Beating the Odds – Susquehanna International – Jeff Yass

Jeff Yass was always a little different from his peers — a brilliant young man taken with poker and horse racing and the power of rational decision-making. He’s used all of it to turn his company — Bala Cynwyd’s stealthy and mysterious Susquehanna International — into one of the world’s most lucrative and powerful financial firms

The night after winning at Sportsman’s Park, they pocketed $211,000 at a dog track in Raynham, Massachusetts. Later that month, they hit the twin trifecta for $149,000 at Delaware Park racetrack in Stanton. One day in June, they bagged $374,292 at Longacres racetrack in Renton, Washington.

The wagering was dangerous, though, because Yass and friends had to take wads of cash to racetracks. They’d pack rolls of hundreds in their bags, sometimes divvying them up among several people — reportedly moving as much as half a million dollars at a time. They’d dump their rolls of bills at the betting windows at tracks and hold things up for some time, which — along with all the winning — caught the attention of racetrack owners. Sportsman’s Park successfully banned them; Yass and two other syndicate members sued, but lost the right to regain access.

Meanwhile, options trading remained hot. Jeff Yass and his Binghamton friends — Dantchik, Eric Brooks, Andrew Frost, Steven H. Bloom, and Joel Greenberg (who’d gone to law school and spent time at a firm in Washington) — formed Susquehanna in 1987. That fall, the market crashed. On October 19th — Black Monday — the Dow dipped almost 23 percent. That day, Susquehanna made several million dollars.

Options, remember, are a bet on stocks going up or down. In ’87, a new toy had just been added, an option based on Standard & Poor’s 100 stock index — an option not on one stock, but on the future value of a basket of 100 stocks. Yass made a bet on the market crashing by buying very cheap index options (the cost of an option is related to the likelihood of the price of stocks hitting a certain number); traders at other firms scratched their heads over this. Why? Why waste your money on something that’s so unlikely to happen? To Yass, though, it was a bet on cost vs. possibility — he didn’t predict the crash, but buying these extraordinarily cheap puts was analogous to going to a racetrack and covering an overwhelming majority of the possible combinations. In the end, you’re going to win — or at least you’re going to win more than you lose. It just requires a lot of cash and the faith to spread it around.

“There was no celebration at all,” Yass told the Inquirer after Susquehanna made its killing as others — many others — lost fortunes. “If the market had gone up 500 points and we would have made that amount of money, then we would have been celebrating. But just the way it happened, it was too spooky.”