"Market-making" doesn't involve "beating the market", it means providing a service for fees.

it's not... it's competing in the market for profits. citadel makes plenty of money from trading, separate from fee-based business

There are markets that pay people to trade to provide liquidity.

that seems like an over simplification. however I do have an aversion to "MBA types" skimming over complicated concepts with the blanket "nerdy mathematics" techniques.

Market making itself is a market, and people compete on cost and speed

I’m pretty sure Citadel securities makes more money from their non-wholesale businesses (I.e. on-exchange trading) instead of their retail pfof business. Either way, they are very successful in the competitive hft/trading arm as well as retail.

The hedge fund quant arm is also extremely successful.

I agree with this, but the comment I replied to is responding to an article about market-making.

Citadels’s market-making arm, Citadel Securities, IS extremely competitive in on-exchange trading. They don’t just do wholesale market making (I.e. service for a price), they provide liquidity on-exchange as well (much more competitive/latency/alpha based than service-at-a-price). They’re also very good at the hft taking.

Given, within Citsec, the retail market making arm is fairly segregated for compliance reasons, but it’s far from the only market making activities they engage in.

In reality there isn't a distinction between "market-making" and what you would consider "beating the market". Market makers employ the same models and approaches as those who "beat the market", because market makers need to know when and where to quote in order to maximize profitability. And people who classify themselves as those that try to "beat the market" also provide liquidity, making them de facto market makers, even if they often take liquidity too. So, people in the industry don't attempt to draw a clear line between the two categories, because they are so overlapping in practice.

Half of Citadel beats the market, the other half are market makers who just make markets and make a steady income from doing so.

Just like Bernard L. Madoff Investment Securities.

You're confusing Citadel and Citadel Securities. Citadel the hedge fund runs many different strategies, including commodities trading and quantitative high frequency strategies that are generally what people think of when looking at books like yours. Citadel Securities is a broker-dealer that specializes in market making, and is popular for being one of the biggest(the biggest?) wholesale market maker for U.S. equities, options, ETFs, etc.

They're connected, but Ken Griffin is focused on Citadel and Peng Zhao runs CitSec.

You're confusing Alameda Capital and FTX. Alameda the hedge fund runs many different strategies, including crypto trading and quantitative high frequency strategies that are generally what people think of when looking at books like yours. FTX is a broker-dealer that specializes in market making, and is popular for being one of the biggest(the biggest?) wholesale market maker for cryptocurrencies, NFTs, etc.

They're connected, but Sam Bankman-Fried is focused on FTX and Caroline Ellison runs Alameda.

Unless I missed something, wasn't FTX the exchange and Alameda the market making specialist that also had a prop book?

The general point stands, that we can't just take their word that they're rigorously separated and not sharing info (a point the HN crowd seems to be missing right now).

The difference is that traditional finance is usually riddled with regulations and legal potholes to find yourself in if you don't follow rules, whereas in crypto the rules consist of whatever validation SBF's excel sheet had.

Yes, and if you want to advance the argument that finance is too well-regulated for anyone to ever break that separation, no matter what the incentive, that would be a great contribution to the discussion!

But that's not what the original comment[1] was doing. It was just saying, the roles are nominally separate, therefore there can't be collusion, which is a hasty inference I was right to call out. I completely agree that a different argument, one not made in the comment I was replying to, might not be so bad!

[1] https://news.ycombinator.com/item?id=35956915

Zhao probably has a three or four sigma IQ, but the rest of the talent is still on a pretty long tail, and the beauty of markets is that in every single one of billions of trades, someone is always wrong. I am not in finance, but every person I have spoken to in finance clams up immediately when I mention anything remotely quantitative. It's not just because I'm being boring, they know they are playing a game of poker that is never not-on.

The most interesting exchange I had was with some derivatives traders, and I asked broadly what kind of math was being used at their bank. Was it graduate level, was any of it novel, and was it within the reach of programmers. The answer was "no, no, yes" and they wouldn't say anything else. I suspect the secrecy is creating an intellectual mean reversion, where you do a thing that works and run it until it is traded out, and then never say anything about it so you can cost your competitors the time thinking about it.

However if none of the math is novel, then current strategies are not information problems that need new science, they are work problems that piece together solved ones, and whose efficiencies come from competency in related domains. I could see how one could become seized by markets like that.

