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
By Robert Huber
LET'S PLAY A game. Let’s say you’re a contestant on Let’s Make a Deal, Monty Hall’s game show from a generation ago. It’s your moment. There are three doors. Behind one door is a brand-new Camaro. Behind each of the other doors, there’s a goat. If you pick the right door, the Camaro is yours.
Silky-voiced Monty Hall gives you the big question:
“Do you pick door number one, door number two or door number three?”
The studio audience weighs in, and tension builds, as you think. Finally you pick, let’s say, door number one. But Carol Merrill, Monty’s assistant, doesn’t open it, not yet. Instead, Monty Hall directs Carol to open one of the other doors — door number two, say. Behind that door is … a goat. The audience titters nervously — that Camaro, still hidden, might yet be yours.
First, though, Monty is going to give you another choice. He’s going to give you both an option, and a dilemma:
“Would you like to stay with door number one,” he asks, “or would you like to switch to door number three?”
You ponder. But it’s a no-brainer, right? With two doors left, there’s a 50-50 chance the Camaro is behind either one. So you might as well stick with door number one.
Now I’m going to quote a man named Jeff Yass, from a book called The New Market Wizards. These words have made him very rich:
“The correct answer is that you should always switch to door number three. The probability that the prize is behind one of the two doors you did not pick was originally two-thirds. The fact that Monty opens one of those two doors and there is nothing behind it doesn’t change this original probability, because he will always open the wrong door.”
That’s what you didn’t consider: Monty Hall knows exactly where that Camaro is parked, and he wasn’t about to direct Carol to open a door that revealed it — no, he’s going to stretch out the game, to have fun with you, to see if, in your finger-crossed begging of the fates, you’ll switch doors.
And that’s the thing — your intuition is telling you, with two doors left, that the odds have got to be 50-50. But that’s wrong. The door you picked originally had a one-third chance of yielding that Camaro; Monty Hall picking a door he knows doesn’t hide the car won’t make it more likely that your door does.
Back to Jeff Yass:
“Therefore, if the probability of the prize being behind one of those [other] two doors was two-thirds originally, the probability of it being behind the unopened of those two doors must still be two-thirds.”
If this sort of thing makes you cross-eyed, suffice it to say that an empire has been built in Bala Cynwyd by Jeff Yass based not on numbers, but on a philosophy, a certain worldview. A world in which Monty Hall will always open the wrong door, so to speak. But Jeff Yass isn’t just some numbers-obsessed geek — no, he honed his idea of the way things work playing poker and betting on the horses in college, then spent a year or so at the gaming tables in Vegas before he returned East, got a seat on the Philly stock exchange, and reportedly became the youngest trader there ever to make a million dollars in a year. Those who know him say he’s just about the most brilliant guy they have ever met.
One perspective of brilliance is to take something complicated and break it down to something quite simple. It would seem that Let’s Make a Deal could not possibly be in need of getting simpler. That’s where Jeff Yass sees something the rest of us don’t. He’s now the brains behind Susquehanna International, an options and equity trading company based in Bala that, on any given day, might trade the financial equivalent of three percent of the New York Stock Exchange and Nasdaq. Billions of dollars’ worth.
Yass learned to make utterly rational choices again and again and again and again, in a game fraught with as much desire and crazy behavior and silliness — with as much raw emotion — as rabbit-ear-wearing contestants on Let’s Make a Deal. That’s Jeff Yass’s brilliance. The world according to Yass runs on figuring out which door to open. While the rest of us might think we know the answer, he asks a question. The question is: What’s Monty Hall thinking?
SUSQUEHANNA INTERNATIONAL MIGHT very well be the biggest privately held options trading company in the world. Over two decades, Jeff Yass and five other founders and many people who work for them — they now employ 1,500, with offices all over the globe — have become very, very rich. Despite the size, secrecy pervades Susquehanna. Stealth is a word that former employees use often in describing the company m.o. A former trader defines it: If you have to choose between fame and fortune, choose fortune. Susquehanna buys and sells options and stocks quickly, in hundreds of thousands of transactions a day, yet it has remained largely below the radar even as it shapes the markets it plays in.
Jeff Yass is silent about his company, because he doesn’t want to let anyone in on what he does, and how. For one thing, those who know him say he is very nervous about personal security. For another, while he seems fine with the notion that his company invests its own money in smarter, more rational, and ultimately more successful ways than anybody else, the particulars of Susquehanna’s methods are nobody else’s business. That’s why the company operates in a nondescript building in the suburbs of Philly instead of on Wall Street. Yass is a self-styled outsider. And he doesn’t want to let anybody in.
