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This was posted 4 days ago. Unfortunately, people didn’t have much to say then either. The idea that math can effectively be used to “beat the market” seems l

This was posted 4 days ago. Unfortunately, people didn’t have much to say then either. The idea that math can effectively be used to “beat the market” seems like a fascinating subject where few want to divulge the secrets. Math has been used for decades: https://www.amazon.com/Beat-Market-Scientific-Stock-System/dp/0394424395 https://www.amazon.com/Beat-Market-Scientific-Stock-System/d... https://www.amazon.com/Man-Who-Solved-Market-Revolution/dp/073521798X https://www.amazon.com/Man-Who-Solved-Market-Revolution/dp/0... One idea that does come up is reversion toward the mean, but few details are offered.

astrange 3y ago
"Market-making" doesn't involve "beating the market", it means providing a service for fees. (That said, you need similar trading skills, otherwise the people "beating the market" will rip you off.)
- cuteboy19 3y ago
  Market making itself is a market, and people compete on cost and speed
- hackernewds 3y ago
  that seems like an over simplification. however I do have an aversion to "MBA types" skimming over complicated concepts with the blanket "nerdy mathematics" techniques.
- gbasin 3y ago
  it's not... it's competing in the market for profits. citadel makes plenty of money from trading, separate from fee-based business
  - is_true 3y ago
    There are markets that pay people to trade to provide liquidity.
- vgatherps 3y ago
  I’m pretty sure Citadel securities makes more money from their non-wholesale businesses (I.e. on-exchange trading) instead of their retail pfof business. Either way, they are very successful in the competitive hft/trading arm as well as retail. The hedge fund quant arm is also extremely successful.
  - astrange 3y ago
    I agree with this, but the comment I replied to is responding to an article about market-making.
    - vgatherps 3y ago
      Citadels’s market-making arm, Citadel Securities, IS extremely competitive in on-exchange trading. They don’t just do wholesale market making (I.e. service for a price), they provide liquidity on-exchange as well (much more competitive/latency/alpha based than service-at-a-price). They’re also very good at the hft taking. Given, within Citsec, the retail market making arm is fairly segregated for compliance reasons, but it’s far from the only market making activities they engage in.
- hackerlight 3y ago
  In reality there isn't a distinction between "market-making" and what you would consider "beating the market". Market makers employ the same models and approaches as those who "beat the market", because market makers need to know when and where to quote in order to maximize profitability. And people who classify themselves as those that try to "beat the market" also provide liquidity, making them de facto market makers, even if they often take liquidity too. So, people in the industry don't attempt to draw a clear line between the two categories, because they are so overlapping in practice.
rr808 3y ago
Half of Citadel beats the market, the other half are market makers who just make markets and make a steady income from doing so.
- danpalmer 3y ago
  Just like Bernard L. Madoff Investment Securities. Edit: you can downvote but this is literally what Madoff did – he had a market making business and an investment business. I'm not saying that Citadel is a scam at all, just commenting on the business structure.
alpark3 3y ago
You're confusing Citadel and Citadel Securities. Citadel the hedge fund runs many different strategies, including commodities trading and quantitative high frequency strategies that are generally what people think of when looking at books like yours. Citadel Securities is a broker-dealer that specializes in market making, and is popular for being one of the biggest(the biggest?) wholesale market maker for U.S. equities, options, ETFs, etc. They're connected, but Ken Griffin is focused on Citadel and Peng Zhao runs CitSec.
- SilasX 3y ago
  You're confusing Alameda Capital and FTX. Alameda the hedge fund runs many different strategies, including crypto trading and quantitative high frequency strategies that are generally what people think of when looking at books like yours. FTX is a broker-dealer that specializes in market making, and is popular for being one of the biggest(the biggest?) wholesale market maker for cryptocurrencies, NFTs, etc. They're connected, but Sam Bankman-Fried is focused on FTX and Caroline Ellison runs Alameda.
  - thinkmaster3000 3y ago
    Unless I missed something, wasn't FTX the exchange and Alameda the market making specialist that also had a prop book?
    - SilasX 3y ago
      The general point stands, that we can't just take their word that they're rigorously separated and not sharing info (a point the HN crowd seems to be missing right now).
      - govg 3y ago
        The difference is that traditional finance is usually riddled with regulations and legal potholes to find yourself in if you don't follow rules, whereas in crypto the rules consist of whatever validation SBF's excel sheet had.
motohagiography 3y ago
Zhao probably has a three or four sigma IQ, but the rest of the talent is still on a pretty long tail, and the beauty of markets is that in every single one of billions of trades, someone is always wrong. I am not in finance, but every person I have spoken to in finance clams up immediately when I mention anything remotely quantitative. It's not just because I'm being boring, they know they are playing a game of poker that is never not-on. The most interesting exchange I had was with some derivatives traders, and I asked broadly what kind of math was being used at their bank. Was it graduate level, was any of it novel, and was it within the reach of programmers. The answer was "no, no, yes" and they wouldn't say anything else. I suspect the secrecy is creating an intellectual mean reversion, where you do a thing that works and run it until it is traded out, and then never say anything about it so you can cost your competitors the time thinking about it. However if none of the math is novel, then current strategies are not information problems that need new science, they are work problems that piece together solved ones, and whose efficiencies come from competency in related domains. I could see how one could become seized by markets like that.
- antihipocrat 3y ago
  Someone isn't always wrong on a trade. Case in point, someone sells shares to fund their retirement, the counterparty buys those shares for the dividend return and/or expected capital gains. This happens all the time. How is anyone wrong in this scenario?
  - anonymouskimmer 3y ago
    I agree in principle. But theoretically if the share is expected to go up at faster than the rate of compounded interest at the current interest rate, then it's a better deal for the seller to instead take out a loan using the share as collateral. And if the share is not expected to go up at faster than the rate of compounded interest at the current interest rate, then it might be a better deal for the buyer to loan out their money instead. The only thing that would make this a worse decision than the share trade are middleman costs.
    - 3y ago
SirLJ 3y ago
Takes a long time to find the right model, it it is well worth it and if you do find it, you will keep the secret as guarded as possible, otherwise the model will be arbitraged away by the other market participants….
helsinkiandrew 3y ago
You’re mistaken in how Citadel is using math to make money. It’s not trying to decide which way a stock or bond is moving. It’s a market maker - at anytime someone can go to them and buy or sell an instrument (when no one else might want to take the other side of the deal). Citadel is using math to create the price, decide how much inventory it should keep and create hedging strategies so that it makes a profit however volatile and whatever way the market is going.

