Pod Shops: what to be wary of the central risk book?
Given how the central book can copy/front-run you, what are some tips/advice to navigate around this?
What are some behaviors that one should look out for?
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In theory, It seems annoying (having algo find alpha signal & replicate you). In reality (and this is dependent on the names u trade), the effects are limited if u trade big liquid lcap and there are definitely ways to outsmart the algo by changing signals
I worked in this central alpha capture book at two mmhf. The truth is there is nothing you can do about it unless you are trading something very illiquid that prevents us from following you. Even in some rare cases, we can still copy some of their very illiquid trades. Don’t be too pissed at this central desk team. You should be more pissed that the AUM that should/could be allocated to you is actually being allocated to us. But we are not making the same percentage of pnl as you are, because it’s not our alpha to begin with. Therefore we can’t demand outrageous percentages. Think of these central books as the kings books. At the end of the day, the king sets all the rules and makes all the money. We just have to live with it.
Also we don’t front run anyone. At most we trade side by side or a few minutes behind the trade. Also this is only applicable, in my experience, to equities and discretionary teams, not quantitative teams.
What average daily turnover would you define as very illiquid?
As mentioned above, a few ways to avoid (1) trade something relatively illiquid and/or OTC (2) stay away from places like Bluecrest that are notorious for doing this.
Mate, can you shed some lights on these lots at Bluecrest?
I've just heard from a friend-of-a-friend who worked in Bluecrest's middle office that they're notorious for running a back book out of Switzerland and that the sell-side knows to quote px requests from them accordingly.
Changing your investment approach or even your trading to offset any impact from center book is a terrible idea.
Center book dynamics are always kept opaque by management to keep PMs from trying to game it. So it's hard to fight something that you don't understand, plus it brings massive distraction into investing/trading, which is hard enough as it is.
You either accept the CB exists and carry on (think of it as a tax?), or you quit and move to a fund with no center book.
Never heard of the actual PMs (in aggregate) outperforming their respective central risk book. If individual Equity L/S pods knew how to manage risk as well as the quants doing alpha capture on them, it wouldn't even exist.
What's the difference in work like being an analyst in the central book vs a sector pod? Had done an interview a while for a central book seat and didn't realize there was much of a difference until I read this thread
How do you verify that such a book even exists? When I worked at an MM there was a special risk book that traders could pitch their high confidence trades to, but this was distinct from an automated algorithm to copy trades.
The central risk book cannot front run your orders, but they can increase your orders or trade a little bit behind you. If you really want to limit the central book's profitability, then trade super aggressively at the last possible minute. You'll burn your own PnL but you'll also limit the ability of someone else to piggy back your trades. I would not actually recommend doing this, since central books are pretty opaque and you might be burning your own PnL for no reason.
In more sophisticated MM the pods never trade with the market. You trade with a central desk, who guarantee you some fill rate, and they go off and trade optimally with the market at whatever rate they want. So even if you wait for the last minute, it won’t help, the central desk will enter the trade with you side by side. And your market impact will be simulated and allocated to your pod and the central desk depending on the size of each trade order.
This is interesting. A guy I know who left Citadel said his main complaint was getting screwed on execution. With the setup you describe it seems almost impossible that they aren’t screwing the pods in small ways that add up over time.
Is there a separate pod that is responsible for allocating to the sector pods ?
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