Which is a shame, because these days, with our financial markets so shaky, a guy who can carry on and crunch numbers and still make his millions, well, he’s either big trouble or the opposite, someone we can learn something from. Yass is a guy, as a former broker there puts it, “who created Susquehanna out of his own head.” So maybe he does know something we don’t. Besides, who can resist him? Yass might be thin and bald and pale and quiet, but he came up with a system for making hundreds of thousands of dollars betting on the ponies. He hosts poker tournaments in his company’s offices, and used to walk around the trading floor on slow afternoons at Susquehanna offering a thousand dollars to anyone who could guess a number between one and 1,000 that he had selected, according to a former trader who beat the thousand-to-one odds and guessed right. (Through its attorney, the company denies this.) Once, Yass offered his golf caddie a ridiculous amount of money (company lore has it at one million bucks) if said caddie could make a hole in one. Yass clearly decided, a long time ago, that he was going to have fun getting rich — and then more fun spending his dough.
YASS STARTED SUSQUEHANNA, for all intents and purposes, in his dorm room at SUNY Binghamton. It was 1975. Yass played poker there with friends, mostly middle-class Jewish kids from Queens (like Yass) or Brooklyn. They skipped class and went to the racetrack. But Yass’s crowd wasn’t like other college kids. They were science geeks — Yass himself majored in math and economics. The poker and betting on horses was cool and fun, but much more than that. The prism of probability and game theory and risk-taking could be applied to practically everything, Yass decided. It was all about finding edge, how one thing plays against another. About figuring out the better way. Traders at Susquehanna joke about looking for edge from the moment of first light, with the decision of which side of bed to get out of. Though it’s not really a joke. June Binney, who befriended Yass as a student at Binghamton, would hang out and marvel: “They really believed there were rational decisions for anything that came their way.”
Self-styled intellectuals with a taste for cards and ponies: They didn’t have much money — some came from summers spent bussing and waiting on tables at the Concord Hotel, a sprawling resort in the Catskill Mountains 90 miles northwest of New York. But they bet to win. Yass studied the Racing Form in the student union. Other students reportedly gave him money to wager at the track, to risk as he saw fit because his game-theory approach worked. Yass’s thesis for an economics course, “An Econometric Analysis of Horse Racing,” was published in Gambling Times magazine. His approach was simple: Make something supposedly built on chance rational. Turn the odds in your favor. Figure out the edge.
It wasn’t purely about money. Jeff Yass’s senior thesis concerned the social value of stock options. (He received a B+.) Jory Weitz, now a film producer in Hollywood, lived on the same floor as Yass: “With a mind like his, you have to be brave and step outside the box, to be stimulated. He was that kind of guy.” After college, Yass and his roommate Arthur Dantchik headed to Vegas; a couple others from Binghamton joined them. They started out with $1,600, rented a dump in a seedy section of town, and hit the gaming rooms.
“I took a lot of hard knocks,” Yass told a reporter 20 years ago about his time there. “But I learned a lot, and I had a lot of fun, too.”
He did okay, well enough to call his friend June one day to tell her: “You’re going to Paris.” She had just met a guy, a new boyfriend, who was spending the summer there. June had been on an airplane once before in her life. Yass bought her a plane ticket with his Vegas winnings.
Yass came home to New York and went to business school at NYU. He and Dantchik and other friends made cash at the track and playing poker. And now Yass was getting into trading options — a relatively new trading offshoot — on the American Stock Exchange, though he worked through brokers, not on the floor.
Then he found the perfect vehicle to run with options. In the spring of 1981, a Wall Street heavy hitter offered to set him up on the Philadelphia Stock Exchange; an established veteran betting on a young guy with unlimited potential wasn’t unusual, and a seat in Philly was far cheaper than starting in New York.
Just when the options game took off.
ON THE SIMPLEST level, an option buys time; it’s a bet made on whether a stock is going to go up or down. Suppose Microsoft is selling for $130 a share. For a very small percentage of $130, you can buy an option to buy Microsoft at, say, $140 — that’s known as a “call,” and you’re betting that the stock will go up. If it does go up to, say, $150 before your option expires, you can exercise it, buy the stock at $140, and — if you so desire — sell it at $150. If Microsoft doesn’t go up, you let the option expire, and all you’ve lost is the price of the option, the “premium.” Conversely, if you think Microsoft is going down, you can purchase the right to sell the stock at $120 — that’s a “put.” If the stock falls to $110, you can buy it at that market price and exercise your right to sell it at $120.
