Finding Signal in the Noise: Machine Learning and the Markets (Jane Street)(signalsandthreads.com) |
Finding Signal in the Noise: Machine Learning and the Markets (Jane Street)(signalsandthreads.com) |
Genuinely perplexing how they always try to show each multi-million earning engineer as some normal person and not someone that went to Exeter and Harvard
There are places that without that Ivy League or Target School degree you don't hear back, I don't think Jane Street is one of them.
I don't think they'd ever call someone like me back, not that I'd ever be able to pass a coding round with them.
People like me are "NPCs" in their parlance.
The reproducible-Python notebook problem/notebook for researchers mentioned in the podcast inspired me to create a new project, branch-pad https://github.com/alexyorke/branch-pad which is an interactive Python notebook environment that allows you to create and explore multiple branches of code execution.
I just taught a course to a client this week helping them with this (and other best practices for Python).
Currently leaning towards no, as they are hard to test, compose, and version control (it is possible, but you need bespoke notebook-specific tools, and most just don't).
Any time a notebook needed to be tested, refactoring it into a module and testing that was the better choice.
Notebooks in my opinion are by far the best tool for interactive and exploratory data work. I've been using Jupyter/IPython for 10 years and it takes very little discipline to keep them clean and clear. I've never bothered trying to deploy them in any meaningful way.
The quirks with version control are annoying, that's one reason I've switchex to marimo in the last few months.
Do you have this written down anywhere or on video anywhere? I'd love to learn more about what you mean.
When you are exploring something, experimenting, showing.. it’s great; train-of-thought structure, APIs like Pandas optimised for writing and terseness etc.
But when you have a piece of code that will lose a million dollars a minute if someone ships a bug, and which will be maintained by many engineers over many years, then you really want a format that’s optimised for long-term maintenance, incremental change, testability, and APIs optimised for readers.
Writing clean data code is one aspect. Filling in knowledge gaps is another. Covertly teaching software engineering best practices to folks who "aren't programmers" yet sit down and write code in Jupyter all day is another.
I should probably write a blog post or record a short video. (I just taught a week long course on this for a client last week.)
He replied with, roughly, "Those of you who work here probably couldn't do anything else other than perhaps math research. Arguably, working here is the economically efficient use of your time."
I think about whenever I see a comment like this. Quant firms select for a very specific set of skills. In particular, I've found that many traders/software engineers in quant are very smart but not very self-directed. Places like Jane Street work well for people who can excel, but only when given a lot of structure and direction. I think this is not unrelated to why so many people 'accidentally' end up as traders after going to an Ivy League school!
This error seems to be a particularly common (and often lauded!) trait among those who work in high-conjecture low-evidence fields (eg, economics). The prominent thinkers become skillful at deploying this fallacy: “see, it’s there, therefore <insert-personal-belief> is certainly the cause!”, using their credentials and esteem to mask the error. Listeners think, “well he’s a smart, respected guy,” and nod along despite the missing logical link.
I greatly appreciate Cowen’s podcast, and I definitely respect him as a thinker and inquisitor – so I don’t mean to discard his work or opinions (in fact, I appreciate his occasional brashness because it exposes the underlying thought/principle). However, many of his aggressive-yet-speculative statements (like the one you roughly quoted) are best received with an understanding of the error.
Complete garbage. The same way that Jane Street hires smart people that don't know anything about trading and those people contribute, the same would be true if there was money in curing cancer.
I don't think there's a gene for playing esoteric minigames on the options market while you literally suck at everything else
I also encourage everyone to read CFTC response to the Vatican's (!) Congregation for the Doctrine of the Faith https://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlore... It talks about about the social utility of derivatives and refutes the narrative that they are basically tools of "speculation." Traders take on risks others can't bear, creating massive economic value that ripples through the entire system.
Derivatives have great value to industry. Derivatives that require the fuel of 15 math Phds to lock in fractions of a percentage pricing inefficiencies so their firm can pocket the difference do not have much value at all.
It's like employing Harvard Med surgeons to remove gold dust from gold market sidewalks, and calling it "gold market efficiency".
