6 ms·

Something I don’t understand: Why haven’t their gains been arbitraged away? Conceptually what they do seems simple enough; and presumably you just need capital

Something I don’t understand: 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.

orange3xchicken 4y ago
At least on the quant side, I think the typical sentiment is that most researchers aren't interested in ops / developing infrastructure / curating datasets.
- Scarbutt 4y ago
  How does that answers their question?
  - simtel20 4y ago
    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.
ReggieCommaRose 4y ago
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.
hackerlight 4y ago
> Hell, their own former employees could theoretically compete against them That happens, with mixed levels of success. But these firms are more than just IP. Their moat is: - Lower fees, negotiated based on their volume and relationships. Crucial given margins of 0.02%. - A well-oiled machine that makes the machine. This includes culture, branding into recruitment pipeline, and so on. - IP has a short half-life. The machine that makes the machine is more important. - Scale advantages -- code sharing between teams and asset classes, which is hard to replicate in a small group. - You need to have perfect execution on every vertical to have a good shot. Devs, researchers, operators, relationships. It's also common for that IP to not all be known by a single person. Division of labor can be used to protect IP.
vecter 4y ago
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?
- wheelinsupial 4y ago
  > 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?
  - vecter 4y ago
    > 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).
rcpt 4y ago
Then the article would have been about whoever beat them.
ithrow 4y ago
If lone wolf day traders can make good money why can't they?
- nly 4y ago
  Over any sensible period of time, like a year, essentially all lone wolf day traders lose money
- badpun 4y ago
  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.
- deleted 4y ago
  [deleted]
bitanarch 4y ago
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.
- rgifford 4y ago
  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.
  - noitpmeder 4y ago
    {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}. You can say this about a lot of companies today.
    - rgifford 4y ago
      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.
  - 4y ago
drpixie 4y ago
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 :)
nly 4y ago
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.
lordnacho 4y ago
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.

orange3xchicken 4y ago

At least on the quant side, I think the typical sentiment is that most researchers aren't interested in ops / developing infrastructure / curating datasets.

Scarbutt 4y ago
How does that answers their question?
- simtel20 4y ago
  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.

ReggieCommaRose 4y ago

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.

hackerlight 4y ago

> Hell, their own former employees could theoretically compete against them That happens, with mixed levels of success. But these firms are more than just IP. Their moat is: - Lower fees, negotiated based on their volume and relationships. Crucial given margins of 0.02%. - A well-oiled machine that makes the machine. This includes culture, branding into recruitment pipeline, and so on. - IP has a short half-life. The machine that makes the machine is more important. - Scale advantages -- code sharing between teams and asset classes, which is hard to replicate in a small group. - You need to have perfect execution on every vertical to have a good shot. Devs, researchers, operators, relationships. It's also common for that IP to not all be known by a single person. Division of labor can be used to protect IP.

vecter 4y ago

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?

wheelinsupial 4y ago
> 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?
- vecter 4y ago
  > 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).

rcpt 4y ago

Then the article would have been about whoever beat them.

ithrow 4y ago

If lone wolf day traders can make good money why can't they?

nly 4y ago
Over any sensible period of time, like a year, essentially all lone wolf day traders lose money
badpun 4y ago
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.
deleted 4y ago
[deleted]

bitanarch 4y ago

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.

rgifford 4y ago
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.
- noitpmeder 4y ago
  {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}. You can say this about a lot of companies today.
  - rgifford 4y ago
    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.
- 4y ago

drpixie 4y ago

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 :)

nly 4y ago

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.

lordnacho 4y ago

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.