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Susquehanna attributes much of their dominance in options & ETFs to their firm-wide embrace of poker. -SIG's founders mastered poker before trading -Training programs involve poker tournaments -SIG employs multiple WSOP champions Here's why poker is so important to them:pic.twitter.com/vdUzhjZIZ7
At its core, poker is about probability & risk management. Every hand presents players with odds of winning that change as cards are dealt & bets are made. Expert players are able to judge their odds of winning relative to their opponents & the size of the pot.
Low odds of winning a large pot could be more profitable than high odds of winning a small pot or a hand where staying in play is expensive. Apart from logic & math, success in poker is equally about controlling emotions & understanding emotional responses of opposing players.
Susquehanna directly ports poker success to trading success, particularly with options. A good options trader is able to not only process a stock's potential range of outcomes (volatility), but also what PRICE they are willing to pay for exposure to this range of outcomes.
Academics have expressed this relationship via the Black Scholes formula. Black Scholes argues that a basket of securities can mirror an option's payoffs, called the "replicating portfolio". An options price should reflect the price of the replicating portfolio.
Option traders & MMs use this idea of a replicating portfolio to arb successfully. Is the price of XYZ option trading out of line with its corresponding basket of equity + interest rates + indices? Trade until the pricing corrects itself or expiration, whichever comes sooner.
This idea translates easily to ETFs as well. An ETF is quite literally a basket of securities that track a benchmark - its life purpose is to trade inline with its replicating portfolio. Now think about fixed income ETFs or ETF options. The arb opportunities begin to add up.
It's no coincidence that Susquehanna is the #1 or #2 prop trading firm in the options and ETF markets. Their metrics speak for themselves: -20%+ share in US options -Lead market maker in 500 ETFs -130 million ETF shares traded daily -$1.8B in daily ETF creations & redemptions
If you're looking for further reading on Susquehanna's training in poker & game theory as it relates to trading, @KrisAbdelmessih has some great resources to check out:
https://moontowermeta.com/you-can-mock-trade-with-a-deck-of-cards/ …https://moontowermeta.com/mock-trading-options-with-market-makers/ …
I'll be diving deeper into Susquehanna's origin & rise to power in this week's newsletter - sign up below so you don't miss it:https://frontmonth.substack.com/
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