Someone isn't always wrong on a trade. Case in point, someone sells shares to fund their retirement, the counterparty buys those shares for the dividend return and/or expected capital gains. This happens all the time. How is anyone wrong in this scenario?

I agree in principle.

But theoretically if the share is expected to go up at faster than the rate of compounded interest at the current interest rate, then it's a better deal for the seller to instead take out a loan using the share as collateral. And if the share is not expected to go up at faster than the rate of compounded interest at the current interest rate, then it might be a better deal for the buyer to loan out their money instead. The only thing that would make this a worse decision than the share trade are middleman costs.

Sure, in an idealized enough world you can make many statements true. In the real world people buy and sell stock for many reasons, and value different types of returns on different time horizons, and it’s likely that for a majority of stock trades both the buyer and seller are happy with the trade.

People have different risk exposures and different risk appetites. If you're a corn farmer then your entire livelihood is tied to the price of corn. You're willing to give up expected value to reduce risk by selling futures and there are others who are less exposed to corn prices who are willing to take the other side of that trade.

In your theory, there is no cost to servicing loans (on both sides), foreclosing on an asset or long term lockup of capital in not perfectly liquid markets. Or other uses for shares (eg exerting corporate control) absent receiving dividend streams.

With the exception of corporate control, this is covered in my final sentence.

None of my costs had to do with middlemen.

Loan servicing costs only exist because of middlemen. If two people directly interface for a loan there is no additional cost (other than the cost of transportation, which only exists because a middleman is charging for gas and car maintenance).

Foreclosing on an asset doesn't happen in my example is not a cost, but a risk, which the interest rate should be accounting for.

Longterm lockup of capital is not a problem, as either party in my example are financially gaining regardless.

And I granted you the other uses for shares, which technically can be done without buying the share, but at a middleman cost (renting the share).

I really don't care to continue this. Mine was just a hypothetical in favor of the idea that there's always a "loser" (when compared to all possible financial alternatives) in stock trades, even if everyone ends up happy with the trade. Sure, there are holes in the hypothetical. I don't care.

You see the share market like someone who invests in value stocks. The other poster is showing their hard that they view the market as a casino. Which is sort of the prevailing 'theme' that comes out of places like WSB's.

In short durations it is a casino.

>bank

Banks are intermediaries. They are not in the business of doing anything sophisticated.

you don't need 4-sigma iq to find good strategies, as Warren Buffett and others have shown . sometimes the best strategies are the simplest and just waiting to be discovered, like one such strategy of selling short bitcoin when the market opens, 6;30 am morning and going long QQQ, split 50/50. Then close both at 1pm, pst. This has returned 45% over past year.

> every single one of billions of trades, someone is always wrong... every person I have spoken to in finance clams up immediately when I mention anything remotely quantitative. It's not just because I'm being boring, they know they are playing a game of poker that is never not-on.

No serious financial professional would expect their strategy or any strategy in existence to be 100% correct. A strategy that is correct 51% of the time is more than good enough. You diversify and hedge, and build up an uncorrelated portfolio. Suppose you've honed in on alpha strategy. You probably don't even want to optimize and fit in further, with past data. Instead, you find a beta strategy that is uncorrelated and run those two together. With the amount of capital firms the likes of Citadel are working with, it's impossible to trade in a single product, and so scaling up, in the case of an MM, is to trade everything all at once.

This is also repeated in the article. "[CitSec CEO] diversifies the firm’s earnings so it can better stomach an occasional loss in any part of its business"

> current strategies are not information problems that need new science, they are work problems that piece together solved ones, and whose efficiencies come from competency in related domains

Applied math is not about pushing mathematical theory, necessarily. Then there is a difference between theory and practice, and there is a difference between practice and sizing trades with this scale of AUM. Academics can talk and write papers about LLMs or CRDTs, but they aren't going to be the ones who will be affective at bringing it to market.

Takes a long time to find the right model, it it is well worth it and if you do find it, you will keep the secret as guarded as possible, otherwise the model will be arbitraged away by the other market participants….

You’re mistaken in how Citadel is using math to make money. It’s not trying to decide which way a stock or bond is moving. It’s a market maker - at anytime someone can go to them and buy or sell an instrument (when no one else might want to take the other side of the deal). Citadel is using math to create the price, decide how much inventory it should keep and create hedging strategies so that it makes a profit however volatile and whatever way the market is going.