallstreet which I initially referenced, or the big short. I understand many machinations of society aren't directly visible as a "product" to the "average joe" of society but their ultimate benefit to society can usually be explained in a way I can understand, such as insurance, loans, industrial manufacturing, and such. These financial companies, as well as lobbyists, seem to just be skilled at manipulating a system and converting it into money.
Probably by your value system I am irrational, I don't chase money as an ends unto itself. I'm trying to understand Jane Street.
> I don't understand higher-order financial engineering except as presented in pop culture references such as wolf of wallstreet
The Wolf of Wall Street wasn't doing any sort of financial engineering in the real sense of the term. They were just committing fraud with pump and dump schemes. These guys had no actual quantitative or mathematical modeling abilities whatsoever that would be required for financial engineering and modeling. They were salesmen who swindled a lot of clueless people out of their money through illegal means.
You may not directly participate in capital markets but institutions around you that society relies on do. They do so to secure operating cash, loans, buy or sell insurance, etc. When people participate in capital markets they do so looking to make a profit or to purchase some utility, ideally these people have done some research about their trade before firing. Market makers compete for the right to charge you a fee (the spread) to make that transaction. You’re paying a fee to sell them risk (the risk that you’re correct with your opinion). Collectively this adds up to information exchange between all parties becoming less expensive: more participants on either side of any trade, smaller spreads, etc. Less friction.
Options MMs are more or less directly buying and selling insurance.
While you yourself might not be directly involved with this, a lot of what makes capitalism go round ultimately goes back to these large institutions swapping vast sums of money around and market makers help facilitate a lot of that action.
Business loans, your savings account, your employer’s (or contractor’s if you’re freelance) line of credit, the global currency system, the prices of commodities that get turned into the physical products that we consume, etc.
Well, that’s the idea anyways. Whether or not the snake has consumed it’s own tail is a whole different discussion, but the stated value of stuff like this is to create efficient markets with correct price/price discovery aka make sure no one is paying too much or selling for too little.
I think the equation changes when you weigh the marginal utility that market makers provide against the social opportunity cost of allocating intelligence to these firms.
They theoretically facilitate capital allocation by increasing liquidity and hence aid in price discovery, if they operate strictly within the market maker role. Whether it plays out like this in practice has been debated elsewhere.
- There is a search cost of finding someone to trade with. Market makers streamline the process by always having a deal available. They might not offer you the best price you could get if you waited, but if you want to buy/sell a commodity right now you now have the option to do so, and probably removing the search costs from society as a whole is economically efficient.
- Special case of the above: They allow people who have want to trade huge amounts of a commodity a way to efficiently do so (no need to talk with multiple people; can do the trade all in one place).
- By making trading more efficient, society can get a better idea of the "true" price of things. Extremely important because prices guide investment. For example, if you're a farmer, and you're thinking about what crops to plant or a research lab thinking about where to focus your research. Having an efficient market with accurate prices ensures the economy grows at max speed.
Thee article addresses this common question near the end. I like this part.
“We don't demand that chess champions use their skills in something with more real-world applications, or that concert pianists find a more practical outlet for their manual dexterity and attention to detail.”
> “We don't demand that chess champions use their skills in something with more real-world applications, or that concert pianists find a more practical outlet for their manual dexterity and attention to detail.”
Maybe because chess champions and concert pianists don't hoard a significant amount of resources, depriving the rest of society of the means to thrive.
They minimize rent extraction from pension funds by bringing scale economies to an industry that used to be manually and inefficiently provisioned.
Evidence: the extinction of manual market makers, and the observed reductions in transaction costs, by virtue of increases in liquidity and reductions in bid-offer spreads.
Collectively they reduce friction and increase transparency for global information exchange. Obviously no one does it for purely altruistic reasons but the byproduct is (probably) net positive.
At my job? I take food ingredients and perform some manual manipulation to arrange them into enjoyable edible form (although the natural gas powered grill and the electric element powered heating elements, via cooking oil perform the bulk of the "work" in terms of watt-hours), and contribute to the maintenence of the facility and equipment that allows that to happen. Per shift (along with 1-4 coworkers) I think I am involved in preparaing late breakfast or lunch for approximately 150-200 people, saving them perhaps dozens of minutes from preparing the equivalent meal themselves. (don't worry, I dont think you owe me too much respect).
