Lessons From Susquehanna

Trading is just decision-making under uncertainty. I suspect that the most advanced thinking on reasoning about risk/reward comes from areas where the stakes are high and there are many reps. Military, medicine, markets.

I got my professional start out of college at SIG (Susquehanna Investment Group). They were and remain one of the largest trading firms globally. In the derivatives world, their training program is legendary.

While I only spent 2000-2008 at SIG, I continued to work with SIG alum until I left trading a year ago. My writing is deeply influenced by my career and the thinking I absorbed from SIG’s education and its culture.

Shane Parrish of The Knowledge Project recently interviewed long-time SIG director Todd Simkin. Todd has a hand in many of SIG’s functions including trading, education, recruiting and determining compensation (option traders negotiating comp with option traders would make an amazing YT channel btw…bonus season is a steady brigade of Moroccan bazaar tactics and brinksmanship).

The institutional knowledge leaking from the interview is hard to come by. SIG is famously secretive which should give you a hint about Todd’s lessons: they are hard enough to implement that there’s little risk in sharing them. The infrastructure and know-how to teach people to make good decisions is a high leverage activity. It is a competitive advantage and it is expensive (before going to SIG’s boot camp in Bala Cynwyd, PA for 3 months we signed 3-year non-compete agreements so they could protect their investments in us).

I did a write-up of the interview dotted with my own commentary. I refactored the lessons into 3 broad categories: decision-making, education, communication. The 3 are deeply intertwined. Only after listening to this interview did I appreciate just how deliberate SIG’s leaders were about education. The interview left me feeling somehow hacked and grateful.

SIG’s influences on me are self-apparent. But I want to highlight imprints that were not obvious until I heard Todd explain their dogma. For example, my own beliefs about education being “socio-cultural” is something I picked up by osmosis. The way I talk to my kids is reminiscent of how I communicate at work (minus the occasional f-bomb lobbed at an anthropomorphized futures ladder). As I listened I was thinking, “wait a minute, is that where I got that from”?

It’s hard to separate SIG’s influence from the lessons anyone would pick up from surviving any high-rep trading career. Still, the lessons from the interview are evergreen and conveniently encapsulated.

Here’s what to expect:

On Decision-Making

  • Why SIG’s approach to markets starts with humility and Bayesian thinking: update hard!

  • Trading is not about opinions or theses. It’s about finding disconfirming propositions. See what that means.

  • How to minimize confirmation bias and “resulting”.

  • Tribalism as a short-circuit in an otherwise useful shortcut. The tension between heuristics and “first principles”.

  • Addressing a paradox — knowledge of cognitive bias doesn’t inoculate you from it.

  • Todd was put on the spot to name the single most important variable to making better decisions. He doesn’t even hesitate. It has to do with the next section.

Communication

  • Truth-finding is the raw material needed to make better decisions. Creating a culture of truth-finding requires a deep appreciation of how to communicate. How does SIG foster such a culture? What does constructive communication look like? Unconstructive communication is subtle and dangerous because it can actually look like constructive communication. Find out the difference.

  • What is “reflective listening”? Why does it sound stupid? Why does it actually work? (This will be a familiar topic to anyone who has read Chris Voss’ negotiation manual Never Split The Difference).

  • The power of “how do you feel about that?”. When my wife listened to that part she told me “It sounds just like you”.

  • The principle of “charity” in both life and trading and why it’s the base of the negotiation pyramid.

  • An amazing example of “modeling behavior” — the story of Todd’s dad when he tried to quit lacrosse.

Education

  • How SIG’s training class is organized

  • SIG’s education philosophy: Traders are made, not born. What they look for in recruits and why.

  • SIG’s application of Lev Vygotsky’s idea that all learning is “socio-cultural”. What that means and the emphasis on modeling behavior.

  • When teaching, a master needs to find a student’s “zone of proximal development” so they can provide suitable “scaffolding”. By using the Socratic method, a teacher can zero in on where the student’s boundaries are. This idea even extends into their interview process.

Extras

  • Todd was on Jeopardy (won once and lost once). The conversation he had with SIG co-founder Jeff Yass before and after his competition is comically revealing of SIG’s culture.

  • Todd’s experience with depression and emphasis on mental health.

My Commentary on Todd Simkin’s Interview On The Knowledge Project (31 min read)

If you prefer to skip directly to the interview:

 Todd Simkin – Making Better Decisions (The Knowledge Project)

I tend to believe that the most advanced thinking on risk-taking in markets comes from trading firms operating at scale betting their own money. There is plenty of cross-pollination between prop firms and traditional bank trading desks as well. Many of these firms have training programs to form a solid basis for decision-making.

You can find a list of prop trading firms here:

 Listing of Proprietary Trading Firms (Traderslog.com)

Their websites tend to be sparse but if you are looking for a rigorous foundation in markets it would be hard to find a better education than spending some time at one of these shops.

Fair warning:

Like college admissions, I expect it’s harder to get into these firms than when I graduated. The business has a brutally high attrition rate as well. If any of that deters you, you likely saved yourself from a career that wasn’t going to work for you anyway.

You can see SIG’s gaming blog for a glimpse into what they find fun.

Raise Your Game (Link)


One last personal note

I am grateful for everything I learned at SIG and from the brilliant people I was able to work alongside throughout my career.

But I’ve written before about how I “overlearned” some lessons. This wasn’t SIG’s fault so much as me being dense. Trading and investing are sufficiently similar that you can port your thinking directly from trading to investing. But they are different enough to screw with how you map concepts from one to the other.

This is especially true for derivatives traders. Derivs folk will tend to start with a much stronger prior of market efficiency. It’s partly an expression of SIG’s humility credo and partly reinforced by the daily grind of the job. Everything they trade is on its way to being arbed with respect to underlying securities. Arb pricing is always relative. It does not share the same undiversifiable or systematic risk premium that the underlying has.

This leaves derivatives traders blind to underlying risk premiums. That is not their business. That’s the business of investors.

I’ve written before about how my narrow understanding of derivatives hindered me in the domain of investing.

 How I Misapplied My Trader Mindset To Investing (14 min read)

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