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A New Breed of Trader on Wall Street: Coders with a Ph.D (nytimes.com)
298 points by hvo on Feb 22, 2016 | hide | past | web | favorite | 177 comments



Lot's of "nothing new" comments here, but I think that may be missing the point.

Wall Street has been hiring physics & math graduates for a good while now, but typically as quants, not traders. Those were (are?) hugely different positions, in terms of responsibility and dollars realized.

Not my area, so I may just be missing something too. But when I had acquaintances going into this sort of things, they weren't getting anywhere near a trading desk. At least, not for a while.


Well the line between traders and quants has always been blurry to the point of no differential at Jane Street, D.E Shaw, and Citadel since inception. Traders have always had quant background, but have focused on more execution-oriented analysis whereas quants are a bit more idea-oriented.

Any sell-side investment bank still has clear lines between traders and quants. In fact, while they blurred more pre-2007 I'd argue they've become more clearly defined.

Source: work at a prominent investment bank.


The line between trader and quant in electronic trading scenarios is pretty vague and has been for some time.


That's plausible, my indirect experience is not current.


One gets you fired when you lose money and the other gets you a speaking opportunities at universities where kids are discovering Gordon Gekko.


You want it to be that way, but it's the other way.

If you're just a "cog in the machine" doing research or writing software for a trader, and he ends up sucking, the firm will probably shuffle you around to work under someone else. You have generally useful technical skills, cost less than the trader, and recruiting good technical people is expensive.

If you're a supposedly brilliant trader but cost the firm money taking stupid risk or fail to make any profit to justify your inflated salary and bonus, there's not really much they can do with you.


.... like john merriweather or victor niederhoffer for instance. two guys who've blown up the world multiple times but still manage to find capital and manage huge funds.


When I graduated from NYU's mathematical finance program with a Master's, I thought I'd be a quant. I thought they make the big bucks. Nope, that was traders and they didn't even need a bachelor's degree sometimes. I never quite figured out how traders get into those positions where they make multi million dollar annual commissions, but I realized early on I like to create social web apps and left finance.

I still always joked about the idea of myself and a friend becoming traders and trading opposite strategies, then splitting the bonus one of us is bound to get. Obviously we'd need to obfuscate that the expectations on our ambitious strategies would be roughly mirror images of each other -- one would get fired, the other may get a few million.


Haha, it doesn't work that way, unfortunately. If you have any strategy that's statistically different to zero, you have a winning strategy; if it's loosing money, you can just trade the opposite strategy yourself!

The problem is, that most strategies are zero, on average. You win some, lose some with your trades, but what eats your capital is the trading costs. Then even trading the opposite trade would still diminish your capital.


No, you don't know whether it will win or lose ahead of time. You just trade opposite strategies in an ambitious way so you are GUARANTEED to have a large chance of winning a lot ... the arbitrage is that one trader gets fired and the other gets a large bonus for being right!


> Wall Street has been hiring physics & math graduates for a good while now, but typically as quants, not traders

Smart people have been hired as quantitative traders for decades, this really is nothing new.


Is it really a market then if wall Street is investing in the flow of money in and out of a position rather than the company itself?


The only time you're actually investing in the company is when they IPO. That's what the market is primarily for, getting capital to companies that need it; after that however, the market also has to allow people to trade those shares with speculators otherwise there's no way to exit your investment. This secondary market is the other function of the market (what you just called investing in the flow of money in and out of a position). Both are necessary. Traders have always played the short term ups and downs, that's what makes them traders rather than investors and without them, there wouldn't be liquidity to exit your positions.


> that's what the market is primarily for, getting capital to companies that need it;

Personally, I believe that is incorrect. The amount of market activity related to getting capital to companies is dwarfed by other activity. As data points:

- Commodities markets don't allocate capital to companies (or farmers or whatever) at all.

- Most new stock sales (IPO or otherwise) happen outside of the public markets first, and are allocated to a minority of the market participants.

I think a much better way to think of the markets is as primarily about pricing risk. That this risk assessment function happens to provide a good way to allocate capital to companies is a by product.


You should perhaps read more than the first two sentences before replying.

> This secondary market is the other function of the market (what you just called investing in the flow of money in and out of a position). Both are necessary.

I clearly addressed that markets have more than one function.


I was reacting to the word primary. I think that is a common (especially on HN) misconception. The markets make more sense when you don't think of them as mechanisms to fund companies, and do think of them as ways to trade risk and liquidity.

I'm not convinced that the capital allocation component of the markets is even as you say "necessary". You could easily envision the markets chugging along fine without allowing any direct sale of equity to the markets. That is some intermediary would be required to buy the equity from the company as it became available and in turn could then sell that equity into the markets. We are almost to that point already.


> The only time you're actually investing in the company is when they IPO.

Well, no, anytime the company is selling shares you can invest in the company rather than the secondary market. The IPO is obviously the first such event, but it isn't necessarily the only such event.


Also, if there was no secondary market, people would be much less likely to buy at IPO and other times the company sells shares.


Right, but I did mention that.


Fair point, and true.


> after that however, the market also has to allow people to trade those shares with speculators otherwise there's no way to exit your investment

You are forgetting about dividends.


Traders != investors.

It's never been a market maker's job to invest in companies.


Are you saying that Wall Street should be taking larger proprietary positions? Not a criticism, just curious.


No offense taken. Idealist me thinks that Wall Street should invest in those companies they believe in and wish to assist in achieving their business goals. As an exchange, the investor shares in the profits and enjoys the satisfaction that they directly and indirectly brought prosperity to themselves and others.

If it is just about agnostic profit over assisting business expansion and creation than Wall Street is really is a casino than a market.

I would never knowingly invest in a tobacco company or an arms maker. (I am long the S&P 500) Some might feel okay with it since they are smokers and appreciate a strong defense but who is okay with a computer crashing a market becasue it was profitable?


I really appreciate your response.

>Idealist me thinks that Wall Street should invest in those companies they believe in and wish to assist in achieving their business goals.

