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Doug Colkitt

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72
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2021-12-14
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2021-12-14
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  1. “You said actually in the beginning is pretty interesting. What is the benefit of market making? What's the benefit of liquidity? And a lot of people criticize locally. Why are all these rocket scientists working for trading firms they could be curing restless leg syndrome instead or something like that?”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “It depends to what you classify as HFT, right? Because you can start going out longer horizons and the capacity increases, but so does the risk, and then you're back in the traditional putting on risk. I'd say probably in the US, probably this year is actually better, but maybe a few billion a year for U.S. equities. And then if you want to go out longer, right, you could look at something like Renaissance medallion, which isn't necessarily HFT, but I think starts getting somewhere in between like what I'll call Statart, which is longer term HFT, maybe a little bit longer horizon, but obviously the returns are very consistent over time, and they might do over $5 billion just one fund. So depending how you define it, it could be anywhere from $2 to $20 billion, I guess, is kind of a big range.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “Exactly PNL. It's like running a grocery store. The grocery store isn't thinking about their sharper ratio, they're thinking about, oh, this is how much business we're doing a day, this is how much revenue, this, how much we need to pay our fixed costs. So in that sense, it's actually kind of more prosaic than a lot of other strategies.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “Returns are going to be very high. The biggest limit. And right, you have sharp ratios, which are 30, crazy, high sharp ratios. You're not optimizing for risk or capital. You're optimizing for I have a team of whatever, five, ten people, and I need to make this much to pay them, put food on the table, pay for all my infrastructure. So really most people are thinking in terms of what are my revenue.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “Those aren't simple numbers, you know. Just plug those into a spreadsheet. There's all kinds of ways to dice and measure those things.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “At these horizons, there's not a ton of things you can actually look at if I'm trading on a, like I said, maybe even if you're holding time as minutes, but really, or maybe you're holding time as even seconds, but a lot of your horizon comes within milliseconds, maybe 100 milliseconds of when you can very quickly, your trade has to move in the right way within like 100 milliseconds, or you're probably not going to make money at that frequency. There's not a ton of data you can look at. News doesn't come out every hundred milliseconds and really not much happens every other hundred milliseconds. All that really happens at that frequency is orders come in, the book changes, and other stocks move. So I'd say those three things. The order book, the order flow, which is the rate that orders are coming out and the price of other, not just stocks, other related securities. So how other, you know, if you're looking at Microsoft, you might want to see what's going on in Intel or vice versa. You have to get very creative in terms of how you drill those.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “Yeah, the actual ideas, even on the back of testing it, it's not easy to build a simulator for this, you almost have to build the entire exchange yourself so you can run”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “You put your order in and then your order comes through that data feed. It doesn't tell you, oh, these orders. Yeah. So you might get okay. I'm responding oh, this guy bidding at the same price of me, and maybe he got in before me. So I'm going to bid up. Maybe you get into dumb feedback loop trading against yourself. It's not that simple because sometimes the data feed comes in faster. Sometimes you get confident because they're two different systems. Sometimes you get the confirmation faster. So it's almost like a distributed systems problem from computer science. Some of these things are pretty hard to solve on because the way things are delivered, the order they're delivered isn't guaranteed at all. And these systems have been pushed to be so fast that oftentimes you have to make these decisions in a pretty high performant way.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “Our code base and maybe like a hundred thousand lines of code or whatever the actual strategy side, the glamorous side of it is maybe 10% of it, maybe 15% of it. There's a ton of work that just goes on getting the data feeds, right? The data feeds from the exchanges are not optimized to be easy to consume. They're optimized to be fast, but you have to listen to the exchange. You miss a message. There's a whole process to regenerate and it's kind of bad. You don't want to do that. Make sure you integrate all the messages, build limit order book in your representations fast. Obviously, like the strategy that we talked about, even just simple things almost that you think are dumb can actually be fiendishly complex. So going back to it, right? You might put in your orders and interface with the strategy, the exchange gateway and say, okay, here's my order. Let me put it out there, process it, and then you have to keep track of it. You might put your order in, but one thing that's actually pretty hard to do.