The 2+2 Hedge Fund

[Redsox]

Interesting theories. First off, I think that Jeff Yass (president of susquehanna, one of the largest market making firms in the world) would disagree with you that the skills used in poker do not translate well to market making.

And as for your positional trading vs. market making comment. Lets examine the difference between the two in today's market place. A guy who sits off floor a makes positional options trades can get himself into a position that makes sense for him, and with the current market environment and competition (i.e. nickel wide markets, nbbo, streaming, the ise electronic market place, the box in boston) can do so losing minimal edge to the bid ask spread. A floor "market maker" must provide certain liquidity guarantees (especially to his own firms customers), must show the same market and size to broker dealers as legitmate retail customers (called one size fits all...3 years ago I could be mega wide and fade my markets for off-floor bd's, firms, etc....not the case any more). And at the same time, after making sickenly tight markets to keep order flow (most floors now have "short fall" fees. If you do not capture enough of the order flow in a certain name for the month, you have to pay the exchange a fee for not doing your job well enough), now I have to manage a position (just like the off floor guy), but instead of being in the position that I want to be in, I often find myself in the position that the rest of the world DOESN'T want to be in. How is that easier than doing what an off floor hedge fund or BD does? Please let me know in an environment which incldes NBBO, streaming markets, the ise, etc. why it is so easy to make markets.(If you are not familiar with these above terms, you don't know anything about making markets, and shouldn't bother trying to answer the question). I patiently await your response.

[Dan Mezick]

Red,

Thanks for the extremely interesting info. (Poker and Sklansky and trading) are interesting topics to say the least. Thanks for posting this detail here.

[cwsiggy]

Most of my comparisons were based on my experience making markets on the Nasdaq, not the floor which probably has very, very different rules. Sorry for the confusion. I will admit I know nothing of the intricate rules of the floor trading. My point is that as a market maker On the Nasdaq, at least 3 years ago, you had an unbelievable edge in using your order book as protection. Floor traders have the same. If I got a sell order for say 10,000 shares at market or even a limit price of say 10.00 and I know my book is filled with buys at 9.92, 9.93 - I know I can take that position with minimul or at least quantified risk - but you know this! Yes, the customer can cancel those, yes you need to be careful not to piss off the salestraders by going bid above a recent order, but your advantage is huge. Being a market maker is like being the House in Vegas. You almost can't lose. All I was saying is that straight out order flow trading is easy on the Nasdaq. Of course any market maker can take a positon, add to it, take on more risk and that takes skill, but not as much as straight position trading/investing - those people don't have books and order flow to constantly bail them out!!!!! So many times we had positions that made us nervous and the salestrader covering Smith Barney would call over and say "don't worry, he's got a lot more this week" or "My guys done - do what you want with the position" Imagine playing poker, and instead of 9 outs to make your flush you have say 12! I still think that the comparison between poker and market making is weaker than the comparison between poker and position trading. Poker and "Investing" are games of incomplete information, market making less so.

[Paluka]

I work for Susquehanna (now in New York but originally in the Bala office), so I have some insight into some of these issues.
I believe that Jeff and the other partners believe that while poker skills do not directly translate to trading skills, there is still a lot of overlap in the thought processes. Risk management, bias recognition, game theory...Just forcing yourself over and over again to really think about where your edge is coming from is a useful exercise.
I can also agree with the posts that say that market making and short-term trading is very different from long term investing. Game players are much better suited for the former.

[cwsiggy]

agreed

[Blackjack]

When's this going down?

I might be interested

Blackjack

[d1sterbd]

This might have been discussed a while ago but Mark Cuban was thinking of doing a gambling hedge fund a while back.

http://www.blogmaverick.com/entry/1234000570021684/

[quadT]

I have the utmost respect for Mr. Sklansky. His books have turned around my poker game. I now consistently make money in 20/40 holdem. I am also an derivatives trader at a hedgefund. Prior to this I was a vice president at wall street's most respect institution. That said, I could say with a high degree with confidence, that if Mr. Sklansky started a hedgefund right now, he would require a high degree of luck to outperform other hedgefunds or the mkt. The same amount of luck that Stan Drukenmiller or Paul Tudor Jones (2 of the most famous hedgefund managers) would need to make the final 3 tables at the World Series. After learning the business for 5 years+, would he then be able to outperform? He'd have a chance. Probably in the ball park of Stan and PTJ's probabilities of taking it down in a WS event. But like anything complex in life...you cannot just walk into a hedgefund and think you will knock the cover off the ball...unless you are extremely lucky.

"smarts" and "intelligence" certainly help in investing, but in no way guarantee success in the markets. I doubt Stan Drunkenmiller or Paul Tudor Jones scored higher than David Sklansky on the SATs....but I bet I would destroy Johnnie Chan or TJ Cloutier on any standarized test.

"Anyways, I'd imagine that the most intelligent of poker players would have entered the markets a long time ago if their talents could so easily translate, the rewards are just magnitudes greater than anything that can be consistently achieved at the card table."

No question that you can make more money on wall street than in poker, when you compare the upper, middle and lower tiers. for example, the best poker player in the world, makes how much a year? There were over 10 fund managers that made 500mm+ last year (not in options or stock...just pure cash). I doubt there was a single poker player that made north of 50mm. Your average veteran wall st. sales-trader makes anywhere from 400k-800k. Your average veteran poker player does not make that much. I'm not talking about good or particularly talented, i'm talking about no-named average middle of the road type of guy that is never on espn, nor has any management responsibility on wall st. Your average right out of college glorified secretary 22-yea rold pimpled faced kick takes down around 100k. the buttom rung in poker lose that much!

[boneil55]

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A similar method I've heard of is spin-offs, where the composition of the shareholder base changes rapidly, and can lead to some predictable changes in volatility.

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Spin-offs are a great place to look for investment ideas. However, it is not due to predictable changes in volatility. Instead, the theory is based on "artificial" selling. That is, if someone or some fund owns stock in IBM, for example, and IBM spins off a tiny subsidiary, a large amount of those someones or some funds will most likely sell the spin-off either because they do not want to own a small company they know nothing about or are not allowed to own a small company (i.e. a large cap mutual fund). Those sales "artificially" depress the stock price, and may, in certain circumstances, drive the price below, perhaps far below, the spin-off's intrinsic value, thereby creating an investing opportunity.

--Brian

[jakethebake]

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true

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David,
I just decided to go back and look for this thread after running into an analyst from SIG earlier this week. He was telling me what a big part of that firm's culture poker is. Apparently they have training classes, and their employees, traders in particular, are expected to log a certain number of hours at the table. He said they have a poker library, and you always see the new traders carrying TOP around. He also mentioned Bill Chen. Funny I come back looking for this thread and the last posts were in reference to Yass & SIG.