[jamespattn]

If the "edge" is ephemeral (I agree that it is), I always wonder how quant/HFT firms like Jane Street, RenTech continuously make insane profits out of such strategies.

I suppose it could be a combination of things that isn't necessarily just related to finding edge over markets. Having an entrenched market position or access to data faster perhaps?

[cmcaleer]

Not all edge is necessarily ephemeral, if you're thoroughly entrenched and have a deep understanding of a market you will usually just outperform your competitors. Take Jane Street's infamously long-lasting (and profitable!) Indian options trade for example. They had clearly put in the work and effort into understanding a market that other firms didn't do to the same extent, and resources and minds who are good at figuring this stuff out are finite.

You're totally right that edge isn't just knowing if number is more likely to go up, as an example since you mentioned faster access to data: some of the best of the best companies will hire meteorologists so that they know how reliable their microwave towers for transmitting data between e.g. Chicago and NY are (and they can lean in or widen their spreads according to how current and up-to-date their information is).

It sounds like crazy stuff to do, but when your data could be up to 10ms slower than you expect due to weather and you're so sensitive to latency you hire FPGA engineers because normal high performance CPUs aren't enough for you, it's not that crazy.

I sometimes feel like HFT is a waste of good talent and wonder what some of the people I've met who work at JS or CitSec could have done in other industries, but at the same time HFT is often the only industry that correctly prices these peoples' minds. Ultimately having a smoother financial system where risk is more correctly priced is a good thing, even if it's not the best thing they could be doing.

[jamespattn]

Nice. I also think about the amount of human brain power that goes into HFT (or trading in general) and how society would be if it were channeled elsewhere. I suppose some do it for a few years and then do other things once they've accumulated enough wealth

[ta12653421]

...let me state that we should be much more worried about the superintelligence which is entering "Ad-Tech" after attending Harvard or Stanford :-))

[TeMPOraL]

My intuition: to the extent it's possible to systematically create an edge for yourself, someone will be doing it, and they'll have a bunch of competitors trying to outdo it, perhaps swapping the "first place" amongst themselves, but also continuously raising the costs of maintaining the edge.

There's an equilibrium there, where the top players have some profits - not necessarily insane, but enough for them to continue the race and take some of it home. Meanwhile, the up-front costs of getting all the advanced tech and expertise to try and compete with them is high enough, that you're not likely to break even for years - so you won't bother, and no one else will either, and the pressure pulling those "insane profits" down disappears. Those profits look like money being left on the table, but no one can afford to reach for it.

[jcfrei]

Jane street and others are essentially market makers. Which means in one way or another they get paid for providing liquidity. They have a different pay off profile from hedge funds, retail traders or mutual funds which usually make a directional bet. For example by having exclusive order flows (for example from robinhood traders), lower trading fees (often rebates), access to better execution (via dark pools), cheaper financing (for leveraged trades), tighter spreads in OTC deals, etc.

[jamespattn]

So is the idea that their quant researchers spend all their time finding alpha just a front/recruitment driver rather than the reality of what a quant researcher would typically do day-to-day to actually increase PnL?

[jcfrei]

All the examples I gave are a precondition to even take part in the market making game. Your actual market share and profitability within the space is then still determined by the quality of your models, execution, tech stack, market access etc. for which you need good quants, traders and also lawyers (for tax and offshore structuring).

[mhh__]

They have the best infra, lots of good properly cleaned data, and market access.

I don't know if rentech ever make markets but one way to make a _lot_ of money in finance to provide liquidity while also have good alpha models. The faster the better. This way you are earning the spread while also getting into the positions you want, and maybe even getting paid for it by the exchange.

[mtillman]

Rentech is an old customer of mine, do you know if they’ve still not had a down year on the employee fund?