August 24, 2022

Why Yass Wins

I get a kick out of Jeff Yass and not just because he’s a libertarian. 

And when did “libertarian” became a bad word? We used to love liberty.

Anyway, Jeff Yass started Susquehanna International Group in Bala Cynwyd, PA.  He’s roughly Number 184 on the Forbes richest list. 

SIG, as the firm is called, says it “thrives at the intersection of trading, quantitative research, and technology.”

By the way, this photo is the ModernIR client services team dining at Mountain Standard during our retreat in Vail this week.  Thank you, Arrabelle, for taking good care of us!

ModernIR client services team at Aug 2022 Vail retreat dining at Mountain Standard. Great job, team! Photo courtesy Tim Quast

In 2020 SIG traded about 25% of all options volume in the USA, the equivalent of 1.8 TRILLION shares of stock.

SIG’s website says, “As one of the largest proprietary trading firms in the world, we trade our own capital at our own risk.”

Mr. Yass traffics in probabilities. It’s arbitrage – buying and selling the same things at different prices. All short-term trading is arbitrage.  It’s 53% of US market volume, our metrics show.

Mr. Yass makes billions trading imbalances in the options market. But he invests in private companies like Bytedance and TikTok.

If you’re an expert on market mechanics, why would you invest in some other market?  Because Mr. Yass – and I’m surmising here – understands market mechanics. 

They don’t work long-term.  Short-term trading returns crush long-term buy-and-hold results.

It’s math. Mr. Yass arbitrages public equities and invests in private businesses, where he can get away from his own arbitrage.

Interjection:  This photo is the group that hiked the Berrypicker trail to the Eagle’s Nest at 10,400 feet, an elevation gain of 2,300 feet. No small feat!

Intrepid ModernIR team hiking 2,300 feet up from Vail Village to the Eagle’s Nest, Aug 23, 2022. Photo courtesy Tim Quast

The founders of another proprietary trading firm, Jane Street, came out of SIG.  In 2020, Jane Street traded $17 trillion of stocks, keeping about $7 billion in earnings. The math suggests Jane Street makes gobs of tiny, profitable trades.

Jane Street says, “We are a global liquidity provider and trading firm, using sophisticated quantitative analysis and a deep understanding of market mechanics to help keep prices consistent and reliable.”

Some still describe SIG’s and Jane Street’s trading as “noise.” It’s the same kind that Citadel, Virtu, Hudson River Trading, Tower Research, Infinium, GTS, Two Sigma, Quantlab, Optiver, and so on, do.

It’s not noise. It’s quantitative investment.  It dominates the stock market and it’s got nothing to do with corporate fundamentals.  The richest investors now are these quants.

Unless investors are making money, they will leave the stock market.  This is what happened to a great many stock-pickers the past 20 years.

By and large, profits in the stock market come from arbitrage – different prices for the same things. You can disagree. The facts won’t change.

And the majority of stock-pickers don’t outperform passive funds. If you can’t beat your competition, you go out of business.

Everything we write here is meant to make public companies and investors more intelligent participants in the market that has made Citadel and SIG and Jane Street wildly wealthy. 

Investor-relations professionals, you need to sit at the intersection of quantitative data and market mechanics and technology, too. Because that’s what THE MONEY is doing.

It’s easier than calling stock-pickers and trying to generate shareholder value.  That doesn’t work. That’s Sisyphus.

Yes, we do it still. But it should be 30% of your time, not 95%.    

Here’s what does work.  Ahead of earnings, know the last time stock-pickers bought, and what they paid. That’s measurable. Know what percentage of your trading volume they drive.  Give those data points to the c-suite and the board.

Why? Because otherwise they won’t understand the stock market. (One study shows retail investors understand cryptocurrencies better than stocks, a disaster for public companies.)

If Demand is falling into earnings and Supply is rising, make the subheading in your earnings release a VALUE message – “bolstered our balance sheet in the quarter.”

Machines will read it.  Your Supply/Demand balance says your stock will fall, so tee up the money that buys dips. Value money.

And after earnings, report what kind of money set price, and how patterns changed, and if Active money bought and changed its percentage of trading volume.

IR in a quantitative market should know when to emphasize value or growth or other characteristics in external communication. And IR should provide regular, cadenced data on what drives or hurts shareholder-value that reflects how the market works.

The market is quantitative because the mechanics and rules of the market are mathematical.

Just a fact.

If we could be coldly analytical, we’d stop wasting time and money on things that don’t matter. We’d own the data. It starts with understanding who’s making money in the stock market, and why.  Ask Mr. Yass what he does. 

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