It seems that the general trend is against banks taking proprietary positions. I guess my knee-jerk response is that I agree with that trend as I don't want my deposits used to fund someone's investment thesis. If I did, I would put my money in a mutual fund or other investment vehicle rather than a bank. At the same time, it's certainly not against the law for banks to make longer term investments.

>but who is okay with a computer crashing a market becasue it was profitable

I am certainly no fan of banks, but this does not seem like an accurate representation of their role in the markets.


"Wall Street" as popularly imagined - the world of big banks like JPMorgan, Goldman Sachs etc. don't invest in anything. Wall Street's role is threefold:

- Providing access to capital and dealmaking facilities for companies looking to grow or change ownership. That's IPOs, debt issues, mergers & acquisitions, spinoffs, corporate restructuring. Banks organize those deals and shop them around, acting as advisers.

- Facilitating trading of securitized instruments (public stocks, bonds, derivatives) by making markets or otherwise connecting buyers and sellers to exchanges or other counterparties. These buyers and sellers are the funds actually investing in individual companies and retail brokers servicing individual investors. The bank is neutral in its view of the issuers of the securities being traded, it just wants to see trading happen. (Sometimes this involves creating a specific instrument for one client and selling offsetting instruments to others, but again the intent is that the bank is not taking a position in that client.)

- Providing banking services to corporate clients. Loaning them money, helping them manage exposure to foreign currencies, and so on. The kind of stuff any retail bank does for its individual clients, but scaled up.

> Idealist me thinks that Wall Street should invest in those companies they believe in and wish to assist in achieving their business goals.

Your idealist premise is also a bit frightening if you think about it further: you're suggesting that an industry with a purely facilitatory role - i.e. offering access to public markets - should use some sort of qualitative moral judgement on who it should provide services to. That's a dark path.

Fortunately your industry does exist: it's called the buy side, and there are fund managers out there who will happily take your money, pool it with others, and invest according to a thesis they are legally obliged to share with you and stick to.


I think this characterisation of Wall Street is a little disingenuous. Just to use Goldman as an example: it's hard to claim that SSG, MSI, UIG, and others are acting in anything approaching a "purely facilitatory role" as you claim.


>> Idealist me thinks that Wall Street should invest in those companies they believe in and wish to assist in achieving their business goals.

Isn't that what the buy-side is for?


I think what's happening is in ETFs, the quants are writing programs that trade, as opposed to slamming phones. In my stint in Wall Street I saw a general move in Fixed Income towards traders with CS/Math/Engineering degrees, sometimes paired with MBAs.


Whilst I think this was inevitable, as banks have become increasingly technical, it also makes me a bit sad that now you need a Math PhD from MIT and a Harvard MBA to go and be a trader.

I think back to an earlier HN discussion [1] on the article "The Rent Seeking is Too Damn High" [2] - when my father worked at a bank he said it wasn't uncommon for your market salesman from the street to get picked up as a trader, indeed my friends mother went from secretary to trader. She was given a chance because her boss felt like she had a spark about her.

It's fun to look back on the past with rosy eyes thinking "those days were better" but truly how can we hope for meritocratic (in the true sense of the word!) social mobility if you need 0.5 million USD in school fees to get a job as a trader?



Thanks for that (forgot to get the sources as was posting on mobile!)


Agreed - I've had colleagues (with PhDs) go to financial jobs, but they were not traders.


I worked for Optiver (largest marketmaker in Europe) between 2007 and 2010. We hired grads for trader positions all the time.

Optiver even sponsored the mathematic, physics and cs study association for students in Leiden for the longest time. Trying to win over students before they graduated.

https://www.deleidscheflesch.nl/p/optiver

Competitors did this too. Really nothing new here.


Depends what you're trading. Cash Equities - probably not needed. Fixed Income Options - probably needed.


Wait, the article cites Knight Capital with a straight face and doesn't bring up the whole "Whoops we lost $440 million due to bad software" [1] as a significant caveat to putting so much emphasis on the role of technology? That doesn't seem very contextually fair. Programmers, no matter how great, can still make costly mistakes.

[1] http://www.bloomberg.com/news/articles/2012-10-17/knight-cap...


The Knight Capital responsible for the Knightpocalypse basically went out of business due to it, and was bought by Getco a different trading firm. Getco switched names because in some places the The Knight brand was stronger than the Getco one.


They actually did this to reverse-IPO, giving all of the PE firms and partners a way to get liquidity since KCG was already public.


Do you know how they ended up splitting up the ownership stakes? I've been curious but never tracked it down?


I would draw the opposite conclusion. If bad software can cost you hundreds of millions, that places a greater emphasis on the role of technology.


It was a devops error. I wrote a blog post about this once: http://blog.terminal.com/knightmare-prevention/


I've been in and out of coding for finance at a few different shops for about 10 years now, and recently have been working more on the front-lines: coming up with my own trades and the software to do those. I can tell you from personal experience that this is a completely different experience than writing code for someone else (a trader) who then is responsible for making/losing the money.

Imagine this for a daily routine: 1) oh shit this is awesome: x times $1000000 means i'm going to be so fucking rich! 2) run code live on the XYZ market, trying not to shit bricks 3) hang-on i found a bug in my analysis/data-preprocessing/ML pipeline and i'm not going to be rich. 4) spend hours (or days) fixing bug & re-running analysis 5) go back to 1).

After a few months of this one gets seriously fragged.


ha ha, I did that basically with bitcoin.


I occasionally meet bankers here in London and I can't help but think to myself what a waste of time and effort when there are actual problems to solve. Bit rude I guess but a whole generation of bright people reducing the latency of trades or compliance software or a new trading algorithm does not move us from zero to one, maybe more zero to -0.3 or something.

How people can claim the market allocates money correctly I do not know, it doesn't seem possible with the rigging and illegal activity that's been going on.


Increase or maintain good funding for the sciences. A lot of people in the sciences aren't greedy, they just want to earn a decent wage doing what they love. Problem is that the grant situation now is so bad in scientific research, people are leaving in droves.

I was doing research on environmental effects on organisms and their offspring with huge implications in development. Now I am using my talents to get more clicks for a website.


I think the same thing when I meet coders who spend their time on ways to get consumers to click on more ads. Or ways to track consumers. Or ways to trick consumers into providing their personal information.