We have far, far too much of our economy sunk into a sector that fundamentally produces nothing of value, one that only shuffles value around and chooses to whom it will be allocated (coincidentally, often the people doing the allocating!).
Compare our economy and its woes to China. Do they spend nearly as much of their human capital figuring out how to get an extra bp on some statistical arb? Thethe origins of DeepSeek are illustrative in this regard.
But, ok, Spread Networks spent $300m around 2010 to build a somewhat straighter glass fibre data connection between NY and Chicago. Other companies spent more to build a micro wave connection, since microwaves move faster through air than light through fibre.
Is that money really well spent? And I'm afraid a lot of what happens in finance is similarly private gain, without much social welfare increase.
This has been the case for well over 200 years and is not done by the same kind of people that modern finance/fintech employs.
Imagine the world 150 years ago and imagine were you'd allocate the smart people that's the highest paid these days. They'd be doing science and developing technology instead of doing finance. Why is finance that much more important now? (is it just because it makes rich people richer?)
In practice, if the availability of the apples you're eating is dependent on finance people, they're commodity grade, not specialty varieties.
I don't eat apples, but I'd rather have a good heirloom tomato from the farmer's market than the commodity grade stuff that's at the grocery store.
See, if you're a fishmonger and someone comes to you and say "why don't you trade flowers instead", you ignore them because they are not your customer. They won't trade fish with you, and in fact they wouldn't trade flowers either. They're just useless relative to your trade and only yapping so just turn your back on them and leave them be. Tell them to fuck off and find a flower monger if they really want it or mong those those flowers themselves because you are sticking to monging fish.
The alternative to highly technical, agile quantitative trading is fat middle men, wide spreads, and capital sitting in 8%* stupider places than it would otherwise. That’s a pretty big deal even if the observable effects are extremely diffuse.
* Made up number, but if we woke up on Monday with nothing but the tech we used to trade in 1984 it would probably hit much worse.
The inverse is true too: lots of things provide value that no one pays for.
I find it shocking that anyone that programs would think this way considering how widespread and common open source tooling is. I don't know how you can get through your day without using OSS or even free websites like stack overflow.
I'd argue that pulling these people out of moving society forward is just another form of externalized cost. The stanford guy who figured out how to halve the cost of solar in 2012 never got to realize it because $750k/yr to do stochastic modeling of cattle feed to (secretly) overcharge farmers for futures contracts was just too enticing.
No, this would be the alternative to securities and derivatives markets being electronic.
>If it didn’t provide value, nobody would pay for it.
The parent was remarking on the value provided to society, not the value provided to the firms.
Lots of smart engineers that work on making buttons pretty and A/B testing crap rather than pushing the boundaries of science.
He started the company in 1982 after he left academia for finance and leveraged quant models for training, they mostly hire PhD mathematicians, physicists and scientists, working on algorithms.
They have a fund called Medallion that is closed off from outsiders (you have to be an employee I believe), and it averages 66% annual gross returns (39% net after fees). Generated hundreds of billions in profits.
If we want more talented traders to become founders building economic value (which we should all agree on), we need to make it less onerous to start a business.
See for example “effective altruism”, which turns out to have been neither, but more of a self-deluded justification for insane greed, coupled with a god complex.
I'd definitionally describe all voluntary transactions free of coercion to imply the buyer values the utility of what they're buying (i.e. true wealth - piles of currency are not true wealth, they're what you exchange for true wealth) more than the currency they're trading for it, no?
Involuntary transactions featuring coercion on the other hand, like the government demanding you pay taxes under threat of imprisonment (enforced at gunpoint, if necessary) are clearly extractive, by my definition.
I guess advertising is too, in the limit. So a lot of the business model on the web is also not much value to society.
There is much more nuance in this world than your post implies.
Who elected you Supreme Leader?
It's also a sophisticated "export" product itself.
However, I think there's a point where, absent sufficient regulation, it overshoots and most of the effort goes to squeezing nickels out of everyone else in underhanded ways. I feel like we could get 90-95% of the benefits with a finance industry that's half the current size, and also avoid a whole lot of indirect costs that come with an oversized finance industry.