astrange 3y ago

"Market-making" doesn't involve "beating the market", it means providing a service for fees. (That said, you need similar trading skills, otherwise the people "beating the market" will rip you off.)

cuteboy19 3y ago
Market making itself is a market, and people compete on cost and speed
hackernewds 3y ago
that seems like an over simplification. however I do have an aversion to "MBA types" skimming over complicated concepts with the blanket "nerdy mathematics" techniques.
gbasin 3y ago
it's not... it's competing in the market for profits. citadel makes plenty of money from trading, separate from fee-based business
- is_true 3y ago
  There are markets that pay people to trade to provide liquidity.
vgatherps 3y ago
I’m pretty sure Citadel securities makes more money from their non-wholesale businesses (I.e. on-exchange trading) instead of their retail pfof business. Either way, they are very successful in the competitive hft/trading arm as well as retail. The hedge fund quant arm is also extremely successful.
- astrange 3y ago
  I agree with this, but the comment I replied to is responding to an article about market-making.
  - vgatherps 3y ago
    Citadels’s market-making arm, Citadel Securities, IS extremely competitive in on-exchange trading. They don’t just do wholesale market making (I.e. service for a price), they provide liquidity on-exchange as well (much more competitive/latency/alpha based than service-at-a-price). They’re also very good at the hft taking. Given, within Citsec, the retail market making arm is fairly segregated for compliance reasons, but it’s far from the only market making activities they engage in.
hackerlight 3y ago
In reality there isn't a distinction between "market-making" and what you would consider "beating the market". Market makers employ the same models and approaches as those who "beat the market", because market makers need to know when and where to quote in order to maximize profitability. And people who classify themselves as those that try to "beat the market" also provide liquidity, making them de facto market makers, even if they often take liquidity too. So, people in the industry don't attempt to draw a clear line between the two categories, because they are so overlapping in practice.

