DEEP THOUGHTS FROM JIM SIMONS

Jim Simons, Ph.D. and founder of Renaissance Capital is arguably the greatest investor of all-time.  Renaissance has compounded at 30% per year since 1988 including 80% returns in 2008 and a 30% return in 2010.  Amazingly, he has done this with a 44% performance fee.  Interviews with Simons are rare, but always interesting and worthwhile.  A brief overview via MIT World (thanks to Paul Kedrosky):

After his retirement in 2009, Simons got “busy as hell” with his third career. The Simons Foundation supports basic math and physics as well as autism research. Simons also wants to improve math at the high school level, by pumping money into teaching jobs so talented people don’t drift to “Google or Goldman Sachs.”

Simons says he is “always doing something new,” and doesn’t like to run with the pack. This approach, which he recommends, “gives you a chance.” Some other parting tips: collaborate with the best people you possibly can; try at problems “for a hell of a long time;” be guided by beauty; and “hope for some good luck.”

He also added some guiding principles:

  • Do something new and don’t run with the pack
  • Collaborate with great people
  • Be guided by beauty.  It’s a beautiful thing to solve problems and do things right.
  • Don’t give up.
  • Hope for some good luck.

He begins speaking at the 11:10 minute mark:

For more from Simons see the following:

Code Breakers

Simons 2009 interview

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Amazing interview. Thanks. I hope someone sends the answer on HFT to Zero Hedge so those guys will just shut up already.

    • Sorry, I don’t buy his answer as he’s got a huge conflict of interest. I strongly suggest you read the research on HFT done by Themis Trading http://www.themistrading.com/.

      Then you’ll understand Mr. Simons is nothing but a parasite who’s legally stealing money.

      • Sorry but Themis also has a conflict of interest. They used to manually run block trades for institutions. Since HFT came about, institutions can now use that to execute block trades. Its like the floor traders vs computers debate. HFT does have some issues but you won’t get the right picture from Themis. The SEC report on the flash crash is more useful to look at.

        • You’ve got to kidding me you believe the SEC? The SEC is a captured regulator: http://baselinescenario.com/2010/05/28/is-the-sec-still-working-for-wall-street/

          The SEC tried blaming the flash crash on Waddell Reed: http://blogs.forbes.com/joshuabrown/2010/10/02/waddell-reed-also-kidnapped-the-lindberg-baby-shot-jr-ewing/

          Please explain the flaws or why the white papers on HFT written by Themis Trading isn’t “the right picture”?

          Because I have yet to hear of any reasonable defense or justification of HFT.

          • SEC is a bit better than before. Whether they are captured or not, their report is informative in atleast indicating their stance towards HFT. Your link doesn’t suggest anything more than that their panel should have more HFT people and it indicates that they were looking into doing that. So, based on that article alone, its not conclusive evidence of capture, is it? In any case, their report points out a few problems with HFT. It needs careful consideration to come to the conclusion as to whether they are merely taken token steps or whether the changes they are making are genuine. I confess I do not know for sure either way.

            “The SEC tried blaming the flash crash on Waddell Reed”

            And, whats the problem with that? Even in a market without HFT, a larger than usual order would have caused a large decline. So?

            “Please explain the flaws or why the white papers on HFT written by Themis Trading isn’t “the right picture”? ”

            I don’t think Themis has ever presented a “picture” of HFT. I skimmed their papers and they have some allegations and suspicions. They do not make up a picture. Again, that’s not to say that HFT may not have problems but Themis is not the only opponent to consider as they have a conflict of interest as stated earlier.

          • What aspect of HFT do you feel needs a defense? There are no laws being broken. We all know the rules and choose to play the game. Where is the problem?

              • Percolator,

                I have read your provided links and I’m not buying it.

                Specifically regarding “quote stuffing”, exchanges have a big interest in preventing overloads to their systems. Furthermore, all participants have restriction on the amount of orders they can put in. When a participant is in violation of those restrictions they are contacted by the exchange and can be fined if this is done repeatedly.

                • I’m not buying that you read all the material in the links I provided, 6 in total, in just 30 minutes.

                  You say you aren’t buying it, but offer no evidence to back your claim other than to say there are restrictions and violators maybe fined. BTW, quote stuffing is illegal, it’s market manipulation, so they should not only be fined, but charged criminally. Yet, only a few firms have been fined and none that I’m aware of have been charged criminally. So, this makes it appear that the SEC is doing its job, but in reality they’re captured by Wall St.

                  Nanex has done extensive research on the Flash Crash and Quote Stuffing and to me the evidence is overwhelming.

                  http://www.nanex.net/20100506/FlashCrashAnalysis_Intro.html

                  http://www.nanex.net/FlashCrash/CCircleDay.html

                • I just want to add that I’ve got an open mind about this, so if you can provide me with some research that refutes the white papers written by Themis Trading and the evidence provided by Nanex I’d love to read it. But, like I said I have not yet read anything that discredits either.

