Tuesday, September 29, 2009

Options: "Beating the Odds - Susquehanna International - Jeff Yass"

Some after-the-close reading, recommended by Kedrosky. From Philadelphia Magazine:

Jeff Yass was always a little different from his peers — a brilliant young man taken with poker and horse racing and the power of rational decision-making. He’s used all of it to turn his company — Bala Cynwyd’s stealthy and mysterious Susquehanna International — into one of the world’s most lucrative and powerful financial firms

LET'S PLAY A game. Let’s say you’re a contestant on Let’s Make a Deal, Monty Hall’s game show from a generation ago. It’s your moment. There are three doors. Behind one door is a brand-new Camaro. Behind each of the other doors, there’s a goat. If you pick the right door, the Camaro is yours.

Silky-voiced Monty Hall gives you the big question:

“Do you pick door number one, door number two or door number three?”

The studio audience weighs in, and tension builds, as you think. Finally you pick, let’s say, door number one. But Carol Merrill, Monty’s assistant, doesn’t open it, not yet. Instead, Monty Hall directs Carol to open one of the other doors — door number two, say. Behind that door is … a goat. The audience titters nervously — that Camaro, still hidden, might yet be yours.

First, though, Monty is going to give you another choice. He’s going to give you both an option, and a dilemma:

“Would you like to stay with door number one,” he asks, “or would you like to switch to door number three?”

You ponder. But it’s a no-brainer, right? With two doors left, there’s a 50-50 chance the Camaro is behind either one. So you might as well stick with door number one.

Now I’m going to quote a man named Jeff Yass, from a book called The New Market Wizards. These words have made him very rich:

“The correct answer is that you should always switch to door number three. The probability that the prize is behind one of the two doors you did not pick was originally two-thirds. The fact that Monty opens one of those two doors and there is nothing behind it doesn’t change this original probability, because he will always open the wrong door.”

That’s what you didn’t consider: Monty Hall knows exactly where that Camaro is parked, and he wasn’t about to direct Carol to open a door that revealed it — no, he’s going to stretch out the game, to have fun with you, to see if, in your finger-crossed begging of the fates, you’ll switch doors.

And that’s the thing — your intuition is telling you, with two doors left, that the odds have got to be 50-50. But that’s wrong. The door you picked originally had a one-third chance of yielding that Camaro; Monty Hall picking a door he knows doesn’t hide the car won’t make it more likely that your door does.

Back to Jeff Yass:

“Therefore, if the probability of the prize being behind one of those [other] two doors was two-thirds originally, the probability of it being behind the unopened of those two doors must still be two-thirds.”

If this sort of thing makes you cross-eyed, suffice it to say that an empire has been built in Bala Cynwyd by Jeff Yass based not on numbers, but on a philosophy, a certain worldview. A world in which Monty Hall will always open the wrong door, so to speak.

But Jeff Yass isn’t just some numbers-obsessed geek — no, he honed his idea of the way things work playing poker and betting on the horses in college, then spent a year or so at the gaming tables in Vegas before he returned East, got a seat on the Philly stock exchange, and reportedly became the youngest trader there ever to make a million dollars in a year. Those who know him say he’s just about the most brilliant guy they have ever met.

One perspective of brilliance is to take something complicated and break it down to something quite simple. It would seem that Let’s Make a Deal could not possibly be in need of getting simpler. That’s where Jeff Yass sees something the rest of us don’t. He’s now the brains behind Susquehanna International, an options and equity trading company based in Bala that, on any given day, might trade the financial equivalent of three percent of the New York Stock Exchange and Nasdaq. Billions of dollars’ worth.

Yass learned to make utterly rational choices again and again and again and again, in a game fraught with as much desire and crazy behavior and silliness — with as much raw emotion — as rabbit-ear-wearing contestants on Let’s Make a Deal. That’s Jeff Yass’s brilliance. The world according to Yass runs on figuring out which door to open. While the rest of us might think we know the answer, he asks a question. The question is: What’s Monty Hall thinking?

very well be the biggest privately held options trading company in the world. Over two decades, Jeff Yass and five other founders and many people who work for them — they now employ 1,500, with offices all over the globe — have become very, very rich. Despite the size, secrecy pervades Susquehanna. Stealth is a word that former employees use often in describing the company m.o. A former trader defines it: If you have to choose between fame and fortune, choose fortune. Susquehanna buys and sells options and stocks quickly, in hundreds of thousands of transactions a day, yet it has remained largely below the radar even as it shapes the markets it plays in.....MORE

HT: Infectious Greed whose pitch was:
Stop whatever it is you're pretending to do and read this great new article on Susquehanna International.