Let me count the vastly more transformational and earlier quantitative funds just off the top of my head: Princeton Newport, Commodities Corporation, Tudor, RenTech, Chicago Research; hell even Soros and the Tigers were more influential and just as quantitative. DE Shaw was an early mover for certain kinds of automated trading, but if he had never met Nunzio Tartaglia (and basically stole his secret sauce -hey at least they mentioned Morgan Stanley), he'd still be writing shitty papers on parallel computing models at Columbia. He got lucky, and was able to take advantage of his luck, but he is also a garbage human being who has made the world worse[1][2]. His company once offered me a job: I told them to go fuck themselves, and the only better "no" decision I made was saying no to Bear Stearns in 2006.
I actually see shaw as a bit of a hero, since he basically made his money, said something along the lines of "finance is stupid", and then took all that money and started working on biochemical problems that actually solve real life medical issues. Is he eccentric? Sure but so are a lot of the other wall street elit types, many of which have much less real contributions to the world. So not sure where all this hate is coming from
> he is also a garbage human being who has made the world worse
His company went on to create Anton and actively pursues computational chemistry and drug design research. To me, that's an active (and expensive!) attempt to improve the world. The extent of your bitterness towards him seems wholly unjustified to me.
It's not clear to me how donating 10s of millions of dollars to prestigious universities in order to secure a grand total of 2 spots for his kids has made the world worse.
Tangentially: I've heard that Nunzio Tartaglia -- despite the astrophysics background -- was basically a banker installed by MS to keep a leash on the quants at APT. He took over, pissed off Bamberger, and that set off the stat arb diaspora.
> but if he had never met Nunzio Tartaglia (and basically stole his secret sauce -hey at least they mentioned Morgan Stanley)
I always have my skepticism when I heard of "he stole my source code" kind of complaints. If you were so good and you invented the whole thing, and he was so bad that he had to "steal your source code" in order to just get started at the time you were already ahead in the game, why can't you beat him?
Also remember that Shaw’s main metric for “elite” is one’s SAT scores, regardless of one’s age, skills, or experience. It’s sort of amazing that Bezos didn’t continue this at Amazon.
That essay [0] was neat, wonder if there’s a database that keeps track of PR firms and the articles written from different journalists/newspapers to study marketing submarine?
While I do understand why they are willing to shell out tens of millions for good spots for undergrad, it also makes me ask: Why not just let them to to wherever they can get, on their own accord, and then just help them to land whatever jobs they can.
Surely, if you're the kid of Shaw, you:
A) Are driven and disciplined enough to get into some Top 20 school on your own - especially with all the private tutoring and what not.
B) Will be able to land whatever prestigious white-collar job through connections. And from there, getting accepted to some prestigious B-School is a lot easier.
Sure, I understand that they want to minimize risks because they value education - but I also have a feeling that it comes down to bragging rights.
But still...you can do a LOT for that kind of money.
Is David Shaw brilliant? Absolutely. Has the quant/technology revolution been a positive development for financial markets? No doubt.
But secondary trading is still a zero-sum game. Firms like D.E. Shaw are profit maximizing and extract a huge amount of value from society. Probably less than the old boys club they replaced, but probably much more than necessary. There is a great deal of competition among quant trading firms overall, and their rise has coincided with electronification of markets, tighter spreads, lower commissions - all good things. But if the forces of capitalism are truly working, you have to wonder why so many firms like these continue to print money year after year (although there have been some new developments-- for example, stock exchanges have gotten much more effective at monetizing their access and data feeds, which has really put the squeeze HFT market makers; still, zero-sum game though).
There's no good reason we can't have it all: efficiently-priced modern-technology financial markets without these huge rents being pulled out. And I shouldn't pick on quant firms specifically - every layer of the system extracts its share, and I'd argue brokers and exchanges are much worse since they're fiduciaries and semi-regulatory entities, respectively, and riddled with conflicts of interest.
Disclaimer: former co-founder/head quant at IEX (Flash Boys), current CEO of Proof Trading (YC S19)
How exactly do you decide how much is necessary?. And is there any reason to think that they are extracting value from society rather than other market participants?