1. It's realllyyyy hard to get hired. So many stories are along the lines of "I applied...blah blah... didn't get in"
2. You have to solve over the phone very hard math questions to make it past the initial screening stage. I dunno what comes after that.
The highest-stakes gambling events in the world are typically very discreet, invite-only affairs. One that might be close to the top in terms of available winnings happens at the end of Jane Street internships: interns get a stack of 100 poker chips and spend half a day getting asked brainteasers and then betting on their confidence in the answers. Some of these questions might be pure math and probability questions, some might be more abstract bets on making a market in some outcome, and apparently one of the questions is a tough probability question where part of the prompt is to bet on how long it will take to get the answer.1
I dunno why brain teasers are so important. I increased my account by 5x since the lows of covid to present with simple large cap tech and etf strategies (tesla ,tqqq, tecl, amazon, and others ). I don't need to mentally visualize 3d shapes intersecting 2-d planes or count colored vertices of hypercubes to make money or develop good strategies. Just some basic calculations and some other analysis..maybe advanced high school level. It's like if you want to find good traders, look for people with good track records.
If I were going to start a fund, I would do away with the puzzles. Instead what I would do is look for people who seem to have good track records on reddit or elsewhere and some decent risk management, like on wallstreetbets. There are thousands of users there and then I would try to find the best ones and try to quiz them on risk management to see if they are relying on luck or have a system. Recruiting from reddit or twitter is harder than linkedin, but I think the quality is better because you are seeing actual traders in their element. instead of hoping that puzzle skill will lead to trading skill, you just pick people who are already good.
Continued:
The other mitigation strategy is: just buy some puts. Markets usually don't crash upwards, but they do have a habit of crashing downwards. And for a market-maker, a crash is a uniquely interesting situation: volume is high, spreads rocket up because people are afraid to trade or don't have the liquidity, so an active participant can make a staggering amount of money. (I liked this Reddit AMA: "Yeah, 08-09 was insane. I've heard stories. No one knew what the fuck was going on and everyone was on edge. Then it all turned out fine and everyone got PAID.")
Puts bleed out a lot. Even during bear markets they lose money if the path dependency is unfavorable. The covid crash would have been perfect, but the 2022 bear market has been much more gradual, so puts would have done more poorly.
Yes, the 'crashing down' aspect is captured by the skew or smile. That's why a 20% ITM put will have a much higher IV than a 20% OTM call or be much higher than predicted by the volatility of the underlying. In some cases it will be massive...like a 38% IV compared to 11% for the underlying. So many people have tried to make put strategies work, and I have yet to see anyone do it, but if someone actually could I imagine they would not tell.
Tldw: meets a person, picks 5 horse winners, gets then to invest. How did he pick 5 winners? Emails 1000s of people, using a permutation per person. The person who sees the 5
wins thinks he has a system.
Real life version: 1000000 monkeys given ability to trade. Scratch
bum=buy, scratch head=sell. One of the monkeys will certainly have a good trading record by the end of it.
It depends if you are getting new money or not. For a lump sum investment, depending on market cycles it's possible to structure the trade to optimize returns. If you assume that bear markets are every 6 years , there are certain simple integrals for computing this in which you input a certain starting capital and then a certain risk -free rate and then the capital is split between two assets like cash and stocks. When the bear market is triggered, you switch from cash to stock. [0]
A calculation i ran to answer this problem shows that if you have $10k and split $3k of into cash that yields 3%/year and the $7k is put into TQQQ, which generates a long-term CAGR of 53%/year, approximates the actual returns of TQQQ .
So this turns the $10k into $1.5 million over 12 years, which is close to the actual result (100% or $10k invested in TQQQ at the start), assuming a crash happens every 8 years (modeled by exponential distribution and based on empirical evidence going back the past 100 years) and and then after TQQQ falls about 70% the $3k cash is then put into tqqq. After crashing, the above formula assumes that TQQQ races higher in order to maintain it's long-term CAGR, so buying the dip helps a lot.