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “That almost seems counterintuitive. Why would that make money over time? But what they're doing statistical models and they're looking at differences. So the simplest one you can imagine is there are the S&P index futures they trade in Chicago, right? And then there's New York Stock Exchange, the Nasdaq. That's in New York. And that's where the actual stocks inside the S&P 500 trade. So if you have a very fast connection to Chicago and you can index futures are much more liquid, the stocks tend to move along with them, right? You can watch those index futures and when the price on those futures move those contracts move, you can kind of use that to say, let me go buy up a bunch of stocks right now before they go up. Oftentimes firms that are willing to cross the spread can make a lot of money, sometimes even more money than firms that are market making it. There are other things sometimes those firms get not necessarily vilified, right? But people don't give them as much respect because they say, okay, market makers are providing”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “The one misconception is that all HFTs are market makers or liquidity providers. And that's actually not true. Actually, some of the most profitable HFD strategies are quite the opposite. They're liquidity takers. And what that means is, just going back to example, at any given point, the market, there's a bid, which is the best price you can sell at if you want to sell immediately the best resting buy order and ask, which is the best price you can buy at immediately, the lowest resting sell order. Liquidity providers are putting their orders out there and letting them sit and people are coming in and trading against them. So one basic way to make money is to do that, put your orders out there, wait for people to buy low, sell high, be patient, wait for people to come in and balance your inventory that way. That's what we call market making or liquidity providing. But a lot of HFT firms actually make their money. They immediately cross the spread. So they're going in and they're actually paying that premium to trade right away.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “Yeah, 30 minutes. Okay, this doesn't work. I got to turn it off. So it's definitely not a case that you're guaranteed to make money because there's a whole risk to build up the infrastructure. I have to build these models and they're not knock them out in a half hour. You're investing a lot in building up the company and the infrastructure and the models. And it's definitely hard to get to the point where you're profitable at all. But once you are profitable, you're probably profitable every day just because you're making so many trades over time that kind of averages up.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  13. “Say you have a coin and say it's a biased coin, so it comes up 51 of the time or heads 51% of the time tails 49% of the time. If you just flipped it one time, you wouldn't bet that much money on it. You have a small edge, but you could lose very easily. So you're not going to bet a huge amount of money on that. But now let's say instead of flipping it one time, we flip it $10,000.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  14. “Portfolio very fast, and that keeps their exposure to longer term trends down. But they're very good at looking at the limit order book and the order flow to predict where things are going.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  15. “To be very reliable, it has to be fast because they're also competing with each other in the sense that there might be an opportunity out there or they want to compete to get their quotes out before other people do because there's also you get priority as if your quotes get hired faster. So that's a whole other game in terms of that. You hear about high frequency traders are always obsessed with latency and shaving off microseconds or nanoseconds just because exchanges give you higher priority for the sooner you get your order into the exchange. So they have to build that and they also have to build these quantitative models to trade something and predict where stocks are going on a very short term because generally these firms don't keep big inventories. They're mostly in the business of balancing out order flow on one minute to 10 minutes. They don't want to take a huge position at the end of the day because that's not their business. There are maybe other people who will step in at that, but they're mostly there to turn over their”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  16. “Get paid more because there's more risk for that. So, because of that, you have to build up very complex infrastructure, kind of to always be watching every market something's trading on, generating all signals and to predict where things are going. So I was go back to the pawn shop analogy, right, that somebody comes in, they want to sell something weird. The pawn shop guy's calling up 100 different people, he always knows somebody how to value baseball cards. So same thing market makers have to build up this infrastructure to value things. More importantly, to detect when markets are moving. So obviously very easy if markets aren't moving to, okay, let me buy at $10 and sell $11. That's theoretically an easy business. But the problem is if you buy a $10, the market moves down and you have to sell at $9, then you lose money. So look at a big trading firm. They're hiring a lot of very quantitative people to number one, build the infrastructure, build the technology.