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.
Rolex is a fine brand. It's a "safe" choice in the mechanical watch world. Not super high-end. Not total BS schmaltz wrapped around an off the shelf ETA movement.
What it reminds me of most as far as products go is a vintage Land Rover, Toyota Land Cruiser, pre-Chrysler Mercedes-Benz, or air-cooled Porsche. You know the brand will support and service the watch forever and you can expect to find qualified technicians all over the world.
If you're buying a watch not just to show off today, but to pass down through your family, that's worth something. Rolexes generally hold their value well, are durable, keep the same style for decades, and have a relatively conservative look.
- 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.