                  • Percolator,

                    I didn’t read it all in 30 minutes. I had read the majority of it around the time it was released. The phenomenon you see in the charts nanex is showing is the normal updating process of the orderbook. The orderbook always updates in sequence. There you have it. This information is readily available to anyone who wants to read through the exchanges process for updating the orderbook.

                    If you are looking for papers

                    Jonathan A. Brogaard, “High Frequency Trading and its Impact on the Market Quality”, Kellog School of Management

                    Or consider this article by Burton Malkiel of Princeton and George Sauter of Vanguard.

                    http://www.ft.com/cms/s/0/33881656-e918-11de-a756-00144feab49a.html#axzz1C5T2De3z

                    Now if HFT was not helping to fascilitate institutional order flow don’t you think that Vanguard would be on the other side of the argument?

                    Instead you are getting your opinions from Themis who is in the business of executing orders for institutional clients and is likely loosing their ability to provide any added value to their clients. You are also looking at Nanex who is a data provider and likely trying to generate some buzz so they can sell their service.

                    I’m not trying to imply that HFTs are doing something noble. They are trying to make a buck like everyone else in the marketplace. However to suggest that they are detrimental to the market without actually studying their impact (as Themis has done in my opinion) is not responsible.

                    • Thanks for the link. Just a couple of quick comments regarding these articles.

                      Both the Burton Malkiel article and the Optiver position paper claim HFT increases liquidity. The flash crash proved this is not true as liquidity vanished as stocks went bid-less. For example, Accenture went from $41 to a penny in seconds now this maybe an extreme example, but there were many other stocks which crashed because there was no liquidity.

                      Optiver says in their paper they’ve “never been involved in trading flash orders. We support any move to ban flash orders from the market…” Good for them, too bad many other HFT supporters are fighting a ban on flash orders.

                      Optiver also states the majority of HFT firms, do not front run. But that also means the minority can and some do.

                      You imply that Themis research is bias, well so are these reports, as Optiver is a HFT firm and Princeton professor Burton Malkiel is Chairman of the New Products Committee of the American Stock Exchange, so of course he’s going to support HFT because AMEX makes money from HFT firms which co-locate their servers there.

                      http://investing.businessweek.com/research/stocks/private/person.asp?personId=552117&privcapId=52252765&previousCapId=52252765&previousTitle=AlphaShares,%20LLC

                      I’m not in favor of an outright ban of HFT, but I’d like to see the implementation of some of the suggestions of not only Themis, but Optiver as well, like banning flash orders. Also the SEC needs to do their job and crack down hard on any violators with not just fines, but criminal penalties when such violations occur.

  2. TPC,

    Would love to hear your thoughts on the interview’s ending. He talks about the great recession, the debt, money printing and the problems in general. Thoughts?

  3. Jim Simons computers are the greatest of all time. This is the grandfather of HFT trading…everyone else’s PhDs aspire to be like his PhDs. Don’t confuse anyone into thinking this guy is anything like Benjamin Graham….he is a completely different animal and no home gamer is replicating what his team does nor is it applicable.

  4. I loved Simons’ presentation but had two disquieting thoughts about M.I.T. First, those folks invited him to give a “why I am so great” type of talk at the same time that they have a huge grant-request pending with him. I think that’s scuzzy at best. At least Simons had the integrity to acknowledge it publicly and say that there was competition. Good for him. Second, the purpose of the talk was to explain how one can have unexpected turns in life but that passion, intelligence and luck can produce amazing results. Yet the questioners were only really interested in what Simons did to make big money. No one got the fact that Simons never set out to get rich. That came later. They just wanted his results, but not his life lessons.

  5. detail: it’s Renaissance Technologies.

    Renaissance Capital is out of Moscow, with a focus on Oil/Gas.

  6. detail: “greatest investor of all-time” ?

    I don’t argue he is the best all-time at what he does.

    but what he does is the exact opposite of investing.

  7. Look, here’s all you need to know that HFT is gaming the system big time, ripping off pensions and biggies.

    THEY COLOCATE THEIR SERVERS. Riddle me why oh why it is so important to share a wall with the exchanges???????????

    Of course they’re fractional penny flippers of the Office Space ilk.

    • Prescient

      You are simply way off on this. If you actually measure market impact (which I do) you would see that fills have gotten better since HFT arrived. If large funds believed that HFT was having a negative impact on the market don’t you think you would hear them complaining once in a while? The people who complain are the ones who used to make their living doing what the HFTs do now. The HFTs are so much better that those people can’t compete so they complain instead.

      • OTS,

        Frankly, I don’t think you know what you are talking about. Things will get very dangerous with all these dark pools, etc., and private HFT parties, i.e. such as blackrock wants to do.

        SUNLIGHT IS ALWAYS THE ANSWER. Bad things grow in the darkness.

        And again, rather than simply making a set spread for providing liquidity, they are frontrunning all trades. You still haven’t told me what HFT provides and why they need to colocate the server. It’s like the bankrobber moving into the space next to the bank. Give me a break.