Here’s the beauty of options: If your analysis is right, you can make almost as much money as you would have by buying the stock conventionally. If you’re wrong, all you lose is your premium. For Yass, options presented a field day of opportunity: He could analyze the variety of possible reasons — some of them purely mathematical, plus a few complications and offshoots of options to play around with — why a stock might go either up or down. And he could figure out whether there was a market for the price, higher or lower, that would make him money; he would try to read other buyers and sellers, in other words. Just like with poker, where a good player reads both the cards and the proclivities of other players. Just like with Monty Hall, who is always going to open the door where there’s a goat instead of a Camaro. Virtually everybody might know that, but what almost everybody seems to miss is how that affects your odds. In trading, reading why a stock is fluctuating, plus divining what the rest of the trading world is likely to do — what, in other words, they’re thinking — happens at warp speed. You have to think fast and make your move.
Yass made a million dollars in 1982. He was 25.
A friend from Binghamton recalled how Yass “called everybody up and said, ‘Come on out here, we’re making a ton of money.’” Fun and games with huge cash prizes. Several Binghamton classmates moved south to Philly. At this point, the worldview was simple: Big money was there for the taking. They’d trade all day, go out to dinner and talk trading, do it all over again the next day.
Meanwhile, Yass and his friends bet money — big money — on horse races and at dog tracks and jai alai frontons all over the country, according to the Inquirer some 20 years ago. They formed a syndicate and named it RAMJAC, from Kurt Vonnegut’s novel Jailbird. Vonnegut’s RAMJAC aims to take over and run pretty much everything in the world, then redistribute wealth in a peaceful, but utterly pervasive, economic revolution. The Yass version would maintain a little more control of the bottom line.
The betting philosophy was pretty straightforward: Basically, if you bet enough money, covering a high enough percentage of possible winners, you’ll win often enough to come out ahead. Never mind that you’ll lose more often than you’ll win, because when you win, you can win big.
This is a central tenet of the Yass philosophy: If the odds are in your favor, go all out. At Susquehanna, when a trader takes the right position on an option, he buys big. It’s house money, and there’s a ton of it. It’s the opposite of gambling: The right decisions will yield positive results — what Yass calls “positive expectancy.” Maybe not in the short term, but certainly down the road.
In a 1985 lawsuit, Yass and friends revealed that they lost on 110 out of 140 betting days. No problem. They still came out way ahead. The Inquirer detailed RAMJAC’s stunning winnings:
In March 1985, they won $752,778 at a jai alai fronton in Miami after wagering $524,288 on all possible combinations in a “Pick-Six” jackpot.
Several days later, they won one of the largest payoffs to that point at a North American racetrack: a $764,284 Super Bet jackpot at Sportsman’s Park in Cicero, Illinois. They covered as many possible winning combinations as they could, betting $60,000 to capture the jackpot, which built until someone won. 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.” The index option game was blamed by many at the time for making the Black Market collapse worse — and some big Wall Street firms got out of it. Two years later, Wall Street revealed which firms were the busiest in index options, and there was relatively tiny Susquehanna — with just $25 million in capital — at the top of the list, with trading big-timers like Morgan Stanley and Merrill Lynch. Few on Wall Street had even heard of Susquehanna.
Stealth. Buying and selling fast. Hundreds of thousands of transactions a day. The finance world was beginning to catch on that Susquehanna was a player. Yass and company would ride their method right on through the high-rolling ’90s and keep adding traders and opening offices across the country and internationally, in Europe and Asia. The company made a fortune.
IT'S SUSQUEHANNA LORE. How Jeff Yass paid a caddie who made a hole in one. The version that has Yass forking over a million bucks to a guy who made a golf shot, which paid for his hip surgery, is wrong, because a million would be a problem — not the amount, but the logistics of packing up that much cash and hauling it around. … Had to be, though, at least $10,000 — anything less than that, Yass wouldn’t be interested. Everybody’s sure of that.
Okay. For the record:
“It was in 2001, the seventh hole,” says John McNeil, longtime caddy at Stonewall, a private club in northwest Chester County, “on the old course. When we were coming off the green at six, he said, ‘If you make a hole in one, I’ll give you a hundred thousand dollars.’” One hundred forty yards, an eight iron. “It never touched the green. Hit the flagstick, and crawled down like a rat in the sewer.”