And of course prices are hugely valuable: the market is a conversation about the relative value of everything, and the language it speaks is prices. So by enabling liquidity, high-frequency traders are enabling efficient allocation of resources towards those things which mankind most dearly needs and desires.
perhaps ancedotal but the bottom 20% more or less stay the same across generations no matter how welcoming an organization is or no matter if an individual is bright or has a good idea
Personally, I think the fact that notebooks are usually easier/funner for me to work with is a big problem. I'm by no means a Clojure expert, but I did do a semi-large project in Clojure a few years ago, and some of the ideas of true REPL-driven development that exist there are things I wish that Python supported.
It's hard to explain without actually learning it for real (and most Python devs mistakenly think Python has REPL-driven development; I sure did before learning Clojure!). But once you get used to being able to interact with your actual source code, and at any point just being able to write new code and immediately print out its value, then with one shortcut make it part of the regular codebase... that just blurs the distinction that exists between Jupyter Notebooks and production code in a way that makes everything much better.
What tools are used for "write new code and immediately print out its value, then with one shortcut make it part of the regular codebase" and how does that square with working on a team and getting code reviewed?
It’s clearly a very flexible philosophy that “smart people” can use to justify pretty much whatever, and given the presence of such people as SBF and cronies, certainly doesn’t support the notion that it’s a great thing for “smart people” to get rich, or really that we should expect that to be any more than neutral.
“Smart People” can be scumbags, and some prominent EA folks were, all the while shouting about how good they were.
But generally nobody pays quants to lose money. They expect value over the other opportunities they have to use that same money.
Is this really controversial?
As with your other comment, this has nothing to do with what the original parent comment was remarking on. They didn't claim, nor did anyone else, that proprietary trading firms weren't making money and that people weren't well compensated due to helping firms make money. Their remark was that the value these firms are providing to society is questionable and that the highly intelligent employees could likely be providing greater value to society elsewhere.
But you are conflating money and value. As you stated, raising children produces value, and as you imply, this is not generating revenue. Which you are also conflating exchanging money with generating value. Sure, liquidity can generate value but don't confuse these things.
People seem to be forgetting that money is a proxy and that a proxy is not the same as the thing you are proxying.
Well first of all because all those niches are already full beyond capacity. All the engineering, arts, cancer research, you name it, that the society can pay for is stuffed to bursting point and in no lack of pipelines of fresh wannabe recruits. Also cancer research is a deeply unprofitable enterprise overall, much in contrast to a domain like finance. One can labor a lifetime and get nothig, at least in finance they'll shovel some money from one pocket to the other and pocket the commission themselves.
Please leave people alone and stop suggesting alternate careers, that you yourselves did not choose. That's the uttermost hypocrisy. I don't wanna see anymore programmers with fat paychecks jumping on whatever latest fad like flies on a fresh laid turd doing AI and crypto and advertising and just bullshit pretend work at FAANG shedding crocodile tears on how the finance guys should be poor and suffering. Quit your high paying jobs yourselfes and go starve while doing biology PhDs then work as baristas while competing with the other 10,000 highly skilled Phds hoping to catch one of the 10 currently open positions in the world that pay a miserable salary with no stability in the future that does cancer research.
People imagine it's like prestigious professors at top research institutions leaving their posts because of the allure of money, when it's more like the 100x people just like them who were denied tenure and realized they chased a career in science like an inner city youth chases getting into the NBA: most people fail. Then what?
I even know people who worked in quant finance, struck it rich, quit to finish becoming doctors, and then came screaming back because of how horrible medicine was.
Now, most of this money is going to HFT shops, but you could also make an argument that some of it stays with the investors, since spreads are much smaller now.
There is 0 cost to society, maybe even a small gain.
As for moving society forward, I don't know. If not in finance, most of these guys would work for big tech companies trying to actively make kids and adults addicted to screens.
Liken it to the government deciding to spend 40% of the budget on roads. Suddenly the roads quickly get pot holes filled, the lines are seemingly always freshly painted, cracks are all filled, and even mildly uneven roads gets freshly paved.
The first order effects of this would all be positive. The transportation dept. could talk all day about benefits to everyone. Everyone would love the great roads.
