4 ms·

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

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.
  - willdearden 3y ago
    People have different risk exposures and different risk appetites. If you're a corn farmer then your entire livelihood is tied to the price of corn. You're willing to give up expected value to reduce risk by selling futures and there are others who are less exposed to corn prices who are willing to take the other side of that trade.
  - yellowstuff 3y ago
    Sure, in an idealized enough world you can make many statements true. In the real world people buy and sell stock for many reasons, and value different types of returns on different time horizons, and it’s likely that for a majority of stock trades both the buyer and seller are happy with the trade.
  - HWR_14 3y ago
    In your theory, there is no cost to servicing loans (on both sides), foreclosing on an asset or long term lockup of capital in not perfectly liquid markets. Or other uses for shares (eg exerting corporate control) absent receiving dividend streams.
    - anonymouskimmer 3y ago
      With the exception of corporate control, this is covered in my final sentence.
      - HWR_14 3y ago
        None of my costs had to do with middlemen.
        anonymouskimmer 3y ago
        Loan servicing costs only exist because of middlemen. If two people directly interface for a loan there is no additional cost (other than the cost of transportation, which only exists because a middleman is charging for gas and car maintenance). Foreclosing on an asset doesn't happen in my example, but regardless is not a cost, but a risk, which the interest rate should be accounting for. Longterm lockup of capital is not a problem, as either party in my example are financially gaining regardless. And I granted you the other uses for shares, which technically can be done without buying the share, but at a middleman cost (renting the share). I really don't care to continue this. Mine was just a hypothetical in favor of the idea that there's always a "loser" (when compared to all possible financial alternatives) in stock trades, even if everyone ends up happy with the trade. Sure, there are holes in the hypothetical, which is why I said I agreed with the comment I was replying to.
- gonzo41 3y ago
  You see the share market like someone who invests in value stocks. The other poster is showing their hand that they view the market as a casino. Which is sort of the prevailing 'theme' that comes out of places like WSB's.
  - rotinNotes 3y ago
    That you “see” a market is just recitation of previously encountered and memorized speech. It’s just numbers. The labels are arbitrary. A lot of hallucinated money is spent on paying people to recite the correct tags and labels.
  - throw9away6 3y ago
    In short durations it is a casino.
majikaja 3y ago
>bank Banks are intermediaries. They are not in the business of doing anything sophisticated.
paulpauper 3y ago
you don't need 4-sigma iq to find good strategies, as Warren Buffett and others have shown . sometimes the best strategies are the simplest and just waiting to be discovered, like one such strategy of selling short bitcoin when the market opens, 6;30 am morning and going long QQQ, split 50/50. Then close both at 1pm, pst. This has returned 45% over past year.
diceduckmonk 3y ago
> every single one of billions of trades, someone is always wrong... 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. No serious financial professional would expect their strategy or any strategy in existence to be 100% correct. A strategy that is correct 51% of the time is more than good enough. You diversify and hedge, and build up an uncorrelated portfolio. Suppose you've honed in on alpha strategy. You probably don't even want to optimize and fit in further, with past data. Instead, you find a beta strategy that is uncorrelated and run those two together. With the amount of capital firms the likes of Citadel are working with, it's impossible to trade in a single product, and so scaling up, in the case of an MM, is to trade everything all at once. This is also repeated in the article. "[CitSec CEO] diversifies the firm’s earnings so it can better stomach an occasional loss in any part of its business" > 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 Applied math is not about pushing mathematical theory, necessarily. Then there is a difference between theory and practice, and there is a difference between practice and sizing trades with this scale of AUM. Academics can talk and write papers about LLMs or CRDTs, but they aren't going to be the ones who will be affective at bringing it to market.

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.
- willdearden 3y ago
  People have different risk exposures and different risk appetites. If you're a corn farmer then your entire livelihood is tied to the price of corn. You're willing to give up expected value to reduce risk by selling futures and there are others who are less exposed to corn prices who are willing to take the other side of that trade.
- yellowstuff 3y ago
  Sure, in an idealized enough world you can make many statements true. In the real world people buy and sell stock for many reasons, and value different types of returns on different time horizons, and it’s likely that for a majority of stock trades both the buyer and seller are happy with the trade.
- HWR_14 3y ago
  In your theory, there is no cost to servicing loans (on both sides), foreclosing on an asset or long term lockup of capital in not perfectly liquid markets. Or other uses for shares (eg exerting corporate control) absent receiving dividend streams.
  - anonymouskimmer 3y ago
    With the exception of corporate control, this is covered in my final sentence.
    - HWR_14 3y ago
      None of my costs had to do with middlemen.
      - anonymouskimmer 3y ago
        Loan servicing costs only exist because of middlemen. If two people directly interface for a loan there is no additional cost (other than the cost of transportation, which only exists because a middleman is charging for gas and car maintenance). Foreclosing on an asset doesn't happen in my example, but regardless is not a cost, but a risk, which the interest rate should be accounting for. Longterm lockup of capital is not a problem, as either party in my example are financially gaining regardless. And I granted you the other uses for shares, which technically can be done without buying the share, but at a middleman cost (renting the share). I really don't care to continue this. Mine was just a hypothetical in favor of the idea that there's always a "loser" (when compared to all possible financial alternatives) in stock trades, even if everyone ends up happy with the trade. Sure, there are holes in the hypothetical, which is why I said I agreed with the comment I was replying to.
gonzo41 3y ago
You see the share market like someone who invests in value stocks. The other poster is showing their hand that they view the market as a casino. Which is sort of the prevailing 'theme' that comes out of places like WSB's.
- rotinNotes 3y ago
  That you “see” a market is just recitation of previously encountered and memorized speech. It’s just numbers. The labels are arbitrary. A lot of hallucinated money is spent on paying people to recite the correct tags and labels.
- throw9away6 3y ago
  In short durations it is a casino.

majikaja 3y ago

>bank Banks are intermediaries. They are not in the business of doing anything sophisticated.

paulpauper 3y ago

you don't need 4-sigma iq to find good strategies, as Warren Buffett and others have shown . sometimes the best strategies are the simplest and just waiting to be discovered, like one such strategy of selling short bitcoin when the market opens, 6;30 am morning and going long QQQ, split 50/50. Then close both at 1pm, pst. This has returned 45% over past year.

diceduckmonk 3y ago

> every single one of billions of trades, someone is always wrong... 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. No serious financial professional would expect their strategy or any strategy in existence to be 100% correct. A strategy that is correct 51% of the time is more than good enough. You diversify and hedge, and build up an uncorrelated portfolio. Suppose you've honed in on alpha strategy. You probably don't even want to optimize and fit in further, with past data. Instead, you find a beta strategy that is uncorrelated and run those two together. With the amount of capital firms the likes of Citadel are working with, it's impossible to trade in a single product, and so scaling up, in the case of an MM, is to trade everything all at once. This is also repeated in the article. "[CitSec CEO] diversifies the firm’s earnings so it can better stomach an occasional loss in any part of its business" > 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 Applied math is not about pushing mathematical theory, necessarily. Then there is a difference between theory and practice, and there is a difference between practice and sizing trades with this scale of AUM. Academics can talk and write papers about LLMs or CRDTs, but they aren't going to be the ones who will be affective at bringing it to market.