As someone who works in the ad industry - by far the best way to get people to click on ads is to have better ads that are more relevant and interesting and correct for that person (and which tracking plays a supporting role).

In this case, they serve as a very efficient market to connect people with the goods and services they want/need which only helps the greater economy and benefits everyone.


I think it is odd to conflate "bright people reducing the latency of trades" with "rigging and illegal activity". It seems to me that the former are rarely involved in the latter. One only needs to look at the libor cases, the FX fixing cases, or the gold fixing case.

I actually have a pet conspiracy theory that the articles about HFT are the result of lobbying on the part of banks. When I worked at a bank, I did see articles that were heavily influenced by employees of the bank. This influence was never nefarious, but I can see how a traditional trader's biases may have lead to some of these HFT articles.

I rarely see articles about the evils of internalization, something that I strongly believe brings great harm to the markets. At the same time, I often see articles about how HFT takes advantage of the market and brings little benefit when I've made internal measurements that show just the opposite.

Of course none of the above is any sort of advice, and it's probably appropriate for me to note that I've worked as trader at a bank and currently work as a trader at an HFT firm.


To be clear I'm saying I don't believe HFT benefits anyone? If there are any papers you know about showing how it's beneficial to allocating capital efficiently I'd love to see them. I don't understand how it can work to do this apart from being some kind of bizarre capitalist arms race...


> I rarely see articles about the evils of internalization, something that I strongly believe brings great harm to the markets

How?


Internalization disincetivizes people from making tight markets in lit venues because you will only get filled when an internalizer thought the flow was toxic. This in turn means that markets are wider for all participants.


Well I am a quant strategy developer, a libertarian, and I am quite proud of my job (except for the compliance part). I see no "rigging and illegal activity" where I work. (Being legal is not equal to being moral, by the way, and vice versa).


What's new is that they are using FP instead of C++ to deliver results quickly and more reliably.

These aren't the quants from the 90s that were Physics PhDs applying the latest and greatest in differential equations and whatnot. These are programmers who know how to make the complier do more work for them so they achieve results faster.


Fast execution with very terse code, and also the code that is produced by a diciplined OCaml programmer can be easier to grok in many situations because it may read close to what the math formulas look like on paper relative to other languages.

To be honest this is the same argument people make for Haskell and I'm only assuming the argument applies to OCaml equally well.


Yay FP! I wish the article had made clear that the OCaml was a programming language. Could be some proprietary junk GUI the way it was actually written.


Trader+coder here.

This article is missing something very important, the fact that coding doesn't mean you're going to trade better.

A coder doesn't know how to trade right off the bat, they'll only know how to code in a specific trading rubric (most trading algos aren't even good unless we're talking HFT) that has been told to them from someone that already knows how to trade successfully.

Anyone that's a real trader and has managed clients money will instantly be able to tell you that this is articles title is misleading.


a "real trader" manages his / her own money, not that of clients.


the street doesn't make that distinction


I wonder if their recruiting tactics are as aggressive as some of the firms I've seen portreyed in film..

MARCY DAWSON: I admit we've been too aggressive. But all I ask is that you give me five minutes. As a token, accept this.

MAX: I don't want your money

MARCY DAWSON: The suitcase isn't filled with dollars, or gold, or diamonds. Just silicon. A Ming Mecca chip.

MAX: Ming Mecca? They're not even de-classified yet.

MARCY DAWSON: You're right, they're not. But Lancet-Percy has many friends. Beautiful, isn't it? Do you know how rare these are?

MAX: What do you...?

MARCY DAWSON: Mr Cohen?

MAX RUNS DOWN INTO A SUBWAY

(taken from π screenplay by Darren Aronofsky)


I don't deal with petty materialists like you!

One of my favorite movies.


I'm currently enrolled in a MSc program with a thesis on portfolio optimization using statistical learning. It might even lead to a publication! But now, the question is, should I go onto a PhD in stats or CS or just settle with it. I know I probably have the chops to complete it, it's just that 4 or 5 five more years in school is somewhat risky. Sometimes it's hard to assert your worth on such a competitive market.

On a side note: omg janestreet is such my dream job. Writing functional code, working on immensely interesting problems (what is the market distribution?) and being paid for it.


I'm not sure I understand these jobs in an economic sense and I still am not sure of the value they provide to society. Does solving liquidity or arbitrage issues a few microseconds, or even seconds, faster than someone else improve productivity? Or when it doesn't depend on speed but on seeing some tiny market inefficiency, how much does that help the world? (And I'm sure I'm overlooking other economic activities in these firms - what are they?)

There's the economic question of why the market rewards them so well (not that, in the real world, the reward is usually proportional to the value, but it's something to think about). Is it essentially the equivalent of rent-seeking - that is, they get their hands on the resource first and then sell it to others? Or perhaps it's simply the free market, but working on a timescale of microseconds, where efficieny does't really benefit a society of humans that live on timescales orders of magnitude larger.

Finally, there's the concentration of wealth that results from these activities, which is a serious concern.

(I'm not saying everything everyone does must contribute to society, or that I'm a saint who lives on nuts and berries and tends to lepers, but it's a consideration.)


This is the crux of the matter. No, there's no evidence that these activities produce economic value of a magnitude that justifies their compensation.

A certain number of "speculators" are needed to provide liquidity to capital markets. It's unclear what that number is, but it is most likely nowhere near the level we currently see.

In essence, it is gambling. These funds are supported on an ongoing basis by asset management fees. This provides a nice living for the fund managers and employees. They are structured so that the players experience all upside and no downside. If they lose millions of dollars it's not like the employees and managers are responsible for making it up (although sometimes there are clawback provisions, but not nearly as often as you would want). But if they make millions they take a cut of their gains.

This most likely leads to unnecessary risk-taking. (unnecessary in the sense that there's no net economic benefit from it).

So if this is largely a zero-sum game, who are the losers and why don't they do anything about it? Good question. Most directly it is the institutions and wealthy individuals who invest with hedge funds.

These institutions/individuals do it because as a species we have a flawed reasoning capacity and overestimate our ability to exercise good judgment.


