Thread by @0xdoug

1/ Zillow made the same mistake that every new quant trader makes early on: Mistaking an adversarial environment for a random one.

https://twitter.com/macrocephalopod/status/1455887352371597312

2/ I know exactly how the conversation at Zillow went, because I've seen it play at dozens of desks across banks, funds, and prop firms everywhere:

"Our model is capturing X% of the variance. With large enough N, the remaining noise will wash out. We now have real edge. 🥂"

3/ The next chapter in this tragedy is going live. The lofty hype just keeps disappointing...

As if cursed, every single bad assumption or source of noise or component not explicitly covered by the model, just happens to realize in the exact way that screws you the most.

4/ You keep missing fills, but only on the most profitable trades-- never on the losers. The inventory, even hedged, keeps drifting in the direction that loses money. Risks blow up at exactly the worse possible time.

5/ Did you push a seemingly tiny innocuous bug that only affected 1% of trades? Congratulation that just wiped out a month of trading revenue.

6/ Live trading continuously disappoints compared to your stellar backtests. When you dig into why, it's not any one thing. It's everything.

Live trading misses one fill, which tilts inventory, which later leads to missing the biggest opportunity of the day. Death by 1000 cuts.

7/ Anything wrong, even slightly, kills performance. Worse it creates a mirage of backtest confidence and an endless wave of disappointment.

Nobody's focused on alpha. Everyone's too busy plugging leaking holes. It drains morale, and honestly even sanity.

8/ This is the biggest shock for the legions of PhDs that will try their luck at the quant market casino. It's why so many otherwise brilliant people end up washing out.

Quant trading often feels like the universe is literally conspiring against you.

9/ The real answer isn't "bad luck". It's that, despite what your models say, the market isn't random thermodynamic noise.

The market is an ecosystem-- one where everything is trying to kill you all the time.

tvtropes.org/pmwiki/pmwiki.…

10/ Behind every order is a thinking, breathing shark. A shark with mouths to feed and a mortgage to pay. A shark who's likely smarter than you. Definitely more ruthless.

You're swimming in shark-infested waters, treating apex predators like specks of geometric Brownian dust

11/ Every quant goes through this. And I can tell you that eventually it gets better. But you have to survive until you've internalized the lessons.

The idealized mechanical models that physics and math programs teach don't mentally prepare you for adversarial environments.

12/ You really just have to build up an intuition for the adversarial. Once you do it becomes second nature.

"Oh of course if we show too much size based on orthogonal signals, everyone's going to dump their toxic inventory on us. Duh!"

13/ The hard lessons are unavoidable, but Zillow made the classic follow-on mistake that's the number one differentiator of quant traders that are ngmi:

When the models diverged from reality, they doubled down on the models.

Always trust empirical evidence over derived models.