I've thought a lot about this too (I used to work in HFT). Here's what I think:
- The only part I didn't like in your article was how you described creating indicators as exploitation. The limit order book is public by design so all traders can look at it. People have the free choice to trade on a centralized exchange or not. This is a trade-off between revealing information and being able to trade quickly without calling all your friends asking if they want to buy some Bitcoin.
- I'm guessing you used data from other exchanges outside the one you were trading as indicators too. That's unquestionably good since your trading helped information propagate faster or more accurately than it would have otherwise.
- Markets are only zero-sum in isolation. Most participants derive utility from things outside short-term profit and loss. Maybe they trade to manage risk, to hedge, to gamble, have a longer time horizon than you, whatever. They just want to trade and get back to their lives. They don't want to waste time squeezing the last fraction of a basis point out of their fills. It's hard to believe, but they actually enjoy getting picked off, run over, paying too much spread, whatever things make you feel bad or indifferent about the service you provide.
I used to get filled making markets on Nasdaq (which pays resting orders a rebate, and charges crossers) when BX (which pays crossers a rebate) was at the same price, and could lay off the trade for an instant profit. The people who traded with me paid for the luxury of saying "fuck it, send it to good ol' Nasdaq." I used to think it was stupid of them, and from the perspective of a prop trader, it was mind numbingly stupid, but they probably had more productive things to do than read every exchange fee schedule or hook up to every small exchange.
- Providing liquidity has nothing to do with resting limit orders vs. crossing the spread. Providing liquidity is about taking risk off the hands of people that don't want it, and moving it across time to someone else who does. If you're market neutral, trade many round trips every day, and end relatively flat, you've played that intermediary role as a liquidity provider regardless of what order types you use.
- Crossing against mispriced orders is doing the world a favor. You're not the bad guy picking them off. If anything, they're the bad guy for holding the market at an incorrect price.
So maybe think of yourself as more of a service provider. Not only will you feel better, but viewing trading through that lens tends to make you a better trader. Strategies truly built around an exploitation mindset are fundamentally unsustainable, since you run out of people to exploit. Providing a service works forever.
FWIW, the rest of what you wrote is almost exactly how the pros do things. If you built this system yourself, you could make far more than 200k at a prop firm. If you're interested, reply with a throwaway and I can refer you to a friend who's still in the business.
You ask a great question: If a business isn't able to employ American workers at competitive pay, what purpose does it serve for the country? Why should it be here or exist?
I have sympathy for cash poor startup founders, but offering substantial equity works wonders. Like a real amount, not something that rounds to 0. It's hard to feel bad for someone who wants to keep all the upside and not pay a good salary. Someone making 500k elsewhere should be a key hire, so spend or dilute yourself accordingly.
And doing that may put downward pressure on wages for ordinary Canadians. Their citizens vote, too.
I don't think offshoring to India is a real worry. They lack the rule of law and stable business environment of countries like the US and Canada. Nobody with sensitive IP would outsource their core business there. If offshoring worked well, even with H-1Bs being allowed, companies would already prefer keeping Indian employees there with lower salary and COL, but they don't.
I also have a hard time believing fully remote work will ever be more than a niche thing. Shared context and serendipitous discussion of ideas are so important.
Paying low 100s + de minimis equity for distributed systems and DSP engineers in a super high COL city like LA is going to be a hard sell for most. People with real experience in those fields will be older, can't reasonably support a family there on that salary, and have a lot of options. The type of inexperienced employee who could pick these things up quickly is already being courted by FANGs on campus, for more money.
To get someone to work for that salary, the equity needs to be meaningful, or the startup needs to be the next Facebook or Google, not a niche product. If I'm thinking of working for you, at the max equity you list, the rosiest picture I could paint myself is an exit 4 years from now for $500mm, after which I'd get $500k assuming no dilution = $125k a year. And that's assuming all the stars align to make that happen.
I don't think you should close, since you have a cool product, but maybe consider moving to a lower COL area? I'm sure you could find plenty of people in a place like Huntsville, AL. Lots of defense contractors have engineers with the skills you need and I bet working for a fun startup would be more exciting than what they're doing now.
If they could hire someone locally at their desired level of pay, they wouldn't. But while a legitimate talent shortage (at any price) may exist for super elite, specialist roles, there are plenty of citizens who can do typical engineering or IT work. Companies that don't pay enough will have a hard time with hiring though, thus perceiving a shortage.