> there's no evidence that these activities produce economic value of a magnitude that justifies their compensation

To be fair, that describes many, many jobs. Consider that a backup offensive lineman for your local NFL team probably makes more money than the General in charge of US forces in the Mideast.


I think it's the wrong way to think about things. The evidence that they produce something of value is their compensation. If you don't agree with this, then the ball is in your court to show some evidence that in fact they do not produce economic value. The value could be hard to understand for a lay person, but that doesn't mean it's zero


> The evidence that they produce something of value is their compensation

Isn't this the same argument car vendors use to justify why car sales shouldn't come straight from the manufacturer?

Basically, a lot of people's careers are based on this and if you deprecate that business, they'll be out of luck. But that's the only reason, that too many people have become too reliant on a niche that shouldn't exist in the first place.


> they produce something of value is their compensation

Your argument 'I produce something of value to society' means 'I am fairly compensated' is a very odd one.


I think you have misunderstood; what s/he said was "the evidence" that they produce something of value is their compensation". In other words: if what they were doing were useless, no one would pay them all that money to do it.

I think this is wrong, though, at least when the question is value to society. Their compensation is very good evidence that they are doing something of value to someone, but that may be counterbalanced by negative consequences for other people.

For instance, suppose I happen to be a very skilled thief, and some acquisitive billionaire pays me to steal great artworks from museums so that he can hang them in his living room. This is a very valuable service for the billionaire, because the museums probably wouldn't sell them to him at all, and if they did they'd be incredibly expensive; so paying me $1M for each theft is a big win for him. And he really, really loves art, and loves knowing that he owns precious things* even more, and he has money to burn, so getting those artworks is easily worth the $1M/item to him.

In this scenario, I am providing plenty of value (as measured in dollars) to my employer, and my compensation reflects that. But am I doing something of value to society? Hell, no. Perhaps our hypothetical billionaire gets more satisfaction from looking at the Mona Lisa than most of those schlubs at the Louvre, but surely nowhere near enough more to make it better for it to hang in his house than in the museum.


Oops, sorry about the b0rked italics. Unfortunately I didn't notice them until after it was too late to edit and fix.


>No, there's no evidence that these activities produce economic value of a magnitude that justifies their compensation.

The evidence of economic value is the fact that these activities are so lucrative. If they weren't producing a lot of value somehow, be it directly or indirectly, they wouldn't receive such high compensation in the market. Economic value is essentially a measure of what people are willing to pay for things (revealed preference), under the assumption that people paying for something, absent any cooercion or market distortion, means they value it.


How much did Albert Einstein make compared to Babe Ruth? Why is the highest paid employee at most large public universities not the Nobel Prize winning scientist, but the football coach?

Even in theory, many conditions are required for free markets to function efficiently. Regardless, we don't live in a free market, and many other factors determine income.


There were far fewer people willing to pay to see Einstein do what he did than to see Babe Ruth did what he did. Millions of people got regular satisfaction from watching Babe Ruth, which suggests more people valued what he did than they valued what Einstein did. Economically speaking the value an average person places on something is no less valid than the value an intellectual places on something, and there are a lot more average people than intellectuals.


Thats like saying a Landlord is producing more economic value than the low wage worker who's wages go to pay the rent. One is working, one is rent seeking.


The landlord (or whomever he inherited the property from) created enough value to buy the house. This individual would have refrained from consuming some of the value they produced in order to save money for the house, meaning this produced-yet-not-consumed value could be invested, increasing the overall productive capacity of society. The landlord could even have been a low-wage worker themselves, who saved money for years so that they could buy a house and have a more comfortable life, with the rent they're able to charge being an economic reward for the consumption they forwent.


Or more likely they inherited it.


People who start pyramid schemes create huge "compensation" for themselves, ergo they are doing something valuable for society?

This argument doesn't work.


> People who start pyramid schemes create huge "compensation" for themselves, ergo they are doing something valuable for society?

Economic value isn't necessarily "valuable for society", it's "valued by people as measured by some particular metric based on the preferences expressed in their spending behaviour". Gambling for instance is something that could be said to have little value to society, but has economic value in the sense that gamblers obviously get some satisfaction out of it or else they wouldn't put so much money into it.

Pyramid schemes generally involve fraud, and when someone is defrauded into buying something economics doesn't consider that purchase an expression of their preferences. If it didn't involve fraud and people knew it was a pyramid scheme yet still invested in it, then they'd have to perceive some value in investing else why would they do it?


There's good evidence that the losers in the hft game are retirement funds and other large, conservative beats that don't have as much access to the inside track. The secret market orders in flash boys are a perfect illustration: market manipulation makes the cheaters rich at the expense of almost everyone else.

Finance provides some liquidity to the market, sure, but is largely parasitic. Just like anyone else with a get rich quick scheme, really.


Here's an interesting question, even though I myself don't know the societal welfare impacts of trading.

Suppose for a moment the value traders create is real. Like the trader making $X a year also creates $X of value (like a farmer that works hard/smart to plant 10 times the number of potatoes as his neighbor). How would that make you feel? Would we accept that that was even possible?


If you're optimizing for total career income, talk to recruiters and headhunters, but remember that they're all trying to sell you something and are optimizing over a shorter term horizon than you are. They have a window into the income distributions for different education levels.


Title mentions PhD yet only 1 of the 6 guys in the article has one.


The first three comments were all variations on "this isn't new" so let's take that point for granted, and see what else this article gives us.

It's not new that Wall Street is hiring Ph.D scientists and mathematicians (that's been happening since the 80s) but what's changing is the kind of role they are getting hired for.

From the 1980s up until 2005 or perhaps even later, most Ph.Ds were hired in "quant" roles, that is, to build mathematical models that could price and manage the risk of derivatives. They were generally not in trading roles.

More recently (i.e. in the last decade) it's common to hire Ph.Ds as traders - that is, to write algorithms that are used to make trading decisions. This requires a rather different set of skills - instead of being skilled in stochastic calculus, partial differential equations and numerical methods, the quant trader is skilled in statistics, data analysis, optimisation and machine learning.

