How Susquehanna strikes a balance in teaching, trading and taking risk

This is a sponsored guest post by Susquehanna International Group. Technical.ly is a free news resource thanks to financial supporters like Susquehanna, a Technical.ly client. A version of this article was previously published on the Susquehanna website.

Todd Simkin recently spoke with Ted Seides of the Capital Allocators podcast, a long-running business show founded in 2017 that reports more than 20 million downloads per episode. Their wide-ranging conversation touched on Simkin’s career history, Susquehanna’s approach towards educating traders and the risks involved when entering a new business. 

Simkin also talked with Seides about how Susquehanna’s success stems from some key practices, including teaching newer traders to understand the “grammar” of trading, having patience when making decisions, focusing on the thought processes rather than results, calculating the right price for taking on risk and realizing that slight edges over time accumulate into long-term success — though some luck also helps!

Check out the full interview here, and keep reading for more takeaways from the podcast.

Trading and grammar 

• Trading is like grammar. There are things you know how to do grammatically that you could not describe.  
• In your native language, you know when something sounds right and when something sounds wrong. 
• Since each trade is unique, there’s no one guideline for how to approach valuing a trade. It isn’t a simple order of operations like order size should come before price.  
• A senior trader will sometimes be able to identify a bad trade that a junior trader might not, simply because they know the grammar. They know what goes into making appropriate decisions for risk allocation under conditions of uncertainty. 

Trading is a mix of art and science 

• Our society increasingly blends art and science, and Simkin thinks that’s true in trading as well. 
• The art side involves figuring out how to appropriately respond to real people who will make their own decisions based on what we do. 
• The science side lies in understanding the fundamental principles of trading and the statistical arbitrage relationships between different products or types of information. 

Getting paid appropriately for asymmetric risk 

• When Susquehanna discusses its insurance business internally, it’s often described as a “short put business,” meaning the most it can ever win is the price at which it sells the risk. It can, however, lose a lot. That’s  asymmetric risk exposure. 
• The venture capital business, on the other hand, is one where you can only ever lose what you invest, what you “buy in” for. Sometimes you invest in a company like ByteDance (TikTok’s parent company) when it’s not worth much, and it turns into one of the largest social media platforms in the world. 
• That does not mean that venture capital is a winning business or that insurance is a losing business because of these differing asymmetries. Ultimately, any risk transfer business — trading, private equity, insurance, etc. — is a good business if we are able to transact at prices that reflect the underlying risk. 

How patient capital provides Susquehanna an edge 

• A problem some competitors (like hedge funds) have is that they must publish not just quarterly, but monthly, weekly or even daily reports. They’ve got to show that they’re staying with the strategy that they outlined for their investors and continue to show regular returns.  
• Susquehanna’s “investors” are the principals of the firm. When we take outsized risks, the principals understand those risks and the decision-making process behind them. 
• Because Susquehanna can be “patient,” it has been able to stay in and grow businesses even when they experience downturns. 

Luck’s impact on investing  

• One of Simkin’s favorite quotes is from Thomas Jefferson: “I’m a big believer in luck and I find that the harder I work, the more of it I have.” 
• Simkin thinks that part of the firm’s “luckiness” comes from that philosophy. That said, there have certainly been times where it’s been objectively lucky. 

Valuing process over outcome in risk decisions  

• Roger Federer recently gave a graduation speech at Dartmouth College, stating that although he has won only 54% of his points, he ended up winning over 80% of the ~1,500 tennis matches he played. 
• Similar to a tennis player winning 54% of his points, Susquehanna aims to have an edge on all of its trades. While principals know that all of those trades won’t go their way, collecting those edges repeatedly across hundreds of traders and dozens of different trading areas, should ultimately benefit the firm over the long run. 
• Both Federer’s points and Susquehanna’s trades exemplify patient growth, where thin edges maintained over long periods result in sustained positive outcomes. 

The two definitions of confidence  

• Confidence can refer to the strength behind your convictions. It can also mean a mathematical understanding of how wrong you could be, i.e. confidence intervals. 
• They’re actually linked; the swagger behind your decisions and how tightly they are held comes from how sure you are in your assessment of the range of possible outcomes. 

Fun risks underwritten by Susquehanna Re 

• The most fun risks the company underwrites are related to sports outcomes 
• In particular, a reinsurance policy that backs a business’s sales promotion tied to a win by the local team is quite fun and exciting. 

If you liked the podcast, check out Simkin’s appearances with the Quantitative Traitor and AlphaMind Podcasts earlier this year here or his recent Wall Street Journal feature here.