Employers know it's harder for them to switch jobs so they have leverage. They can't complain or do much if management requires they be on-call in the evening or work late. This makes the H-1B worker more attractive to management at the same salary level, since they'll do more work and won't rock the boat. I've also seen H-1Bs receive the same base salary offer, but over time their variable compensation/RSUs (large portion of TC at many tech jobs) and salary progression are much worse.
I don't think it's unreasonable to limit H-1Bs to exceptional talent, or at least review their total compensation more thoroughly to ensure they aren't putting excessive downward pressure on the wages of ordinary middle-class citizens.
RenTech doesn't publish much so I'm merely conjecturing based on their volumes and other information that's in legal filings. There are a lot of ways to provide liquidity and fair pricing over diverse time horizons. It doesn't really matter how they do it. If your bets are independent and you have a statistically significant edge, you are basically guaranteed to make money with proper bankroll management.
From what Virtu's published, they make two-way markets, and once filled they scalp a tick, arbitrage in another product, or cross if the market becomes weak. Maybe RenTech does something like buy underpriced oil producers whose prices haven't moved up after bellwether stocks in the industry like XOM and CVX have, then sell once the spread between them converges. I'm sure both firms have loads of different tactics. The key thing is that they're mildly better than chance.
Commercial work will always pay better than academia. Roles like trader/quant where your value is measurable & portable will always pay better than being a drone in a big machine like Google. If anything, front office finance roles aren't underpaid: people with similar skill sets are underpaid elsewhere.
I don't work in trading anymore, so I'm not talking my book here. Trading is zero-sum at a transactional level, but has knock on benefits beyond profit and loss:
-Making it easy for companies to raise capital through IPOs or offerings (without a robust secondary market for securities, people will be less likely to invest)
-In commodities: Letting businesses bear the risks they want and insure against the ones that aren't their core business
-Liquid markets let real people trade in and out of investments without friction at fair prices
-Providing accurate price signals to other businesses and the broader economy
So I don't think I was saving the whales, but I don't think it was wasteful, either.
Also, as a mildly clever OCD math guy who's semi-good at writing fast C++ code, I don't think I would have been curing cancer anyway.
ETA: At least in the case of HFT, if you accept that markets need intermediaries of some sort, it seems more efficient to have a few dozen tech/math guys do the same job thousands of guys in mesh vests were doing years ago, and cheaper.
Again I've seen the same just running a single HFT desk within a larger firm. The only time we ever lost money was from rare technology errors. Trading equities, even if one position spikes 5-10% bad on news, you will still make money, because it's just one little position out of the thousands of tickers you trade. Even guys making far fewer bets in asset classes like FX only ever lost on extreme dislocations like the Euro/Swiss unpeg.
If you make a large number of bets, even with just a tiny statistical edge, you will be consistently profitable. RenTech probably isn't profitable every day, but I bet over a year they make at least as many bets as someone like Virtu makes in a day, so it's not surprising that they never have a down year, provided they have the edge.
1: Now does this mean Virtu the business made a profit above cost every day? Probably not. But it does show that consistent trading profits are achievable.
Return on capital isn't a super meaningful metric for capacity constrained trades. If a fund earns 80% returns, but has no means to compound the resulting profits through the same mechanism, whoever receives them naturally puts them into something with worse returns, so their wealth still grows slowly over time.
I think Medallion is somewhere between HFT and stat arb, probably a mix of multiple strategies along those time frames. The faster you trade independent opportunities, the more you recycle capital, and prime brokers extend tons of leverage. When I worked in HFT, our profits were bound by other factors way before cash, and my desk's ROC was far higher than this when doing well (even when doing poorly, ROC was quite high. It was the expenses of finding those returns that killed us).
If all the money is employees', Medallion is basically just a prop firm. The employees paid out of the fund are essentially partners/owners, and the rest earn discretionary payouts of management/performance fees.
Even within the fund structure, most profit is return on labor, not capital. I'm sure if you compare margins paid to partners in professional services firms like law or consulting vs. typical publicly traded companies, they're also far higher, but Cravath, McKinsey, etc. won't let you buy in as a passive investor; you have to work for it.
