
D.E. Shaw and how computer geeks and English majors transformed Wall St. (2018) - yarapavan
https://nymag.com/intelligencer/2018/01/d-e-shaw-the-first-great-quant-hedge-fund.html
======
scottlocklin
What a marketing submarine! [0]

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](http://paulgraham.com/submarine.html)

[1][https://nymag.com/intelligencer/2019/09/david-e-shaw-
college...](https://nymag.com/intelligencer/2019/09/david-e-shaw-college-
donations.html)

[2][https://www.propublica.org/article/hedge-fund-
billionaires-d...](https://www.propublica.org/article/hedge-fund-billionaires-
donations-college-admissions-elite-universities)

~~~
harryh
re [1][2]:

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.

~~~
lotsofpulp
It’s clear to me that the message that a sufficient amount of money let’s you
subvert the rules weakens trust in society and increases justification for an
every man for himself strategy.

~~~
alehul
Subverting the rules doesn’t equate to making the world worse.

Assuming just $10m for 2 of his children to be admitted? That’s enough to
fully fund the education of ~50 low-income students [1].

I personally believe we should turn these quiet donations into a public
bidding process instead to maximize what colleges can receive and ensure it’s
done in as fair of a way as possible, but that’s separate.

[1] It’s important to distinguish that the donations went to the university,
not a corrupt official at the university. This is actually productive.

~~~
Rotten194
Maybe the universities could start offering to give rich people's kids
automatic 4.0s, too, if they donate twice as much. Sure it undermines the
system and acts as an insidious poison into the idea of meritocracy, but think
of how many scholarships it could pay for!

~~~
lotsofpulp
This already happens:

[https://www.latimes.com/california/story/2020-07-16/qatar-
pr...](https://www.latimes.com/california/story/2020-07-16/qatar-prince-usc-
ucla-la)

[https://theunionjournal.com/qatar-prince-awarded-usc-
masters...](https://theunionjournal.com/qatar-prince-awarded-usc-masters-
degree-despite-barely-attending-classes-middle-east-monitor/)

It's a shame how easily the reputation of the US higher education is being
ruined. If an entity that already has billions of dollars in endowments can be
corrupted, what chance does society have?

------
dcaisen
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)

~~~
ghufran_syed
“probably much more than necessary”

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?

~~~
carlineng
GP is in agreement with you on the last point, and the highlighted conflicts
of interest are not related to DE Shaw:

"brokers and exchanges are much worse [than DE Shaw] since they're fiduciaries
and semi-regulatory entities, respectively, and riddled with conflicts of
interest."

~~~
ghufran_syed
I understand that - what I'm hoping is that dcaisen will clarify what exactly
their concern is with DE Shaw. I'm claiming that other than conflict of
interest, having firms like DE Shaw make lots of money is not a problem. I'm
hoping that if there is some non-conflict-of-interest reason why it's harmful,
they'll explain and I'll learn something useful

~~~
carlineng
I'll let dcaisen speak for himself, but I don't get the impression that he
believes DE Shaw is actively harmful; just that the service they provide
(market liquidity, low spreads) comes at a relatively high cost. "How?" is a
perfectly legitimate question, and it looks like a problem he's actively
working on as the CEO of Proof Trading.

~~~
auntienomen
If he believes that, then he doesn't understand what DE Shaw's business is.
It's like confusing a bakery for a flour mill.

------
edna314
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)](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.

~~~
bxji
So that's where Gilfoyle got the name Anton from...

~~~
adamnemecek
I thought it was an Anton LaVey reference
[https://en.wikipedia.org/wiki/Anton_LaVey](https://en.wikipedia.org/wiki/Anton_LaVey)

------
mlthoughts2018
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.

~~~
bobwernstein
they paid for your flight and hotel?

~~~
mlthoughts2018
Yes they did that, but they had scheduled me for 9-5 on the day of the
interview, which doesn’t entitle them to waste my time by having one
unprofessional interview session followed by me sitting for 45 minutes and
being told I can go. I could have scheduled other things or planned my time
differently if I had known it would only last ~90 minutes, or even that it
lasting less than the full 9-5 based on realtime decisions was a possibility
(it was not described as a possibility).

~~~
bobwernstein
I agree with you. For that kind of disrespect I would not only need to get
paid for hotel and travel, but my time too. And waisting my time costs like
100x more per hour than my normal rate. Seeing as they cheapened out here by
only paying hotel and travel, what does that say about how they treat their
employees comp wise? Doesn't look good. For that alone I would avoid them like
the plague.

------
holidayacct
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.

------
drtillberg
Paperclip maximizing AI. It's so interesting that the long-form narrative of a
trading house omits to dive into the detail of _a single_ actual trade!

~~~
an_opabinia
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.

~~~
Ntrails
I am going to need a pretty good citation on that

~~~
an_opabinia
There isn't going to be documentation out there, in some pithy Bloomberg
article, "Banks have prized relationships with arbitrageurs that help them
monetize opportunities that plainly violate fiduciary duty."

Information about how hedge funds work - like information about say how ad
tech firms work - is incommensurable with HN's Reddit/Wiki-style way of
disseminating knowledge. I hope that information without citations could be
tolerated more, I have no dog in this race, I just like sharing knowledge.

Shaw and many hedge funds that have been around for decades acquire smaller
arbitrage firms that can be thought of as having "licenses" to perform
arbitrage. This portfolio of arb is how they scale to their AUM.

There is nothing actually secret or protectable about what an individual arb
firm does to execute the trade. For example a particular HFT trading
algorithm. Such firms that rely on actual secrets do not last long and so in a
Darwinian way do not wind up in the portfolios of huge funds like DE Shaw.

The arb shops that last a while have permission, from a bank, that depends on
a relationship with a real human being, that is exclusive to the firm granted,
to launder a particular form of arb the bank would like to do but could not.