It's true that Wall Street has Ph.Ds hired to build trading models for many years (e.g. Renaissance) but the change is that this is no longer an esoteric fringe pursuit. It is seen as standard that trading desks at investment banks will have a large number of quant traders. Large European investment banks have heads of trading who are quants. Quantitative hedge funds are no longer mysterious and exciting - many of them use well understood models that have been widely replicated across the industry.

To be honest, I am surprised that it has taken this long. Finance is so obviously suited to these kinds of quantitative methods that only an aggressive rearguard action by voice traders has been able to keep them at bay. The question is no longer whether quantitative traders and their algorithms will largely replace voice traders, but how long the voice traders will manage to hold out.

Jane Street is an interesting special case. From my (somewhat limited) interactions with them, they are neither wholly voice traders nor wholly algorithmic. Instead, their researchers and traders build algorithmic trading systems which can be "driven "by humans. For example, the system will continually calculate a set of useful metrics that a human trader uses to make a final buy/sell decision, and trade is then immediately executed by high frequency execution algorithms. Or the human trader decides to make a complicated spread bet (e.g. long an ETF vs. a cost-optimized basket of the underlying stocks) and the algorithm goes out to execute the basket as effectively as possible.

I think there's an interesting parallel to "Centaur chess" [0] where the combination of a computer and a human is much more powerful than either of them acting alone.

[0] https://en.wikipedia.org/wiki/Advanced_Chess


> This requires a rather different set of skills - instead of being skilled in stochastic calculus, partial differential equations and numerical methods, the quant trader is skilled in statistics, data analysis, optimisation and machine learning.

Although I'm not a quant and do not even directly work in the finance industry, my experience working as part of a machine learning outfit definitely corroborates this. Data Science may be a hard term to truly define (it's quite broad, particularly when you start applying it in the real world) -- but the general skill set is definitely seeping into computer software/engineering roles. I'm not sure how it will go in the future (there are many viewpoints on this) but I wouldn't be surprised for this trend to continue.


That's the essence of complementarity. Cowen's "Average is Over" talks about it a lot, and uses many chess examples specifically to back it up. Recommended.


I thought the book was alright but spent way, waaaaay too much time on chess.


I'm coming to the end of my PhD, and have been contacted by a few recruiters for various hedge funds. It seems like a shame to leave academia. Realistically though, most people will be stuck in a series of ~18 month postdoc contracts, with little prospect of getting tenure. Add to this the poor pay, and hedge funds start to seem pretty attractive!


This industry irks me.

What's the point of doing engineering anywhere if you don't get paid as much as these guys to shift money around?


The pay in these sorts of articles is always overhyped. As with any business, the people making the most money at these kinds of firms are the owners of the firms. Consider this line

“As a trader, if you do well, you will retire before you turn 30,” said one employee on an industry message board.

That is basically 100% unattributed, unconfirmed bullshit.


Yeah that sounds like complete bullshit to me. I know some top quant traders who make high-six/low-seven figure comp consistently at that point in their careers, but they're nowhere near able to retire with a comfortable lifestyle, and that's an extremely biased sample. For every person like them, 100 others fail early on, 10 stick around making a nice but not much higher than Google salary, and 5 have a couple busy high comp years then get pushed out by greedy management, have their edge eaten by competitors, or quit when the markets slow down.

Getting to that level is like making partner in a law firm. You have to do much better than "well" and anyone who gets there would be a fool to retire and likely wouldn't want to anyway due to the personality traits/defects required to get there in the first place.


Yeah, I feel like "As a founder, if you do well, you will retire before you turn 30" is the sort of thing I could totally expect to read here, even though there would be plenty of "what are you talking about" replies.


For what it's worth, I have seen couple of such traders, below 30 and able to retire (as in couple millions in the bank).

The thing is, what you mean by "if you do well". In the cases I observed, for every trader that did well for themselves there were 49 that did not.


Providing something useful to the world. Reasonable hours. Not having to do any statistics.


What's the point of doing engineering anywhere if you don't get paid as much as those other guys to shift ads around?


You might think that you're joking, but I agree with you. A pox on both their houses.


Interested to find out why OCaml. Not that it's wrong in my view, but why, next to so many choices.


I imagine it's because until about 5 years ago, there weren't many choices that were significantly safer than Java (no null references, failing to account for all cases in a match statement is a compile error, etc.) and generally within a factor of 2 of C's speed. Haskell's laziness by default can mean less predictable performance, or at least fatter tails on the performance distribution.


What would be the choices now? Most references to alternatives suggest Haskell.


It's a reasonable language choice, and the OCaml's type safety was obviously an important factor. However, the key reason why it was such a brilliant choice was for attracting top talent. People who show the initiative to learn a functional language tends be very self-motivated, intelligent, and passionate about their craft. As a result, Jane Street has long been known as one of the (if not the) top places to go if you want to do functional programming full-time.



Yaron Minsky of Jane Street gives some insight here https://vimeo.com/14313378


I don't know much about ML, but this was a good talk!


because Yaron Minksy is super-smart and he likes OCaml. Other companies do well without OCaml.


I believe for many of the same reasons that Lisp was used with great success in the past. OCaml is descended from the ML family of languages and grounded in solid mathematics, like Haskell. In the hands of the right person it's a formidable tool and arguably provides barriers to entry for competitors.


For a quick answer check out https://www.janestreet.com/technology/ , "The OCaml difference" near the end of the page.


This seems to be the wall street equivalent of transitioning sysadmin roles into devops.


"Writing computer code, or at the least being conversant in the firm’s program of choice, OCaml, is a requisite for all traders. Indeed, new traders must complete a monthlong OCaml boot camp before they start trading."


Reads like a recruitment piece for programmers, or maybe that's how I read too many articles being programmer. I was a little confused by this:

> For example, Jane Street, which is privately held, has increased its shareholder’s equity, or net worth, to more than $1 billion today from $228 million in 2007.

Is this supposed to be an impressive stat? ZocDoc has become about $2 billion company in basically the same time frame, which seems more impressive given that ZocDoc didn't start from that $228M handicap. My perception is that it's also much more expensive to run a company like Jane Street.


you are confusing valuation with shareholder's equity


Okay. Thank you. This is probably the source of the confusion. Would a company like ZocDoc even have shareholder's equity?