But spending 40% of the budget on roads is insane, and the second and third order effects would be disastrous to that society.
In a separate single example, it's fairly easy to point out what's the right thing to do - as you do with your Stanford guy example. However, history show us that it usually turns out to be disastrous in the long term. Maybe this Stanford guy will make several millions $, and then go back to desiging how to produce those half price solars at scale.
> The problem is that smart people are the ones being employed, not the ones getting rich.
Wealth Creation: creating new pie.
In practice, a lot of things that look extractive (e.g., designing better high frequency trading algorithms) potentially have some marginal utility (e.g., creating market liquidity), but the money high performing people make is likely larger than the utility they add to the system (because most of the money in having the best high frequency trading algorithm comes from beating other people's high frequency trading algorithms).
Even in a purely digital world - most of the economy is not zero sum - i.e., it _creates_ wealth. I pay you 100USD for 1 million LLM tokens - a purely digital transaction - the net result of this is the 1 million tokes that I can consume and use - net of the transaction.
For example, the added value provided by sub-millisecond arbitrage between NY and Chicago - while making the prices converge a fraction of a millisecond faster, makes the overall set of people playing that game in excess of 1B USD in aggregate. I'd argue that such a ratio of profit vs value-added gain is very bad, bordering on 0 - thus making that effectively a zero-sum game.
You’ve defined scamming people, a totally voluntary error, as creative not extractive.
You’ve also defined building roads as extractive not creative.
I think you’re latching onto some very misguided principles.
Public roads, OTOH, are extractive because someone is taking money from you to build them even if you don't consent to it and deliberately avoid them at every opportunity.
They have at least as much value as the total compensation of 15 math PhDs, otherwise that work would not be done.
A scammer who makes $1m dollars a year does not generate any value, in fact he removes value from society.
The amount of gold recovered by them as a function of the entire global gold market is a minuscule rounding error. A loss so small that when distributed across every market participant (as it would be if left alone on the ground), would amount to no practical discernible difference in anyone's life.
But having 15 less top notch surgeons not doing surgery? There stands to be many practical discernible differences in many people's lives.
Keep in mind, the surgeons are not the only ones out there. There are large armies of grunts combing those streets 24/7 picking up all the easy pieces. The surgeons are there to get the dust that everyone else misses. It's an enormous waste of talent.
If you subscribe to the theory that markets allocating capital based on supply and demand is beneficial for society (even if detrimental sometimes in the short term), then traders provide the utility of contributing to the proper allocation of resources in society (which is constantly in flux).
The fact that smart people opt to go into trading (or selling advertising) rather than research is a consequence of government underpaying scientists (or the volatility is too high, or the path to quality of life at work is too low).
Either way, if the situation is that society needs more scientists or doctors or whatever, then the government should be paying more to incentivize those choices.
Expand the number of medical schools, the number of residency positions, etc. Reduce tuition or pay graduates and residents more. Reduce unnecessary learning requirements so that one can expect to have a life and become a surgeon. Reform tort law.
None of these are under the purview of trading firms or the people that work there.
Why? I have met many “smart with computers” people. Many of them have terrible people skills, don’t show up to things on time, are unable to keep their workspace clean, don’t know how to explain anything, and cry about how they can absolutely never ever be interrupted because their workspace is so hard. There are also people who are “good at it all”, of course, but I have the impression that the math/computer people tend to be fairly unwilling to deal with even mild inconveniences.
People who can barely deal with the tyranny of daily standups probably would struggle a lot in a world where you need to write grant proposals continuously to justify your existence.
I’m being glib for effect, but there’s so much involved in getting work done beyond “being smart”!
Besides… it’s not like the reason we don’t do more cancer research is because smart people didn’t go into that. “Cancer research” is limited by funding for positions into that domain!
So “this quant should have been a cancer researcher” is saying “this person who decided to become a quant will be a better cancer researcher than a cancer researcher who went into that domain directly”. I don’t know the prestige vectors there but it’s a stretch in my book!
I'm continuously writing grant proposals to justify my existence, and have been quite successful (lucky) in it. But I do bitch about the pointless grant game and about the pointless meetings.