And is there any evidence that having one company make a billion dollars from other market participants is somehow worse for the system than having a million companies make a thousand dollars each?
The low spreads and liquidity are not some fact of nature - I’m pretty sure that a lot of it comes as a result of many people competing with each other to try and make money. I agree there are lot of people trying to screw their clients to make money in both the retail and the institutional markets (I used to work in sales for an I-bank). And I agree that those areas with conflict of interest are badly policed and do NOT help market structure or society as a whole. But my impression is that DE Shaw is a prop trading firm - where is the conflict of interest?
No, since stocks can uniformly rise. Thus I can trade a lower performing stock (which can still increase) for a higher performing one, so that was not zero sum for me. The buyer could have turned cash into those stocks, so he could have gained too.
So we both gained from the transaction didn't we? Doesn't seem zero sum while stocks grow, and there's no mathematical requirement them to return to those previous prices.
This also doesn't cover value for price signalling, the empirical fact these patterns have returned significant money to investors through lower spreads, or the fact that primary markets don't function without functioning secondary markets.
Calling it zero sum is a bit shortsighted I think.
> you have to wonder why so many firms like these continue to print money year after year
They haven't. A few have - most don't do so well. Buffet's hedge fund bet ended pretty spectacularly. As a group hedge funds have underperformed index funds for some time (if not always, net of costs), so they're not extracting money, except from investors.
Net gains from the top 20 or so funds are around $20B annually, while managing a few trillion in assets. This seems like an incredibly small amount of gain for the assets managed.
With all these ruthless profit-maximizing firms on Wall Street, it's nice that Silicon Valley VCs have given up on maximizing profits since the early 2000s [0]. Gives them more opportunities to focus on making the world a better place.
The standard justification is that these firms provide market liquidity which lowers the cost of capital for all businesses, thus boosting economic growth. But I've never seen a rigorous quantitative analysis. How much growth do they actually cause in the real economy relative to the value they extract?
Rents like 2 percent management fees and 20 percent incentive fees for private equity and hedge funds? Lack of antitrust enforcement of tech firms? Sell side firms and their business models are the least of our problems in my opinion.
You mentioned data in passing - middlemen who extract rents as data purveyors are extracting huge rents and it is largely unremarkable upon maybe because west coast people are the shadiest rent-seekers of all time. At least financial mstket data is mostly not acquired by surveillance of users, though that is changing with the advemt of "alternative" data.
I have heard that quant trading firms build software systems that have sub millisecond response times to data feeds.
Are the signals coming though these data feeds (reports by government agencies, news events, corporate filings) really occurring that fast? Or do the systems simply need to have low latency for responding to infrequent events (infrequent relative to the response time)? Or are the trading systems trading against each other in a kind of feedback loop long after a signal comes in over the wire?
This is a claim that I think you really need to back up with some kind of proof, because it is so central to your line of thinking. All the points in your comment follow if this is true, but they are also all questionable if this is not true.
> But if the forces of capitalism are truly working, you have to wonder why so many firms like these continue to print money year after year
Because so many other counterparties don't continue to print money year after year. An incredibly high number of funds isn't successful. I think you're ignoring survivorship bias.
Wondering what D.E. Shaw did after getting rich? He used his money for building a specialized super computer (https://en.wikipedia.org/wiki/Anton_(computer)) which runs molecular dynamics simulations for drug development. His 2008 computer still runs molecular dynamics simulations about an order of magnitude faster than general purpose super computers in 2020.
I passed a series of phone interviews with DE Shaw and they flew me to NY to interview on-site many years ago. It was for a statistician / machine learning role.
Once I arrived on site they asked me to write a program to rotate a matrix on the whiteboard. The catch was, it had to be in syntactically correct Tcl, a language I had never heard of, which was not on the job listing, not discussed in any of the phone interviews, and not on my resume.
I clarified that I had never heard of that language and no one gave me any information that I had to prepare to answer questions about it and the two interviewers in the room said it was required for the job. I offered to code it in Python but they said it had to be Tcl. I was freaking out at this point, sweating, wondering if I was mixed up with a different candidate.