Of course, shareholder equity is just assets - liabilities.

Granted, it's probably significantly smaller than the $2B figure you cited.


If there's one place where just about everyone I know has done job interviews, it's jane street. They cast a very wide net.


I see their advertisements everywhere. Probably because I searched OCaml at some point.


As a swing trader, this interests me. The volatility of the market presents opportunities I don't think would otherwise be possible. Certain news items will push a stock significantly below market value, as determined by 10-Qs overtime (and some knowledge of a given industry). I happen to believe the current AI-led trading induces extra volatility in the market that is eventually corrected for which ultimately leads to swing trades.


Not new. A high school (early 2000s) physics teacher told us all that if we wanted to make money with physics, we should:

1. Get a physics PhD with

2. Some experience in computer modeling

3. Get hired by Wall Street

Even with the downturn in '08, I've seen no indication he was wrong.


Yeah, half my friends from university graduated straight out of their Physics degree and went straight into finance. Didn't even bother with the Masters or PhD.


Quants were around before then. Look up the story of Long Term Capital Management (IIRC, they were quants).


Pretty ironic since salaries for quants have gone down and getting replaced by outsourced overseas PHD graduate.


To all the "Nothing new here" people - really?

Yes there is nothing new, in that you physically cannot write the words "Jane Street Capital" without subsequently writing the the word "OCaml". But seriously, an OCaml reference in the New York Times. Someone must be celebrating.


1986,87 also saw a boom in quants, mainly engineers, even nobel prize laureates. They put them in one room, come up with ways to make money using quantitative models. There was a lot of buzz for decades until the collapse of LTCM.

Peter Thiel said MBAs flocking to certain tech as warning signs of a peak, likewise wall streets have had PHDs flocking as a measure of it's peak.

I fear that with a double whammy of low oil prices and low commodity prices, it will spark a long period of economic stagnation in the near future, as more jobs disappear in increasing numbers and social benefit falls and governments around the world struggle to monetize their aging populations.

The countries with young and increasing birth rate will feel the impact the worst, and we are already seeing such demographic in Europe packing up their bags and joining jihadi movements.


> I fear that with a double whammy of low oil prices and low commodity prices, it will spark a long period of economic stagnation in the near future, as more jobs disappear

So if commodity prices go up, it's bad because Europe can't afford those commodities. But then if they go down it's also but because...?

Heck, it's not a double whammy, it's good news for most countries in the world. A different story might be why are these commodities going down (because China's demand has been drying up), and that might actually be bad news, but it's another argument.


Low commodity prices are a good thing, they don't cause stagnation.


Different evidence, same fear. Assuming trend continues, is there any alternative to war?


I think wall street has been hiring PhDs to code for a long time. I don't think this is a new phenomenon.


Yea isn't the old joke that quants are composed of Physics PHD dropouts ?


Here is the breakdown for the quants at the bank I worked for in 1995-1999 (I may have forgotten a few people):

Cornell physics PhDs: 3

Harvard physics PhDs: 2

Princeton physics PhDs: 2

Univ of Penn physics PhD: 1

Other physics PhDs: 2

Cornell applied math PhD: 1

Other applied math PhD: 1

Cornell mechanical engineering PhD: 1

Univ of Chicago finance PhD: 1

So, if by "dropout" you mean that they didn't complete their PhDs, then no, that's wrong. If by "dropout" you mean people leaving physics, then yes, it's very common (especially for theorists -- all physicists on the list above where theorists except maybe one or two).


On the assumption that their dissertations were not on relevant topics, I can't help but feel this is such a terrible waste of highly specialized education resources.


Are there lots of unfilled physicist jobs where you are?


Yes, very snarky, but I can promise you that science faculty do not consider it a good use of their efforts and resources to train students for jobs moving money around in circles.


Beats training students to work at Starbucks. Not everyone can become a professor.


We get to train them, not choose what they do afterwards.


That's not in dispute. I'm saying it's a waste, not that I know how to fix it. More relevant jobs is obviously a part-answer.


I hope the same faculty understand that here are not many science jobs available.


Don't worry, they do. Who else will write their publications/advance their research agendas?


not necessarily, I often feel the same way about people who are experts in literature. But just mastering SOME topics is still a contribution to humanity and can be applied in other areas.


It's a good point, but what part of ETF trading is a contribution to humanity? Seems like quite the opposite in fact.


ETFs are a broad topic. They still bring liquidity to market, but they are a trading vs. investment opportunity. Like any other financial vehicle, they are subject to abuse, but are not the cause of such actions. The FED purchases numerous bonds in some of these portfolios, and therefore some of the costs are hidden. These do not reveal themselves in the market, and as such are bad trades or investments.


I wasn't saying that ETF's contribute to humanity, I meant the non-financial research that Ph.D's do prior to wall street. That research adds up and eventually people can apply it to do amazing things.


Not that I've heard. Quants tend to hold PhDs in technical fields.


in the sense that they've dropped out of academia


Nothing remotely new


How are people bypassing NYT and WSJ paywalls these days? The Innocuous Chrome Extension posted a few days ago on HN no longer works, and coming from Google isn't working for me either.


This may surprise you, but some of us actually have subscriptions. I don't have one to the WSJ but I have one to nyt.


What made you subscribe to the Times versus other newspapers? I've been debating a Times vs. WSJ subscription.


Some differences, from someone who knows far more about news and the news industry than they should (and I'm not in the industry):

* Very generally, the Times focuses more on investigative journalism and non-business news; the WSJ's priority is business news. But they both cover plenty in all fields.

* The Times is generally a little more prominent, the leading newspaper (and news source) in the world and the "Newspaper of Record"[1] for the U.S., but I'm not sure how that reputation benefits you, the reader.

* The Times' arts coverage is unquestionably the best and most sophisticated of any newspaper, if that matters to you, from film to theater to music to exhibitions to other 'fine' arts. However, it is somewhat New York-centric (it is the New York Times, after all, and NY is the center of the U.S. and global art world).