ETA: If you're wondering how it's possible to earn 80% returns, or even more: there are myriad tiny inefficiencies you can trade on given the right research and infrastructure. I'm sure 80% is simply the point at which Medallion makes the optimal $ per year relative to risk. They could probably throttle back, make less $ on smaller capital, but far higher percentage return, if they wanted.
Money quote on page 345: "In the second study, Mosing, Madison, Pedersen, Kuja-Halkola, and Ullén (2014) had over 10,000 twins representing an extremely wide range of music skill estimate deliberate practice and perform tests of music aptitude. Mosing et al. (2014) found that there were genetic effects on both music practice and music aptitude. More important, there was no evidence for a causal influence of music practice on music aptitude. Identical twins differing massively in amount of deliberate practice did not differ significantly in music aptitude."
Apologies for being contrarian, but let me flip things around: Perhaps people who are able to benefit from practice enjoy it and tend to do more of it.
I get excited learning about the latest C++17 features and used to love reading stock exchange specifications, which most people would find about as exciting as a root canal. I find it rewarding because I can apply what I learned and feel a sense of satisfaction. Conversely, I've always sucked at golf and could barely stomach the half-dozen lessons I tried, even though I consider myself a diligent person and spent years practicing many other things. I never improved my swing and the entire experience was nothing but frustration. If you have a rough time at a beginner or intermediate level, it's hard to gin up the desire for continued practice beating your head to a wall.
The premise of this paper is naturally enticing. If you had only tried a bit harder practicing lay ups in gym class, you could be just as good as Michael Jordan (ok more like you could get a bit closer, since they claim practice explains ~20% of results). I don't really buy it.
Most people know this on a visceral level. If you only live for yourself, you'll never be satisfied: There's always someone with more. I definitely had some kind of seeking feeling but couldn't put my finger on what I was missing. Nobody really told me what to do.
The decline of organized religion might play a part? These communities provide a purpose beyond the self through volunteering/charity, steer their members to start families, and provide role models/mentors for younger men & women to model.
IMO, the rise of extreme ideologies is telling. Rudderless people are so desperate for a moral code and sense of belonging that even alt-right neo-Nazis look like an attractive option instead of a sad joke. I'm not sure what type of positive community fills this need today. I'm not a religious believer, nor are most of my peers. I volunteer at a food pantry, but the volunteers are kinda transient and it doesn't feel like a cohesive group.
I won't comment on better/worse since I have no idea what op meant and it also makes no sense to compare. Having children is a fundamental human right. It's a shame that people who are capable of doing so, and want to do so, defer this goal until it requires medical intervention or becomes impossible, just to have a good career or fit in with their peers.
I don't think being versed in family life matters. The older I get, the more I realize that the folks in charge are just as confused as I am half the time. Everyone learns as they go. Nobody is born knowing how to raise a kid and every kid is different. If you give them a safe & nurturing place, spend time with them, and try your best, you'll do just fine.
Yes, it's a very complicated situation though. I see a few causes among my peers:
-College alone, except for a select few schools and/or majors, is no longer a strong signal for getting jobs. My wife went to a good state school and studied Philosophy in undergrad, but had trouble finding good work. She ended up at a top law school, starting her career at a big law firm when she was 25. More post-grad education isn't necessarily bad, but it often leads to debt and delays independent adult life milestones.
-Less loyalty from company to employee and vice-versa compared to years ago. Hiring generally bright people and training them up to work for a decade plus is unheard of today at most companies. I was lucky to get my job out of undergrad and move up the ranks. Many of my peers had to hop jobs and cities.
-Geographic bifurcation of haves vs. have nots and tech eating the world. The best jobs are concentrated at fewer companies, mostly in very expensive cities like with high housing costs. Around the smaller city where I grew up, baby boomers in middle management could earn good salaries, but there were few good entry-level jobs. People move away from home for a career. Having kids means expensive childcare or one partner giving up a job/taking less lucrative work. In the "good old days", extended family would help with the kids and it was easier to get by on one salary.
-This will sound controversial, but availability/acceptance of hedonistic pursuits: world travel, casual sex, drinking/drugs/partying, video games, porn, etc. I'm sure the Tinder era makes this even easier. On a more banal level, when I was single, I rarely cooked a meal for myself or even did laundry. Eventually this felt empty but it was a siren song at the time. There's very little social/peer judgment telling you to "grow up." I could still live like this today if I wanted to. I'm not a Ned Flanders type: It was mostly fun, but I do think extended adolescence can extend a bit too long.