Jeff Yass has “way more money than brains,” McNeil says. “He’s got too much money.” McNeil is kidding, because Jeff Yass has exactly the right amount of money, and he was more excited than McNeil when that ball slid down into the hole. Yass forked over $2,000 in cash at the end of the round — it was McNeil’s idea to split the 100 grand with the other caddie in their group, a 15-year-old girl who would later use it for college. Then, two weeks later, Yass hired limos, took McNeil and a bunch of his caddie buddies out to dinner at Savona in Gulph Mills, and presented him with a check for the balance. McNeil didn’t use the money for hip surgery; he banked it.
One hundred grand for a hole in one.
That’s just Jeff Yass fooling around, tossing cash at excellence and luck. Inside Susquehanna, a betting culture prevails. Not just in trading. It’s the philosophy that percolated in a dorm room in Binghamton, that anything that came their way would succumb to rational analysis. In the aggressive mentality of a trading firm, that means you don’t say anything you’re not willing to bet on. A few years ago, a young Susquehanna trader named Alex Mendoza bet around $500, he says — a hundred with one guy, $50 with another, a lot of side bets, just like the trading floor itself — that he could do 300 push-ups in 45 minutes. He didn’t make it. He paid off his bets, and then was quietly told by management not to make that sort of wager again.
Not because of the amount — $500 is lunch money to a trader. Mendoza was reprimanded because he’d gotten ahead of himself. He had made a dumb bet, because he really didn’t know if he could do 300 push-ups in 45 minutes. If you don’t know the answer, betting is a gamble, utterly antithetical to the Yass method.
“Every mistake, every loss, becomes a teaching moment,” Mendoza says. He means both in trades and in how traders think. “When you’re constantly reminded of how the world works and how it doesn’t deviate, you start to think that way.”
How many doughnuts can you eat in 20 minutes? Research! A trader in the New York office surreptitiously went to Dunkin’ Donuts, took the doughnut maker aside, learned which ones are the lightest, have the least filling and sugar and calories, etc. Pocketing a few hundred bucks after winning his bet, he sat back at his desk munching the richest, most sugary doughnut. Just to rub it in.
If you open your mouth, back it up. How many people will know what year — within 20 years, within 10 years, five — Abraham Lincoln was shot? Is Alabama bigger than Wisconsin? One year, traders in the Chicago office bet on snow futures, a made-up security, wagering against (or for) a harsh winter.
This is the place you want to work. You’ll get rich and have a sporting time. Always seeking edge. A couple of giggling traders from the New York office once made a bet on something they figured Yass couldn’t possibly know, and gave a quick call to the Bala office:
“Jeff, who was the last king in the Plantagenet dynasty?”
“Richard the Third!” Yass growled, slamming the phone down. Very well-read guy, that Yass. Dumb to bet against him.
For a long time, Yass didn’t lose the betting bug. A trader named Francis Wisniewski says he kept getting kicked off his computer in the Bala office back in the ’90s so Yass and Dantchik and Greenberg could check the odds, place Pick 6 bets. (The company denies this.) The firm also hosts poker tournaments — Jeff Yass deals — with cash prizes. It’s a way of attracting top-drawer recruits (employees don’t risk their own money) and of vetting them as decision-makers: reckless poker player equals reckless trader. Susquehanna has become renowned in the trading world for its three-month tutorials of new hires, where in-house games of poker are front and center as a teaching tool. After-hours games in the offices — that’s just for sport. At first blush, poker would seem to be at odds with the rational decision-making that Yass preaches. But poker — well-played poker — is all about making decisions, again and again and again, that are most likely to succeed: when to bet, and how much; when to call, when to fold, based on the cards dealt and actions of other players. Which makes poker played well the opposite of gambling. Making the rational decision, again and again and again — it’s the Susquehanna mantra. Over time, you’ll come out ahead. Poker is akin to trading in other ways: The decisions have to be made fast, under pressure, and there’s the lurking risk that what you want to happen, or the bad result that just happened, will color your decision now. Poker tutorials are designed to bleed out such stupid emotion.
Eric Brooks, one of the founders of Susquehanna, left the company to play tournament poker. He won the World Series of Poker in 2008, and immediately announced that his $415,856 purse would be donated to the Decision Education Foundation, a Palo Alto-based initiative he works with to teach the “science” of decision-making to children. With that, what June Binney observed in Jeff Yass’s dorm room in 1975 — They really believed there were rational decisions for anything that came their way — had morphed from getting rich to spreading the news.
At any rate, the beauty of the poker/trading connection is how simple it is — yet not so easy to institute. As one former Susquehanna trader who gave poker tutorials says: “It’s hard to embrace that culture. Who has the time to teach, on the level they do? Who knows poker? That kind of vision can come only from the top. They love the gaming of it. The gaming of the whole venture.”