* Editorial: Even the best newspapers' standards of accuracy on their editorial pages are far below those of their journalism; they often are happy to print outright lies and propaganda either to push a political issue or because it's influential. IIRC, maybe a decade ago the Times decided they would raise the standards somewhat on their editorial page. Regardless, I find the Times publishes less outright bullsh-t; they have a politically diverse roster of columnists but the unsigned editorials are definitely liberal. The WSJ regularly pushes things like climate denial and other bizarre ideas (that serve the conservative, wealthy busiess elite) such as this one:[2] Personally, I don't read any editorials in any paper - they are so regularly ignorant of or lying about the facts and full of propaganda (that word again) that I never know if I'm becoming more misinformed by reading them.

* Other options: Also, I'd consider the Financial Times, the leading international competitor to the WSJ, which I think is just as good as the other two and provides a more diverse perspective coming from the UK. Certainly there is more overlap in coverage between the NYT and WSJ than between either and the FT - check out their site and you'll see many important stories you'd oterwise miss. The Washington Post also is excellent. I can't think of another source of serious news, in English, in the class of those four.

* IMHO: The WSJ is owned by News Corp (Rupert Murdoch), the same company that owns Fox News. Their demonstrated willingness to lie and push propaganda at Fox News, as well as openly use it to control the political process, makes me doubt that the same owners would have more integrity at WSJ. Their editorial page confirms my doubts to a degree. I don't trust it, though many others do. I don't completely trust the NY Times either, of course, but much more than their Manhatten neighbor.

I hope that helps.

-----

[1] https://en.wikipedia.org/wiki/Paper_of_record - don't believe some Wikipedia editor's attempt to equate the LA Times and Washington Post with the Times. If any challenges its position, it's the WSJ.

[2] http://www.huffingtonpost.com/2014/01/30/wsj-defends-kristal... - It describes and links to the original, which is behind a paywall.


I would also add that the NYT simply has the best online newspaper. The site itself is beautiful, and I am continually impressed with their innovation in interactive features and design.


> I would also add that the NYT simply has the best online newspaper. The site itself is beautiful, and I am continually impressed with their innovation in interactive features and design.

Interesting. I would disagree, or at least I think being the "best online newspaper" is sort of like being the best WAP web browser. I think many bloggers do better.

Note that we call it an 'online newspaper' - often you can instantly identify news websites are made by former newspapers as opposed to other news sources, as if the UI of their website should depend on the archaic medium they once used.


What are you thinking of that has both the scope and depth of content of the NYT, and the innovation in design? Or did you just mean one of those two criteria?


They're content is unmatched (except arguably by one of the three I mentioned above), I was just talking about design.

As a user, I don't find the innovations very useful and the design functions poorly. For example:

1) Most of their content is hard to discover; the front page must have 100 links to stories, some old and some new, and much more is buried elsewhere - if I wanted to see every story of interest to me, I'm not sure if or how I could do that starting from the home page. I also read it via RSS and it's a whole different news source, with far more coverage. People reading on the web miss a lot.

2) Updates to news stories: If a story has been updated, how do you know? You have to look around the home page for the words 'updated xx:yy' - not really a great method of notification. And if I click the updated story there is no way find out what's changed without reading the whole story again, looking for things that don't seem familiar.

3) Their inability to integrate multimedia in story-telling: A movie review never says, 'watch the clip below; see how the colors ...' <video> 'also note how the actors ...'. They have images and video, but they are decorations stapled onto the real story in text and not an integral part of it - or even a more dramatic example, the videos with hard news are completely segregated from the text story. They still are a newspaper, stuck in the limitations of the old medium where text was the only realistic option, with a few images added on.

Note that bloggers handle many of these issues efficiently. The NYT is still a newspaper on the web.


These are fair comments, but the NYT also frequently has interactive, data-based visualizations that are among the best in class.


WSJ seems a lot more conservative and hacky. NYT is more liberal.


Click on the "web" link from the top of this page.


NYT doesn't paywall in incognito, I think?


For the new WSJ you need to go incognito and turn off ad blockers


Delete all the cookies.


[flagged]


Were you also a self taught spammer or did you go to school for that?


You might not like it, but site is blowing up.


I haven't figured out what the (self taught) part brings to this equation. The way I interpret it is that self taught has a factor > 1.0 which is better than someone who would have learned in college or some other form of learning? I get the (human communication skills)... that makes sense in the equation. Care to explain it? I figure if you take the time to write an equation, it might as well be explained in terms more formal? :)


Note that the site linked to looks highly dodgy, and so the above post is essentially spam and hence unlikely to contain too much deep meaning.


Keep watching CNBC bro. ;)


You call me dodgy, but this guy isn't? You most definitely a rockstar!

http://www.zerohedge.com/news/2016-01-19/david-einhorns-conf...


Self taught really should mean someone that has the initiative, drive, determination and passion for their particular project. I don't think any self taught coder, starts off wanting to write code, they just need to move their particular project into code realm. My passion was stocks, when excel couldn't handle my calculations, I had to teach myself code to handle the calculations. Being self taught allow me to think in non traditional ways, to solve code problems.

I also get a lot discrimination in the web development world, because I don't have a CS degree. I was once told from an interview, "We would like to hire Chad, he is well educated and smart, but we can't cause he doesn't have a CS degree." It wasn't a requirement. Since then I embrace the fact that I'm self taught, some might see it as weakness, I see it as a strength.

Finally, I really like Jack Dorsey quote: http://www.businessinsider.com/jack-dorsey-on-programmers-20...


Coder * (self taught) + MBA * (human communication skills) = somebody elses money :)


Coder + CFA + Financial market + Financial reporting & analysis = $$$ + Trading = $$$$


Where?


[deleted]


But, what has science got to do with it? None of the "experiments" can be reproduced.


This is because of the shift to HFT.


It's really not, HFT doesn't require quants, it's all about latency arbitrage, not about predicting future prices with quantitative analysis.

It is all about the shift to algorithmic trading, of which HFT is only a small sub-category.