Perhaps the problem is that to survive in academia you have to be able and willing to waste your time on all the bullshit that is not research. And it selects for people who are good and willing at the grantwriting and politics game, which is not the same as being good at research.
Maybe there's some point in bitching about the tyranny. Having tech people to do sales and marketing on the side like researchers have to do probably isn't an ideal division of labor.
The market has two functions:
1. Incentivizing convergence of the price towards fundamental value, to support proper asset allocation decisions.
2. Supporting buying and selling (ie "liquidity") to shift consumption in time (and enable productive investments with the delayed consumption).
Suppose a retirement fund holds their investments over a 20 year period on average, growing at a modest 4%. A 1% wider spread would reduce the return from 119% to 118%. I'm not sure avoiding that is worth the financial sector constituting 30% of GDP.
What would happen if equity markets were only open a very short period a day? Say you have one auction a day, or maybe two, and no continuous trading?
Everyone whose advantage is speed would lose out (HFT, some prop traders). Their current gain would instead accrue to those on the other side of the trades.
According to this source: https://www.statista.com/statistics/248004/percentage-added-...
> finance, insurance, real estate, rental, and leasing ... is 20.7% of US GDP.
Since the original article is about Jane Street's financial market making business, let's focus on investment banks. What percent of US GDP do you think that investment banks and trading hedge funds represent? It is tiny. I would be shocked if it is more than 5%.
> What would happen if equity markets were only open a very short period a day? Say you have one auction a day, or maybe two, and no continuous trading?
Finally, professional financial market makers have an important role to play in reducing the size of bid-ask spread. I recently bought some 1Y US Treasury bills using Interactive Brokers. I was stunned by how tight are the spreads, and I am a "Retail Normie/Nobody". Absolutely, this was not available to people like me 30 years ago. Who do you think is providing this liquidity that keeps bid-ask spreads so tight?
I think about it like this:
How stable are prices of low liquidity instruments compared to the most liquid instruments?
What happens in the first 10-15 mins after the markets open? EXTREME volatility.
Longer trading sessions, higher volume and more liquidity lowers volatility on average.
A hypothetical X percent worse spread on my mortgage bonds, means I have to borrow X% more to buy the house. That’s meaningful money for most people.
Market makers will still earn the spread. More trading just means it gets lowered because of competition and volume.
Allocation of capital, market liquidity etc are useful, but the size of the financial sector and the rewards it gives out for this shuffling of money are insane.
He probably overstates that case, especially talking to early career interns that haven’t yet narrowed their specialization and could pivot to other highly quantitative roles that use other high level math.
He’s also probably flattering his audience, to whom “math research” is more likely to be status-bearing.
Doubt he’s saying they’d suck at anything else.
With respect to trading only once a day, I don't think your ad absurdum counterarguments hold water.
The HK stock exchange used to trade 4.5 hours a day, from 10 to 12, and then after a generous 2 hour lunch break from 2 to 4:30. How is trading 8 or 12 hours a day better for pension funds?
Price discovery with a limit order book that's cleared once a day might work just as fine as when it's spread out over hours, maybe even better.
Think about some major event affecting a company happening on the weekend. Then everyone can put in buy/sell orders with adjusted prices, and they'll be cleared during the morning auction. How is that worse than if the event happens intraday, and only the most switched on automatic HFT will pick off people still quoting at the old price, then the professional traders in hedge funds will pick off people?
As I said, the difference would be that the gains of the fast movers would instead be distributed among those on the "wrong side" of the news. Why should price discovery be worse?
Finally, what makes you think that liquidity and bid-ask spread concentrated in a minute a day would be worse than spread out over many hours a day?
[0] https://www.investopedia.com/ask/answers/030515/what-percent...
[1] https://conversableeconomist.com/2022/09/13/financial-servic...
Additionally, even if governments improved pay for essential roles like scientists or doctors, the outsized financial rewards from trading would still attract talent away from these critical areas. Therefore, depending on markets and government incentives alone ignores the negative impact traders’ profit-driven strategies can have on society’s overall well-being.