I said the role I was interviewing for and asked if it was possibly a mistake, they replied it was not and they expected me to write Tcl for that solution.
I thought maybe it was some kind of finance bluster sort of thing, like to test if I would stick up for myself or offer an outside the box idea.
I sat down from the whiteboard and said if they could explain to me the syntax of Tcl I would give it a try.
The interviewers both thanked me for my time and said the next interviewer would be in shortly (I had a printed sheet of a 9-5 full day of scheduled interviewers).
I sat and waited in that room for over 45 minutes, no one came to get me, nothing. Eventually I walked back to the main reception desk area and explained what happened, and the attendant person looked me up on a computer and said all my interviews were done for the day, I was free to go, and they would be in touch. The point of contact was someone named Isaac Torres. I went back to the hotel they put me in which was right across the street, feeling incredibly depressed, and just ordered food and stayed in. My flight was the next evening, but around 11 am before I even left the hotel, Isaac called me to say they were going to pass on me.
It was a weird thing. I wasn’t even mad because it was so absurd, like getting struck by lightning or something. It was like surrealism, irrational.
But I sure did walk away feeling like DE Shaw the company is absolutely fucked internally, and I would never in a million years consider working for them and would try to warn anyone I can away.
Among other things, this is exactly my experience. I was invited to virtual on-site interview earlier this year due to covid19. After the 3rd round, I was told to wait there and the next interviewer would come online soon. Two hours passed, no one showed up. That was it. No response or whatever ever since. And btw, no one communicated with me beforehand what the interview would look like. I asked the headhunter but they had no idea either.
It was really weird interview experience. They gave me the impression that they're really a group of "elite" engineers. It's a general SWE (not quant) interview but they asked quite a bit of mathematics and statistics questions. At some point I can feel arrogance from one of the interviewers.
I'm sorry that was your experience. If that's true it reflects really poorly on the firm. I have considered applying to DE Shaw in the past and I've heard a few stories like this, which have mostly made me stay away.
Wow. It seems kind of bizarre that they would waste their money by flying people in, only to impose hidden criteria later for no stated reason. That's a shame.
I hate to rain on everyone's parade but no one transformed Wall Street. If you saw how most of the banks are run and who is in charge of these places up close there would be a run on the banks. Everyone would be withdrawing their cash and storing it under their mattress.
Because all the computer hocus pocus is obscuring how they make money: they launder arbitrage banks are not allowed to do to their own clients in exchange for a large fee.
There have been perhaps a few. One obvious one is LTCM whose board of directors included the mathematical creators of a highly used option pricing theory..
I am confused. This article is very positive about DE Shaw. Nonetheless, it says DE Shaw is a "$47 billion firm [assets underlying management (AUM)], earning its investors more than $25 billion". That is a return of 53% which sounds good until you consider the firm was started 32 years ago - at which point the compound interest rate is less than 1% a year. I realise the AUM has likely grown over time, but this rate of return is less than inflation at a time when the market has grown considerably. This is a negative return while, per the article, many employees have become millionaires and Shaw himself a multi billionaire. From the article it appears that DE Shaw is good at is attracting assets underlying management and paying themselves well without providing value to their customers. What have I missed?
[+] [-] scottlocklin|5 years ago|reply
Let me count the vastly more transformational and earlier quantitative funds just off the top of my head: Princeton Newport, Commodities Corporation, Tudor, RenTech, Chicago Research; hell even Soros and the Tigers were more influential and just as quantitative. DE Shaw was an early mover for certain kinds of automated trading, but if he had never met Nunzio Tartaglia (and basically stole his secret sauce -hey at least they mentioned Morgan Stanley), he'd still be writing shitty papers on parallel computing models at Columbia. He got lucky, and was able to take advantage of his luck, but he is also a garbage human being who has made the world worse[1][2]. His company once offered me a job: I told them to go fuck themselves, and the only better "no" decision I made was saying no to Bear Stearns in 2006.
[0] http://paulgraham.com/submarine.html
[1]https://nymag.com/intelligencer/2019/09/david-e-shaw-college...