Anyway I don't really like to preach to people. Raising a family is hard work, and it's a full-time 100% always-on commitment, even more than that finance, tech or big law job. It might not be for everyone. I will say for the people who want to some day, but want just this one trip to Machu Picchu on their Instagram, one more notch on the headboard, one more Michelin three-star tasting menu, one more good bonus/promotion, etc. etc. to just take the leap.
This. Not having children sooner is one of my deepest regrets.
My wife and I had our first when we were 30, and luckily, another through IVF, which is far more complicated, painful, emotionally draining and expensive than you'd expect based on how people casually talk. It's unlikely that we can ever have more, even though we could easily take care of them, and we both come from big, happy families.
I was afraid to get married and start a family. It seemed so daunting and I dreaded being a bad father/husband or letting a poor innocent kid down. My parents grew up struggling in Portugal and as poor immigrants to the US and I wanted no part of that. By the time I felt ready I had a few million dollars in investments, owned a large apartment in a nice city without a mortgage and was doing well in a very competitive job (HFT).
And it ended up not mattering a bit. My industry got decimated, just as I'd feared, and I never touched a single dollar of the money I had put away. My kids never starved. My wife still had her job. I work hard and am somewhat clever. I found another that paid more than enough, not finance money, but plenty.
Kids aren't that expensive. Once you have a family you aren't going to fancy restaurants or racking up big bar tabs every few weeks. Clothes can be cheap if you look around. Your kid doesn't need a 50k preschool. As long as you're employable in a middle or upper middle class job, you can take care of a kid. Money and career success aren't even the toughest parts. Being an old dad sucks. Everything is just physically and mentally harder than when I was in my 20s. In retrospect, I wish I were waking up at 3am to change diapers instead of getting in from the club at 26.
It's a cliche but I feel more joy and personal satisfaction watching my sons grow and learn new things than anything else in the world. I've been very fortunate, had a lot of successes and cool experiences, but nothing comes close.
Insurance is an apt analogy. Intuitively, if someone consistently makes money, they're just skimming without providing any value. People were astonished that Virtu made money almost every day, but wouldn't care if GEICO made money almost every day.
In statistical expectation, you are better off not selling your stock to an HFT market maker. They are only buying from you, on average, when the spread you pay is more than they expect the stock to move. You could wait and sell to someone else for a tiny bit more, on average.
In statistical expectation, you are better off not insuring your car. The insurance company writes the policy such that their expected payout over its lifetime is less than the premiums they collect.
But real people don't live in the world of maximizing expected value. The guy selling his stocks is doing it a couple times a year, and doesn't want to risk losing a few % if the market gaps down, just to make a tenth of a penny more in expectation. Nobody wants to take out another car loan if their shiny new SUV gets hit driving out of the dealership. Bearing risks people don't want is valuable.
So bizarrely, while these services may satisfy a need, consumers are only really happy when the provider loses. Nobody looks back on decades of crash-free driving reminiscing about paying those insurance premiums. Nobody likes to sell stock and see it tick up.
(And I'm hand waving assuming you're a randomly selected trader or driver. If you have inside information, trading with anyone is positive EV. If you drive drunk at 100mph but have no tickets or DUIs on your record, insuring your car is positive EV.
I'm also hand waving away comparative advantage. That better price an HFT market maker gets when turning over your trade may not be achievable for you. Maybe they can trade on more exchanges or predict prices better to get out at the right time. They do this all day so trading optimally is not a waste of their time, but it's probably a waste of yours. In that case, you may lose more and take more risk doing it yourself. I think that's closer to reality.)
That's fair, but the reason isn't entirely due to bias. Few people outside the industry really understand market microstructure. It's a dry and complex subject. Legitimate criticisms are pretty subtle and get lost in the noise of "zomg guys with lasers front running Joe Average's 3 share GOOG trade!"
I no longer work in HFT. You can do everything better, smarter, faster than ever, and make less. It is one of the most brutally capitalist businesses: orders on exchanges are a pure undifferentiated commodity. The guy making the smallest spread fastest gets the trade. [1] Nobody cares if it's Virtu or Citadel or three guys in their garage. Think of a business like Wal-Mart's, but if someone finds a way to sell soap a half-cent cheaper, you sell 0 and go out of business.