WHICH IS WHY Jeff Yass doesn’t want this story published — he’s afraid it will all be taken away. Yass declined to be interviewed, but tried to control this story through repeated calls to the magazine’s president and editor, with missives from two lawyers, and in an off-the-record meeting. His old friend June Binney describes Yass as charming and very funny. I sensed a man about to get a colonoscopy.
Many people who know him say he is highly nervous about security. After 9/11, Yass and company were worried that incoming mail could be laced with anthrax — a fear at many institutions. For a few weeks, a trailer was set up in the parking lot, where all mail was checked out before it was allowed into the building. Security guards were hired to monitor visitors. The trailer is long gone; the guards remain.
Perhaps Yass’s fear of being written about is really a different concern — that Susquehanna could be fingered as a greedy player in our financial markets, a stealth mover and shaker that has gotten fat as others have lost life savings.
That accusation doesn’t wash, though. We now know, of course, that Wall Street was front and center in our economic problems because it orchestrated an elaborate game of lending money to everyone and his brother for houses, and then sold off those loans in bundles in what amounted to a classic pyramid scheme. Susquehanna doesn’t operate that way. In fact, in the financial world there’s a great deal of tittering about the company having taken its own substantial hit recently in long-term municipal bonds, though Susquehanna’s diverse and complicated hedging techniques make such claims iffy. At any rate, both Susquehanna itself (through the company’s lawyer) and a former high-level administrator say the company is in better financial shape now than two years ago. Investment Dealers Digest estimated four years ago that the company had $16 billion in assets; company equity currently available for trading is conservatively estimated by ex-employees to be several billion dollars. But given the company’s secrecy, only Jeff Yass and a handful of others know for sure. It might be tough to swallow, these days, that a rich trading firm represents what is actually right about American finance. But Jeff Yass has made the case, over the years, in eloquent off-the-cuff presentations to his traders, for the value of Susquehanna’s role in the marketplace. This, too, is part of the Yassian worldview — he’s on the board of directors of the Cato Institute, a promoter of limited government and free markets. Though his views on markets really reach all the way back to his Binghamton years, to his senior thesis on the “social value of options.”
In a nutshell, Yass posits that Susquehanna’s huge volume of deals bolsters liquidity, wherein assets can easily be converted into cash, and that liquidity is a hallmark of the American financial markets. The ease and speed of buying and selling securities makes our markets, in turn, the engine that drives creative industry. If, for example, you have a phenomenal idea for a new and improved widget but you happen to live in Outer Mongolia, where there is no money to be had for anything, coming to America is your godsend. We have investors who are ready and willing to help you out, given that whatever money they put into the market — into your new and improved widget — can be recouped. That’s because our markets are so liquid, with the constant buying and selling of securities. Exactly what Susquehanna is all about.
A FORMER TRADER remarks on Yass’s utter belief in linear intelligence, especially his own. Yass once said, “If I had time, I could be one of the best golfers in the world.” He might actually have meant it. Isn’t golf the ultimate brainiac’s game? I asked John McNeil, the caddie Yass made $50,000 richer, whether the Yass mind could overcome limited athletic ability. His answer was immediate: “No.”
But take Dan Quayle, the vice president who was accused of having an ordinary brain. Yass once argued with a trader that Quayle had to be intelligent. Why? “Do you know how good a golfer he is?” Yass replied, laughing.
The former trader considers what is fundamentally more important to Yass, money or brains. “At one point,” he says, “it had to be money, but he might have crossed over a long time ago.” The gaming world — it’s the perfect melding of brains making money. Another ex-Susquehanna trader says that if the company’s higher-ups didn’t have to sleep, they wouldn’t. That trading is in their blood. That it’s an enormous game of poker played at the highest level — especially by Jeff Yass. A game of poker played, the trader says, at both the highest level and the highest stakes. Next to death.
So I come to understand that the reason for Jeff Yass’s silence about his company is really quite simple. It goes all the way back to that Binghamton dorm room. Jeff Yass figured something out, and it is very, very important. That the world would bend to his brain. That he could play cards, or bet on the ponies, or invest in the stock market, and do it better than anyone else, because he’s smarter.
And it’s his. Jeff Yass has gone into tirades, when traders leave for other firms or go out on their own, taking what they’ve learned from him and making their own millions. He argues that it’s wrong, what they’re doing, getting rich off of Susquehanna ideas. Because they are his.
In the end, it really does boil down to picking door number three. The thing is, Jeff Yass figured it out. We didn’t. The largest company of its kind in the world. The smartest guy in the room invites us to stay the hell out.