rr808 3y ago

Half of Citadel beats the market, the other half are market makers who just make markets and make a steady income from doing so.

danpalmer 3y ago
Just like Bernard L. Madoff Investment Securities. Edit: you can downvote but this is literally what Madoff did – he had a market making business and an investment business. I'm not saying that Citadel is a scam at all, just commenting on the business structure.

alpark3 3y ago

You're confusing Citadel and Citadel Securities. Citadel the hedge fund runs many different strategies, including commodities trading and quantitative high frequency strategies that are generally what people think of when looking at books like yours. Citadel Securities is a broker-dealer that specializes in market making, and is popular for being one of the biggest(the biggest?) wholesale market maker for U.S. equities, options, ETFs, etc. They're connected, but Ken Griffin is focused on Citadel and Peng Zhao runs CitSec.

SilasX 3y ago
You're confusing Alameda Capital and FTX. Alameda the hedge fund runs many different strategies, including crypto trading and quantitative high frequency strategies that are generally what people think of when looking at books like yours. FTX is a broker-dealer that specializes in market making, and is popular for being one of the biggest(the biggest?) wholesale market maker for cryptocurrencies, NFTs, etc. They're connected, but Sam Bankman-Fried is focused on FTX and Caroline Ellison runs Alameda.
- thinkmaster3000 3y ago
  Unless I missed something, wasn't FTX the exchange and Alameda the market making specialist that also had a prop book?
  - SilasX 3y ago
    The general point stands, that we can't just take their word that they're rigorously separated and not sharing info (a point the HN crowd seems to be missing right now).
    - govg 3y ago
      The difference is that traditional finance is usually riddled with regulations and legal potholes to find yourself in if you don't follow rules, whereas in crypto the rules consist of whatever validation SBF's excel sheet had.

motohagiography 3y ago

Zhao probably has a three or four sigma IQ, but the rest of the talent is still on a pretty long tail, and the beauty of markets is that in every single one of billions of trades, someone is always wrong. I am not in finance, but every person I have spoken to in finance clams up immediately when I mention anything remotely quantitative. It's not just because I'm being boring, they know they are playing a game of poker that is never not-on. The most interesting exchange I had was with some derivatives traders, and I asked broadly what kind of math was being used at their bank. Was it graduate level, was any of it novel, and was it within the reach of programmers. The answer was "no, no, yes" and they wouldn't say anything else. I suspect the secrecy is creating an intellectual mean reversion, where you do a thing that works and run it until it is traded out, and then never say anything about it so you can cost your competitors the time thinking about it. However if none of the math is novel, then current strategies are not information problems that need new science, they are work problems that piece together solved ones, and whose efficiencies come from competency in related domains. I could see how one could become seized by markets like that.

antihipocrat 3y ago
Someone isn't always wrong on a trade. Case in point, someone sells shares to fund their retirement, the counterparty buys those shares for the dividend return and/or expected capital gains. This happens all the time. How is anyone wrong in this scenario?
- anonymouskimmer 3y ago
  I agree in principle. But theoretically if the share is expected to go up at faster than the rate of compounded interest at the current interest rate, then it's a better deal for the seller to instead take out a loan using the share as collateral. And if the share is not expected to go up at faster than the rate of compounded interest at the current interest rate, then it might be a better deal for the buyer to loan out their money instead. The only thing that would make this a worse decision than the share trade are middleman costs.
  - 3y ago

SirLJ 3y ago

Takes a long time to find the right model, it it is well worth it and if you do find it, you will keep the secret as guarded as possible, otherwise the model will be arbitraged away by the other market participants….

helsinkiandrew 3y ago

You’re mistaken in how Citadel is using math to make money. It’s not trying to decide which way a stock or bond is moving. It’s a market maker - at anytime someone can go to them and buy or sell an instrument (when no one else might want to take the other side of the deal). Citadel is using math to create the price, decide how much inventory it should keep and create hedging strategies so that it makes a profit however volatile and whatever way the market is going.