And for the end users of the markets, that's great. Let these guys compete to make tighter markets or arbitrage prices sooner. HFTs play an intermediation role, helping other traders transfer risk immediately to lock in a guaranteed price, rather than waiting for someone else to trade with them. They're basically like CarMax or a grocery store: research what things are worth, buy at wholesale prices, sell at retail prices, and control inventory risk.
Some rich heir being a shoe in at Harvard where he skips half his classes and takes a spot from someone with academic interests bothers me too. It's not fair.
But I'm a bit less skeeved out by a school administrator judging someone as an individual, even if it's for a crappy reason like dad being a donor, than having them admit or deny someone just based on the color of their skin.
Just as I would rather work for a boss who hired his buddy from the country club, but harbored no prejudice, than one who refused to hire blacks, Jews, Asians, etc. who met the job requirements.
Is that surprising though? There's a strong correlation between pay and intellectual ability/education. There aren't many dull, uneducated engineers, doctors, lawyers, or executives.
If intelligence is at all heritable, you'd expect to see this. If educated parents tend to push their own children to become more educated, you'd expect to see this.
I wonder what the chart looks like broken down by where parents went to school or some non-financial metric. I would bet the children of well-educated college professors or journalists also score well, despite growing up with a more middle class household income.
Sure but you're fighting a strawman here. Nobody believes standardized tests are perfect or 100% accurate at determining ex post performance. We all know people who score well but lack discipline. People who support quotas don't merely believe tests are flawed, but believe they are flawed in extremely biased ways that need outside correction.
On most of these tests, you have to solve math or logic problems, or read passages and synthesize information. It's hard to imagine someone could do exceptionally well answering those questions quickly & accurately and not perform in a classroom, or be unable to do those tasks yet excel academically.
Yes, instead we have holistic approaches which schools refuse to document for proprietary competitive reasons, and that holistic process has the same outcome as a racial quota. Very odd case.
- The only part I didn't like in your article was how you described creating indicators as exploitation. The limit order book is public by design so all traders can look at it. People have the free choice to trade on a centralized exchange or not. This is a trade-off between revealing information and being able to trade quickly without calling all your friends asking if they want to buy some Bitcoin.
- I'm guessing you used data from other exchanges outside the one you were trading as indicators too. That's unquestionably good since your trading helped information propagate faster or more accurately than it would have otherwise.
- Markets are only zero-sum in isolation. Most participants derive utility from things outside short-term profit and loss. Maybe they trade to manage risk, to hedge, to gamble, have a longer time horizon than you, whatever. They just want to trade and get back to their lives. They don't want to waste time squeezing the last fraction of a basis point out of their fills. It's hard to believe, but they actually enjoy getting picked off, run over, paying too much spread, whatever things make you feel bad or indifferent about the service you provide.
I used to get filled making markets on Nasdaq (which pays resting orders a rebate, and charges crossers) when BX (which pays crossers a rebate) was at the same price, and could lay off the trade for an instant profit. The people who traded with me paid for the luxury of saying "fuck it, send it to good ol' Nasdaq." I used to think it was stupid of them, and from the perspective of a prop trader, it was mind numbingly stupid, but they probably had more productive things to do than read every exchange fee schedule or hook up to every small exchange.
- Providing liquidity has nothing to do with resting limit orders vs. crossing the spread. Providing liquidity is about taking risk off the hands of people that don't want it, and moving it across time to someone else who does. If you're market neutral, trade many round trips every day, and end relatively flat, you've played that intermediary role as a liquidity provider regardless of what order types you use.
- Crossing against mispriced orders is doing the world a favor. You're not the bad guy picking them off. If anything, they're the bad guy for holding the market at an incorrect price.
So maybe think of yourself as more of a service provider. Not only will you feel better, but viewing trading through that lens tends to make you a better trader. Strategies truly built around an exploitation mindset are fundamentally unsustainable, since you run out of people to exploit. Providing a service works forever.
FWIW, the rest of what you wrote is almost exactly how the pros do things. If you built this system yourself, you could make far more than 200k at a prop firm. If you're interested, reply with a throwaway and I can refer you to a friend who's still in the business.