[2]https://www.propublica.org/article/hedge-fund-billionaires-d...
[+] [-] ackbar03|5 years ago|reply
[+] [-] Reelin|5 years ago|reply
His company went on to create Anton and actively pursues computational chemistry and drug design research. To me, that's an active (and expensive!) attempt to improve the world. The extent of your bitterness towards him seems wholly unjustified to me.
[+] [-] harryh|5 years ago|reply
It's not clear to me how donating 10s of millions of dollars to prestigious universities in order to secure a grand total of 2 spots for his kids has made the world worse.
[+] [-] auntienomen|5 years ago|reply
Tangentially: I've heard that Nunzio Tartaglia -- despite the astrophysics background -- was basically a banker installed by MS to keep a leash on the quants at APT. He took over, pissed off Bamberger, and that set off the stat arb diaspora.
[+] [-] nsoonhui|5 years ago|reply
I always have my skepticism when I heard of "he stole my source code" kind of complaints. If you were so good and you invented the whole thing, and he was so bad that he had to "steal your source code" in order to just get started at the time you were already ahead in the game, why can't you beat him?
[+] [-] pinewurst|5 years ago|reply
[+] [-] hhs|5 years ago|reply
[+] [-] TrackerFF|5 years ago|reply
While I do understand why they are willing to shell out tens of millions for good spots for undergrad, it also makes me ask: Why not just let them to to wherever they can get, on their own accord, and then just help them to land whatever jobs they can.
Surely, if you're the kid of Shaw, you:
A) Are driven and disciplined enough to get into some Top 20 school on your own - especially with all the private tutoring and what not.
B) Will be able to land whatever prestigious white-collar job through connections. And from there, getting accepted to some prestigious B-School is a lot easier.
Sure, I understand that they want to minimize risks because they value education - but I also have a feeling that it comes down to bragging rights.
But still...you can do a LOT for that kind of money.
[+] [-] atlgator|5 years ago|reply
[+] [-] dcaisen|5 years ago|reply
But secondary trading is still a zero-sum game. Firms like D.E. Shaw are profit maximizing and extract a huge amount of value from society. Probably less than the old boys club they replaced, but probably much more than necessary. There is a great deal of competition among quant trading firms overall, and their rise has coincided with electronification of markets, tighter spreads, lower commissions - all good things. But if the forces of capitalism are truly working, you have to wonder why so many firms like these continue to print money year after year (although there have been some new developments-- for example, stock exchanges have gotten much more effective at monetizing their access and data feeds, which has really put the squeeze HFT market makers; still, zero-sum game though).
There's no good reason we can't have it all: efficiently-priced modern-technology financial markets without these huge rents being pulled out. And I shouldn't pick on quant firms specifically - every layer of the system extracts its share, and I'd argue brokers and exchanges are much worse since they're fiduciaries and semi-regulatory entities, respectively, and riddled with conflicts of interest.
Disclaimer: former co-founder/head quant at IEX (Flash Boys), current CEO of Proof Trading (YC S19)
[+] [-] ghufran_syed|5 years ago|reply
How exactly do you decide how much is necessary?. And is there any reason to think that they are extracting value from society rather than other market participants?
And is there any evidence that having one company make a billion dollars from other market participants is somehow worse for the system than having a million companies make a thousand dollars each?
The low spreads and liquidity are not some fact of nature - I’m pretty sure that a lot of it comes as a result of many people competing with each other to try and make money. I agree there are lot of people trying to screw their clients to make money in both the retail and the institutional markets (I used to work in sales for an I-bank). And I agree that those areas with conflict of interest are badly policed and do NOT help market structure or society as a whole. But my impression is that DE Shaw is a prop trading firm - where is the conflict of interest?
[+] [-] SideQuark|5 years ago|reply
No, since stocks can uniformly rise. Thus I can trade a lower performing stock (which can still increase) for a higher performing one, so that was not zero sum for me. The buyer could have turned cash into those stocks, so he could have gained too.
So we both gained from the transaction didn't we? Doesn't seem zero sum while stocks grow, and there's no mathematical requirement them to return to those previous prices.