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  17. “Come into the store to sell the best stuff. They're just selling junk. People are always kind of giving you their worst stuff and giving you low ball offers. So market maker world, we call that toxicity. So you say, okay, people are trying to trade against you, but mostly they're probably trying to trade against you in the wrong direction. If there's bad news on, say, Microsoft tomorrow, there's going to be a big rush to sell Microsoft. So if you're just a market maker, put your orders out there. If that happens, probably your buy orders are going to get filled a lot sooner than your sell orders. So all of a sudden you're sitting on a bunch of shares of Microsoft and Microsoft is going down. So the market makers also have to be very aware of what's going on on a macro level, but more even so on a micro level, what they're basically doing is they're looking at the market on a very low level and saying, okay, there's way too much, way too much flow this way. That doesn't look like a normal market. I need to adjust my quotes. I need to.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  18. “Somebody really kind of wants to understand this field on intuitive level, I always say is start with, I don't know if you've ever seen those shows about pawn shops. All the same concepts that apply on those pawn shop shows. It's the same concept. At any given time, right, some people want to buy, some people want to sell, but most people, they just want to buy right now or they want to sell right now. They don't want to come in and wait around. That introduces this whole concept. You need a market maker. You need somebody who's willing to stand in there, be willing to buy when people want to sell and vice versa. If I'm running a pawn shop, they're always low people come in and they lowball them. They don't pay the full value. They have to pay a little bit less than full value. And that's because a number of reasons. Number one, after they buy it, they have to go put it in their inventory. They have to go put it in the back room and wait until somebody sells it. So that costs capital. And that's like risk, right? You have to commit that. You have to pay the overhead all your employees in the store and everything for that process.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  19. “MEV, or at least as far as I was aware, they weren't calling it MEV. So I thought that was kind of interesting. I said, let me just try making this as a hobby. And I did. And then the botch, it started working pretty well. Was doing very, very well there for a while, putting more and more time into it and took over everything. From summer 2020 until spring 2021, right around when this new generation of DEXIS come out.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  20. “Them just randomly online, but they were looking for someone on the quant side to help out build there. Went in a partnership there, we were trading Turkish equities. I don't know anything about Turkey, so I'd trade these stocks. I wouldn't even know what the symbols were. I said the other day, I just found out some symbol that was like kind of one of your most profitable for. I always thought it was a soccer team or a football club turned out as a steel company, but that's kind of the nature of HFT where you don't necessarily care about the underlying stock so much as you care about the market and price formation. So was in Turkey for a few years and again similar story, right? When they started being fully electronic was very, very easy for one-man show or a small team to make money and then over time things keep becoming more competitive. So you either have to say we're going to consolidate it or we're going to make big investments on the infrastructure to kind of scale up. So right around DeFi summer in summer of 2020 just very randomly read an article online about, and this was even before they called it.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  21. “The most competitive ferry. Let me see if I can get a toe hold there and then if I can trade that, I can trade anywhere. Over time, just those markets kept getting more and more competitive. So for reference, I think at one point I was the only actual individual, not a trading firm who was authorized direct market access to the CME, right? So you normally trade, you have to go through a broker and you go through everything, but a small subset of people usually trading firms are authorized to directly enter their orders to the exchange and there's a whole process to go through there so you don't break the exchange. So at one point I think it was the only individual. And then randomly connect it with some people who were operating in Turkey. This was right after their market went fully electronic or modern electronic infrastructure.”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source

  22. “Maybe not the most popular nowadays, but definitely some of the smartest people out there. So I was really lucky to start my career there and learn from some of the best people in the industry. It was actually around 2008 when the financial crisis, everything was going to hell, including most of Citadel. But the one group there that was consistently making money, making a ton of money was the HFT group. So it was kind of space everyone wanted to be in, especially around that time. So I joined the HFT group there, initially working on what they call alpha signals, which is statistical modeling to predict where the market's going over the short term. It was at Citadel for a few years and then left right around the flash crash. I decided just to go out on my own and see if I could build the whole stack myself. And originally I was trading at the CME trading the index futures and the bond futures for a while. That was pretty competitive. I kind of decided, okay, that's”

    2021-12-14 · Invest Like the Best · Doug Colkitt - The Evolution of Markets - [Invest Like the Best, EP. 255] · IDENTIFIED FROM THE TRANSCRIPT · source