"The Poker Aces Playing a Key Hand in the $5 Trillion ETF Market"

We've mentioned Susquehanna a few times over the years, usually in connection with their options and other derivatives business. They have access to the data and information flows that most houses dream of having, and transform the information flow into cash flow.

From Bloomberg, November 20:

Harnessing poker prowess and game theory, Susquehanna International has become a key ETF player.

On City Avenue in the Philadelphia suburb of Bala Cynwyd, Pa., across the street from a TGI Fridays and California Pizza Kitchen, sits a bland building that looks like any other corporate office. The only notable feature is in the parking lot: a large oak labeled a “significant tree” because it survived the American Revolution.

And yet within that dull gray-brown edifice, away from the trading hubs of New York and Chicago, sits a crucial engine of the $5 trillion global exchange-traded fund market, one increasingly relied upon by investors ranging from hedge funds to individuals. What’s more, the little-known billionaires behind the operation have groomed a generation of canny market experts.

Like its headquarters, Susquehanna International Group LLP is hidden in plain sight. It keeps a low profile even though its fingerprints are everywhere in financial markets. In addition to ranking among the largest U.S. traders of ETFs, it’s a giant in options trading and has plowed into sports betting, private equity, and even Bitcoin.

Susquehanna, as well as other under-the-radar, closely held competitors created by its alumni, such as Jane Street Group LLC, grease the wheels of the ETF market, keeping the instruments inexpensive and easy to trade. As better-known Wall Street companies such as Goldman Sachs Group Inc. have stepped back from performing this function in recent years, regulators have started asking more questions about the stability of the market, which has become dependent on Susquehanna and its brethren.

Susquehanna built its empire on poker. All six co-founders met in the late 1970s at the State University of New York at Binghamton, where they gathered to play cards before advancing to Las Vegas casinos. One of the six, Jeff Yass, had the insight that card skills could transfer to Wall Street. That bloomed into Susquehanna’s philosophy that poker provides the best training for the type of probability-­based decisions in uncertain circumstances that are needed in markets.

Yass proved to be a preternatural trading talent. He was in his 20s when Izzy Englander, now chief executive officer and founder of Millennium Management, one of the world’s largest hedge funds, sponsored him for a seat on the floor of the Philadelphia Stock Exchange.

Yass persuaded his five college buddies to join him in Philadelphia. With Steve Bloom, Eric Brooks, Arthur Dantchik, Andrew Frost, and Joel Greenberg, he founded a firm in May 1987 to deploy their poker skills in the options markets. They named it after the 444-mile river that runs from near their alma mater in upstate New York through Pennsylvania, the home of their new venture.

“My friends and I took poker very seriously,” Yass said in an interview in the book The New Market Wizards: Conversations With America’s Top Traders by Jack Schwager, published in 1992. “We knew that over the long run it wasn’t a game of luck, but rather a game of enormous skill and complexity. We took a mathematical approach.”

Neither Yass nor his co-founders would comment for this story, according to Dave Pollard, Susquehanna’s head of strategic planning and special counsel. The following account is based on interviews with current and former employees and people familiar with the firm.

Regulators have started taking a greater interest in the role that firms such as Susquehanna play in the market

Five months after Susquehanna was founded, the U.S. stock market crashed, with the Dow Jones Industrial Average suffering its largest ever one-day percentage decline. Susquehanna not only survived, but thrived. By October 1988 the firm had 100 employees, and it had brought in about $30 million in its first year, compared with $43 million earned by PaineWebber & Co., which had about 12,900 employees, according to a Washington Post story at the time.

Today, including those who work at its Pennsylvania headquarters, Susquehanna has about 2,000 employees in six other offices in the U.S., five in the Asia-Pacific region, and two in Europe. Options and ETF trading are the pillars of its business. It trades about 7 percent of U.S. ETF volume and more than $1.5 trillion in ETFs globally on an annual basis, according to a person familiar with the firm’s trading activity. In U.S.-listed options, Susquehanna handles about a quarter of total trades, the person said.

By all accounts, Yass is a workaholic. Legend has it that he’s been seen in a robe and slippers heading into the office to put on a trade. In contrast to hedge fund stars such as Citadel’s Ken Griffin or Bridgewater Associates’ Ray Dalio, the balding, bespectacled Yass isn’t widely recognized. He can be seen around the office in sneakers and jeans. He stays out of the headlines, other than occasional appearances among top donors to political candidates, especially those with a libertarian bent.

Susquehanna’s recruits, the majority of them straight from undergraduate programs, undergo rigorous training at poker tables, where they receive feedback on their strategy. Employees learn a specific approach to risk-taking. Traders who make losing bets for the right reasons are favored over those who get lucky betting against the odds.

The firm’s website touts its “entrepreneurial mindset,” gamer blog, and day-in-the-life portraits of a software developer and a quantitative researcher—more like a tech startup than a financial giant. Its Facebook page chronicles outings to baseball games and its no-limit Texas Hold ’em annual poker tournament.

“The basic concept that applies to both poker and option trading is that the primary object is not winning the most hands, but rather maximizing your gains,” Yass told Schwager in The New Market Wizards....

...MUCH MORE

Way back in 2009 Paul Kedrosky wrote at the now 404'd Infectious Greed:

Stop whatever it is you're pretending to do and read this great new article on Susquehanna International. 

So we did:
Options: "Beating the Odds - Susquehanna International - Jeff Yass"

And from a November 22, 2010 post on First Solar with the stock at $122:

Following up on yesterday's "First Solar Gets Some Love from Susquehanna, Price Target $180 (FSLR)"
The stock was showing a bit of strength in after-hours trade, finishing up another 50 cents to $127.25, on top of Friday's $3.11 gain.
As we said in Friday's post:

I don't have much info on the analyst's skill, this is an initiation after all but the comments have a nice new-age feel to them.
Maybe we can all get together on the hill to watch the sun come up Monday morning.

On a more serious note Susquehanna's parent company, Susquehanna International Group is probably the largest privately held options trading firm in the world and the timing rather than the verbiage may be what's important here.*

A couple months later, on February 7, 2011 FSLR top-ticked at $166, a price it has not gotten close to in the following 93 months.
Proceed at your own risk, your milage may vary, close cover before striking etc.