Nonsense. Most HFTs are market-makers, either official or unofficial and have to predict price movements to quote competitively. If you only make quotes where you have an immediate arb in another product/exchange, you won't get many trades: https://ptportal.kcg.com/kresearch/do/research/getDownload?a...


HFT market makers aren't doing complex quantative analysis in microseconds it takes to do trades, and latency arb isn't "an immediate arb in another product/exchange", that's just normal arb. Quants are used for longer term stuff, not microsecond level stuff. HTF's are doing order book stuff and flipping the spread, nothing hugely complex, just fast.


What is "latency arb" then? To "flip the spread" you need to predict where the market will go after your order gets elected. The market is pretty efficient. The average limit order loses the spread and rebates after execution. You can't make money just being on the bid and offer with the crowd without a directional prediction.

You are right that the actual execution algorithms aren't doing super complex analysis in real-time. Usually that is done offline through simulation to generate rule sets, decision trees or factor weightings. That work is definitely quantitative. Aside from pure arbitrage, most HFT strategies have a statistical edge, not a mechanical one.


Latency arb is taking advantage of people with slower connections by being able to place/cancel orders faster than them. As most exchanges are price, time priority, unless someone beats your price, first in line gets filled first.

> To "flip the spread" you need to predict where the market will go after your order gets elected.

Lets talk abstractly for a moment, that sentence is exactly wrong. The whole point of flipping the spread is that you can immediately sell what you just bought and make the spread risk free. That's what market making is, providing liquidity for the spread as profit. Now, pragmatically, of course the market doesn't sit still for long and the price may change between your buy and sell so of course it's good to predict the market direction to reduce the risk of being on the wrong side of a move. But HFT is trading at the microsecond scale, prices aren't moving much at that scale in that short a period of time and you only need to know where the market is going for say the next second to be in an out of a slew of trades.

> The market is pretty efficient.

Agreed.

> The average limit order loses the spread and rebates after execution.

I don't believe that. That would mean that slippage exceeds the spread and more on most orders and unless you're trading a very illiquid market there's no way that can be true unless you're trading very large, large enough to move the market alone.

> You are right that the actual execution algorithms aren't doing super complex analysis in real-time.

That's my main point.

> Usually that is done offline through simulation to generate rule sets, decision trees or factor weightings. That work is definitely quantitative.

I agree with that as well, but that's not HFT trading, that's market analysis and mostly I believe, though I admit I could be totally wrong here, that analysis is mostly used for slower algorithmic trading, not HFT. In HFT, it's better to be faster than smarter, especially with the sub-penny rule imposed by Dodd-Frank.


http://www.tradeworx.com/media/pdf/TWX-SEC-2010.pdf (p.13) and https://mechanicalmarkets.files.wordpress.com/2015/01/toa-ex... back up my claim that limit orders lose the spread on average net of costs. In a competitive equilibrium, this has to be the case. If the average limit order lost less than the spread and rebate, it would be profitable to mechanically copy every limit order with an infinitesimally small limit order placed right behind it. If the average limit order lost more, it would be profitable to copy every marketable order trading to remove any residual liquidity on the book at that price. Of course HFTs limit orders perform better than average or they'd be out of business (and many do go out of business).

FWIW, every successful HFT trader I know does this type of "market analysis" driven trading backed by very fast execution. Speed alone is no longer an edge in most markets. Most are holding risk for more than microseconds or single seconds. Trade direction is auto-correlated in short timescales so even being front of the line you are unlikely to buy and sell to earn the spread so quickly.


I don't think those don't back up your claim, those numbers are specifically pre-rebate and are being shown there to justify the fairness of rebates as a useful market feature by showing that without them the expected returns would be negative and thus discourage trading. You claimed the average was unprofitable post rebate, showing pre-rebate numbers has no bearing on your claim.

> In a competitive equilibrium, this has to be the case.

I don't agree, the spread exists for a reason, it is quite literally the minimum cost of doing business for selling liquidity. If selling liquidity were not profitable, no one would do it.

> If the average limit order lost less than the spread and rebate, it would be profitable to mechanically copy every limit order with an infinitesimally small limit order placed right behind it.

That doesn't follow. You have no idea how much liquidity is sitting at that price so even posting at the same price wouldn't guarantee execution let alone posting behind it. Limit orders are profitable because they are inherently offering a service that the market is willing to pay for, liquidity, that's it.

> If the average limit order lost more, it would be profitable to copy every marketable order trading to remove any residual liquidity on the book at that price.

If the average limit order lost, it'd be called a market order because market orders lose the spread and limit orders make the spread, that's how it works. That is the equilibrium, market orders buy liquidity from limit orders for the price of the spread.

> Of course HFTs limit orders perform better than average or they'd be out of business (and many do go out of business).

Yes, exactly, and they perform better due to latency putting them first in the queue, that's rather the whole point of HFT, being first in line.

> Speed alone is no longer an edge in most markets.

Incorrect, speed is always an edge for the fastest trader; it's simply no longer easy to compete on speed for most firms. Dodd Frank has devastated HFT with the sub-penny rule making latency even more important and driving most out of business.

> Most are holding risk for more than microseconds or single seconds.

Yes, because they can't be the fastest, they have to start speculating a bit. This is because the hay day of HFT is over; they're being forced into speculation by the inability to compete on price due to the sub-penny rule and the inability to compete on speed due to the massive costs of doing so. But once you start speculating for longer than a few seconds, you're no longer a HFT trader, you're just an algorithmic trader. HFT is market making, if you're speculating on direction and holding for expected moves, you're not a HFT, you're an algo trader.


The total size of the HFT pie is indeed minuscule, considering the amount of hype it gets.

Past the high infrastructural barrier to entry, and assuming they can stay ahead of the competition, the consistency of returns does seem lucrative, but the actual magnitudes of the opportunities are hard-limited by the nature of the time scales. You can't move any significant amount of capital in milliseconds and expect to profit. Compared to the average hedge fund, they are playing with pennies.


"Writing computer code, or at the least being conversant in the firm’s program of choice, OCaml, is a requisite for all traders."

nytimes... why u so noob?


Seriously, are you serious, these are the people who bankrupted an entire generation.


Every time I hear about algorithmic trading, I keep thinking back about Enron.




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