For example you're allowed to take a spread as a bond trading desk, but
wouldn't you like to sell the bank's bonds instead of its competitors bonds?
That's plainly against fiduciary so it "doesn't happen." Instead you go to an
anonymous arb firm, for $1m in bonds, and you say, "okay we're going to sell
you the bond that is actually ours, you will sell it back to us, here is your
fee, now we can sell this bond back to the client and wash the fact that it is
ours." Nobody says that! But that is the economics of the trade, why the arb
firm can make money for so long, why banks work with them despite seeming to
be "parasites," etc. The computers are just part of the hocus pocus of
laundering that arb.

Shaw doesn't actually come up with this arb or necessarily source the
relationship. Instead it finds the little anonymous arb firm and buys it, and
carefully scales the relationship for $1m of bonds with 1 bank to $1b in bonds
with 10 banks. The risks in Shaw's business are that you lose the license to
arb. The _upside_ is from investors persistently underpricing the ability for
Shaw to _scale_ this arb from $1m to $1b. No, they basically pull a rabbit out
of a hat every year and continue to scale a particular arb further than people
thought was possible.

Also, nobody is going to want to just give Shaw, a bunch of rich people, a
bunch of free money. But you can't fight their ability to acquire little arb
firms. This is the way.

~~~
throwlogon
> Instead you [the bank] go to an anonymous arb firm, for $1m in bonds, and
> you say, "okay we're going to sell you the bond that is actually ours, you
> will sell it back to us, here is your fee, now we can sell this bond back to
> the client and wash the fact that it is ours."

How does the bank _make money_ doing this? Routing the sale of this bond
through the "anonymous arb firm" doesn't do anything to the price. If the
bank's competitor is selling their bond at 1.00, the bank could directly offer
their bond at 0.99 without getting "anonymous arb firm" involved. If the bank
routes the trade through the "anonymous arb firm"... what difference does that
make? If it shows up on the market at 1.01, the bank still has to give the
client the 1.00 bond first, and if it shows up on the market at 0.99, the bank
could have just done that itself.

------
hogFeast
They have a huge non-quant business. I believe they are actually mainly a non-
quant firm now.

------
viburnum
There was another famous hedge fund noted for mathematical excellence but it
turned out to be a different story entirely ...

~~~
w1ntermute
[https://en.wikipedia.org/wiki/When_Genius_Failed](https://en.wikipedia.org/wiki/When_Genius_Failed)

~~~
cvrjk
Amazing book. Truly astounding sequence of events.

Greatest irony of all, they named their firm "Long-term Capital Management",
while taking hugely leveraged short-term positions ($1 trillion dollars worth
of derivatives backed by about $100 billion or so assets) that were beyond the
understanding of anyone else. Didn't last 4 years before they blew. They did
show 40% annual returns when they started and I guess that's what kept them
going without much regulation. But man, did they crash hard. Investors who
were returned their money after a year or 2, and those who were turned down
from even investing must have thanked their Gods for saving them from absolute
destruction.

There is another book by Michael Lewis (who also wrote "The Big Short") called
"The Liar's Poker", where he talks about his time at Salomon Brothers and how
they collapsed in a very similar fashion. Highly levered derivatives with a
magic formula that has worked well (so far..). It's fascinating how they were
allowed to do what they did. Open gambling with client's money, and no
repercussions on loosing it all. "Blowing up a customer" was apparently common
and chalked up to a rookie's mistake. "Baptism by fire". How did the rookies
even get access to millions of dollars of money to bet on crazy derivatives!!

I feel that every time a major upset in the financial markets lands on us, it
is because some group of really talented people managed to convince everyone
that they discovered something that no one else has and have "cracked the
market" by showing consistently high returns for a period of time, and gain
access to huge pools of capital. Only, after a few years the market turns
around, showing a side of things that they did not take into account and the
whole thing goes belly up, market crashes, loads of people loose money, mostly
its everyone else but that group (leverage, borrowing, access to someone
else's capital etc).

And because everyone who was supposed to keep them in check did not do it
because despite it being their job not to, they did take them for their word,
they try to cover it all up by paying the very people who caused all the
trouble and who were supposed to watch out for all this.

Banking world seems to have a lot of conflict of interest all around. It is
much better now, with lots more rules and regulations, but it is still there.

------
known
When you find a loophole in market

    
    
        you'll inform the authorities to correct it
        you'll make money out of this anomaly
    

DESCO chose the 2nd option; The devil is in details.

------
rosstaylor90
Ed Thorp’s Princeton/Newport Partners was the first great quant hedge fund.

~~~
admin_account
Jim Simons/Renaissance were the first great quant hedge fund. For the last 30
years their annualized returns, after fees, is 39%.

~~~
hchz
The medallion fund began at Axcom under Elwyn Berlekamp and RenTech bought it.

[https://en.wikipedia.org/wiki/Elwyn_Berlekamp](https://en.wikipedia.org/wiki/Elwyn_Berlekamp)
[https://en.wikipedia.org/w/index.php?title=Axcom_Trading_Adv...](https://en.wikipedia.org/w/index.php?title=Axcom_Trading_Advisors&redirect=no)

~~~
auntienomen
Rather more precisely, Simons hired Ax to pursue a dream he'd first had with
Baum in the 70s, using math to predict markets. Ax had some success, but the
Medallion Fund didn't take off until after he left. Berlekamp gets a little
credit, but wasn't really there long enough to have major impact. If you want
to know who did the real work, figure out who Simons paid the most.

~~~
objektif
Who did he pay the most?

------
Brett_S
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?

~~~
smabie
Umm... you're missing that the firm has not always been $47 billion? You think
DE Shaw was started 32 years ago with 47 billion dollars?