So generally speaking, keeping 30% in cash/bonds equals the result of 100% fully invested if you buy the dip. The downside is if there is no crash you will lag.
There are various tweaks like above to improve risk adjusted returns. It's not that hard to do if you have a basic knowledge of calc and stats.
There are a lot of assumptions in this comment, and solid math based on faulty assumptions is not going to be a good long-term strategy.
The markets are not predictable based on past history. Whenever you have a model that shows they are, you are either cherry-picking or have been lucky. Even more, there are far too many external phenomena affecting the fortunes of an individual company to be able to reliably make the kinds of bets you are taking about.
> After crashing, the above formula assumes that TQQQ races higher in order to maintain it's long-term CAGR, so buying the dip helps a lot.
This is the funniest assumption by far. All (public for profit) companies try to "race higher" at all times. Sometimes they succeed, sometimes they stagnate, sometimes they crash. Right after a crash is when you have the highest chance of it never coming back up. The CAGR is a historical observation, not some kind of parameter of a forward-looking model.
I think COVID is enough to disprove this idea. That was the bear market that turned bull ... for some sectors but not others. I don't think the cycles are predictable enough to make more profit (on average) than a buy the index strategy.
The highly mathematical quants hired by trading firms are doing something pretty different. They are trying to find opportunities for profit wherever they exist using advanced techniques. It is much different to you or me casually using what seems like a "common sense" approach. Most people who say "of course it will..." find that the next quarter is the exception to their definite rule about how everything works.
One of the funds you list is leveraged 3x. If the market drops 33% you're wiped out, get liquidated, and can never recover.
You've already made the assumption that you can detect the market bottom to select when to drop the $3K, which is ludicrous, and begs the question if you're know where the bottom is why not put the full $10K in then with maximum upward leverage.
I think your strategy is making the fallacy that past performance is a guarantee of future performance. Using specifically picked events (e.g. 33% decline) and then assuming that the event not happening in the past makes it impossible to happen in the future.
Also how does TQQQ work. I don't know and I am happy to admit that. But I assume they need to do re-balancing shenanigans to keep the leverage at 3x, they have to pay interest on the leveraged money, and so on. So it is possible that the market takes a milder dip than 33% but you get stung on TQQQ - maybe not a wipeout but severely down and takes years to get back to break-even. Would like to hear from someone with knowledge of this.
If you have a long term alpha strategy - one that can beat the market every time - and it is as simple as buying an off the shelf instrument and topping it up. I would be surprised.
I increased my crypto account 50x since the start of Covid. But I’m not delusional enough to think there was any skill involved in that. I was simply the beneficiary of an unprecedented macro environment.
You are likely the same, though you don’t know it.
Now if you manage to grow your portfolio 5x again between 2022 and 2024, that will be something.
> I increased my account by 5x since the lows of covid to present with simple large cap tech and etf strategies (...)
You managed to make money on a levered high-beta strategy in a zero interest rate environment? If you don't know who the rube is in a market, it's you. Add a bit of volatility and the smart kids at Jane Street will eat your portfolio. They are on both sides of every trade, taking your money no matter what you do.
The days of the "good track record" traders in the public markets have been over for 15 years. Forget your strategies, park your money in SPX and thank me later.
They'd be silly to not interview someone who applied with strong quantitative background. Once you make the interview, it's all up to you. No amount of referrals will make up for a poor interview.
If this stuff floats your boat I'd also recommend any of Carl Cook's talks, e.g. https://www.youtube.com/watch?v=NH1Tta7purM. Optiver is AFAIK in a somewhat different business than Jane, but they're also players (or were last I had any inside baseball).
Too many people got their worldview on this industry from "Flash Boys", and I say this as a Lewis fan, is criminally stupid at best and in bad faith at worst (if you want a well-researched, accessible alternative: https://www.amazon.com/Trading-Speed-Light-Algorithms-Transf... is about a zillion times better).
It's a pretty short list of places I'd ever go through some grueling and semi-arbitrary gauntlet to work for, but Jane is on it for sure.
I hope the author(s) do Medallion next.