This also doesn't cover value for price signalling, the empirical fact these patterns have returned significant money to investors through lower spreads, or the fact that primary markets don't function without functioning secondary markets.
Calling it zero sum is a bit shortsighted I think.
> you have to wonder why so many firms like these continue to print money year after year
They haven't. A few have - most don't do so well. Buffet's hedge fund bet ended pretty spectacularly. As a group hedge funds have underperformed index funds for some time (if not always, net of costs), so they're not extracting money, except from investors.
Net gains from the top 20 or so funds are around $20B annually, while managing a few trillion in assets. This seems like an incredibly small amount of gain for the assets managed.
[+] [-] KKKKkkkk1|5 years ago|reply
[0] https://blogs.cfainstitute.org/investor/2020/02/17/venture-c...
[+] [-] nradov|5 years ago|reply
[+] [-] MrMan|5 years ago|reply
You mentioned data in passing - middlemen who extract rents as data purveyors are extracting huge rents and it is largely unremarkable upon maybe because west coast people are the shadiest rent-seekers of all time. At least financial mstket data is mostly not acquired by surveillance of users, though that is changing with the advemt of "alternative" data.
[+] [-] jackcosgrove|5 years ago|reply
Are the signals coming though these data feeds (reports by government agencies, news events, corporate filings) really occurring that fast? Or do the systems simply need to have low latency for responding to infrequent events (infrequent relative to the response time)? Or are the trading systems trading against each other in a kind of feedback loop long after a signal comes in over the wire?
[+] [-] nv-vn|5 years ago|reply
This is a claim that I think you really need to back up with some kind of proof, because it is so central to your line of thinking. All the points in your comment follow if this is true, but they are also all questionable if this is not true.
[+] [-] airstrike|5 years ago|reply
Because so many other counterparties don't continue to print money year after year. An incredibly high number of funds isn't successful. I think you're ignoring survivorship bias.
[+] [-] unknown|5 years ago|reply
[deleted]
[+] [-] edna314|5 years ago|reply
[+] [-] mlthoughts2018|5 years ago|reply
Once I arrived on site they asked me to write a program to rotate a matrix on the whiteboard. The catch was, it had to be in syntactically correct Tcl, a language I had never heard of, which was not on the job listing, not discussed in any of the phone interviews, and not on my resume.
I clarified that I had never heard of that language and no one gave me any information that I had to prepare to answer questions about it and the two interviewers in the room said it was required for the job. I offered to code it in Python but they said it had to be Tcl. I was freaking out at this point, sweating, wondering if I was mixed up with a different candidate.
I said the role I was interviewing for and asked if it was possibly a mistake, they replied it was not and they expected me to write Tcl for that solution.
I thought maybe it was some kind of finance bluster sort of thing, like to test if I would stick up for myself or offer an outside the box idea.
I sat down from the whiteboard and said if they could explain to me the syntax of Tcl I would give it a try.
The interviewers both thanked me for my time and said the next interviewer would be in shortly (I had a printed sheet of a 9-5 full day of scheduled interviewers).
I sat and waited in that room for over 45 minutes, no one came to get me, nothing. Eventually I walked back to the main reception desk area and explained what happened, and the attendant person looked me up on a computer and said all my interviews were done for the day, I was free to go, and they would be in touch. The point of contact was someone named Isaac Torres. I went back to the hotel they put me in which was right across the street, feeling incredibly depressed, and just ordered food and stayed in. My flight was the next evening, but around 11 am before I even left the hotel, Isaac called me to say they were going to pass on me.
It was a weird thing. I wasn’t even mad because it was so absurd, like getting struck by lightning or something. It was like surrealism, irrational.
But I sure did walk away feeling like DE Shaw the company is absolutely fucked internally, and I would never in a million years consider working for them and would try to warn anyone I can away.
[+] [-] voiddb|5 years ago|reply
It was really weird interview experience. They gave me the impression that they're really a group of "elite" engineers. It's a general SWE (not quant) interview but they asked quite a bit of mathematics and statistics questions. At some point I can feel arrogance from one of the interviewers.
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