        • Prescient,

          To say that HFTs are front-running is 100% inaccurate. Front running is the act of trading on non public order information. HFTs are not doing this. It would be impossible to have that information ahead of anyone else who has similar data feeds and colocation. Even in the case where orders are internalized there are strict rules regarding separation of customer order flow and proprietary orders. That is not to say they can’t be crossed. Just that there are specific guidelines to when and how that can happen.

          You ask why HFTs choose to colocate. They obviously do this so they can respond quickly to changes in the market. As a said before, they are in the market to make a buck like anyone else. How is colocation any different than someone buying/leasing a seat on the NYSE ten years ago? People did that so they could be as close to the order flow as possible. This is the same thing. Frankly, I don’t see how it can be viewed any other way.

          To address percolator’s comments above. Anyone we choose to quote on the issue is going to fall on one side or the other I suppose. I think if you look at it objectively and consider the fact that the largest funds, as far as I can tell, are not complaining about HFTs that is a pretty big indicator that they are providing a service. As I said before, I measure the market impact of trades on a regular basis. Overall my fills have improved over the last five years. You have to take the good with the bad. In this case I think it is clear the good outweighs the bad

          • OTS,

            Let me clarify what I meant, I do not mean to say that all HFT is bad and I agree there are benefits. My concern is more on the fact that regulators do not know what the hell they are doing and are not effectively “policing” the market. It’s fine to make a buck, etc., but as long as you are doing something positive.

            Liquidity is down, and I mean real liquidity. There is a lot wrong with HFT and I respectfully disagree that they are running wild frontrunning trades.

            As long as liquidity is provided, ok, there’s a tradeoff. But if they are pinching fractions of pennies without providing any service at all, or purely nominal ones, then no, you don’t get a seat at the exchange and you can’t make computer love with the exchange servers.

            • Prescient,

              Do you measure the market impact of the trades you make? If you do then you will see that it has decreased since HFT started. This is important for large institutional order flow, short term traders, option market makers, etc. This is a good thing.

              Regarding colocation, anyone can lease colocation space at an exchange. You could do it if you wanted to. It’s not something exclusively granted to HFTs.

          • OTS,

            The paper you provided me the link too from Optiver which you used to support HFT said the majority of HFT firms do not front run, but this means that a minority can and some do. Maybe you ought to read that paper a little more closely. They also want Flash Orders banned.

            And from my experience as a professional trade my fills have gotten worse to the point where I no longer do block trades and now enter trades individually for each account. It’s more difficult to trade in size.

            You seem to be arguing that HFT is great without acknowledging there are some problems, like front running and flash orders that even a HFT firm like Optiver realizes need to be banned.

            • I never said that it was flawless. I agree about the flash orders.

              Please define front-running as you see it.

              • My definition of front running is the same as the one used in the Optiver paper which you used to support your argument. As stated by Optiver there is a minority of HFT firms that front run their clients.

                • Percolator,

                  Just to clarify, I did not provide a link to the Optiver paper in any of my posts. I provided the title of a paper from Northwestern University and linked a FT article. However I have read the Optiver paper. If you read it as well you will see what they actually say is that the majority of HFT firms DO NOT HAVE clients. This in no way implies that firms that have clients front run them. As you stated, if a firm did engage in that activity it would be illegal and could be prosecuted.

  8. I am by no means an HFT expert, but something is wrong with a society that has 100 stock transactions for every actual economic purchase. I am not inclined to say that HFT is all bad, but I think, as a society, we have to very seriously wonder if our markets are too deep and too integral to our economic growth. HFT is merely a product of the environment. Not necessarily a cause.

    • Simons essentially says as much when he says he wants fewer people to work for GOOG and GS. It’s a bit of a contradiction then to say that HFT is providing some good for society.

  9. TPC, I don’t think its that big a deal because I don’t think intraday markets matter that much. How does it matter (for long term prices) if stocks are being shunted around repeatedly all day long, thousands of times? It doesn’t matter from an economic or social purpose point of view. The problem is that most people say that HFT is ripping mutual funds/pensions, etc. That argument I don’t buy because how can trading (even if your argue it is manipulative/excessive) at the intraday level affect trades done for the longer term? Mutual Funds/Pensions don’t and shouldn’t care about intraday movements much. It is also a fact that HFT has changed the intraday markets and has improved block order execution, so that day traders and others dependent on institutional order flow have lost business. I would not be looking for them to explain to me the problems with HFT.

    However, my main criticism is that it must be ensured that 1) there are no malicious participants (not just within the US) 2) system errors or hacked servers don’t end up causing crashes. The main problem here is that there is no one to police the system or to even know after the fact what happened. SEC is woefully behind the technology curve. They could not piece together anything because the timestamps from different trading venues didn’t match. That is pathetic!

    Bottomline, if the playing field is fair and failures can be monitored and followed up, then I think HFT is just a natural development that one can’t avoid.

    I don’t think Simons said that fewer people should work for GOOG/GS! He said that teacher pay needs to be competitive so that talented people have more of a choice between GOOG/GS and teaching. That is very different from maligning GOOG/GS.

  10. Simons does not meet the definition of an “investor”.
    He is a great speculator, with the track record to prove it.