MM Center Book
"Overlaid on top of individual teams’ portfolios is a sizable “center book” that both offsets concentrated positions and adds to high-potential trades. Managers of the center book might sell stocks to which multiple Citadel teams have exposure as a hedge, or augment bets taken by teams that it has determined are likely to do well, usually without their knowledge."
Have heard of this before, but does anyone have any personal experience dealing with this? Does it really impact each pod specifically? Link to article below.
Yes in less liquid sectors. You can see shadow of central behind you. Typically u size positions small because of low ADV but central may follow so stocks could move with your trades more than they should
In addition to copying your trades, they will try to reverse-engineer your alpha (talking about non-quant equities) to the extent possible which is more annoying.
Can you elaborate on this
yes please elaborate
These centers I think are basically the central risk/liquidity books. They're intended to cross orders from one pm to another, and also optimize the central book with the PMs orders. This may include following managers flow and trying to reduce t cost. Every major HF now days have one of these central books. Sell side has a similar book as well, but more focused on crossing and reducing tcost
A total vote of confidence for the central book to short a stock that you just bought because the data indicate you suck.
Funny story my PM and I once got screamed at for testing something out/making huge orders and canceling them to toy with the center brook tryna front run us lol
If you have a $50m GMV position and there’s a $50m copy in the centerbook, isn’t your 20% payout really a 10% payout?
What’s the transparency like? When people get liquidated does it all happen in the centerbook before PM gets the shoulder tap? Can centerbook front running actually cause PMs to trip their drawdowns?
Interesting concept. Makes sense for GP.
Yes to all your questions. Makes sensw for the GP but extremely annoying for the PM and leads to second-guessing trading action all the time.
is it true some of the pods have "contraindicator" PMs who they front run but the opposite? PM loses $ on >60% of trades, so if they buy a stock center book will short?
I absolutely love the concept of being a professional contra, running a tiny book of illiquid names, continually just getting lit up by own centerbook in a self fulfilling prophecy of despair. Comically sadistic
Some comments here are just flat out lies and others are partially correct. I worked at a central desk so this is the gist of what they do. Also check out a recent odd lots pod cast featuring an ex C guy and the ex p72 guy who talks about this stuff to.
First we don’t reverse engineer your strategies. Just think for a second how difficult this is. I give you 30 trades in some sector and based on that you have to tell me what my strategy is, impossible. Especially since you can use any input you want, that’s like saying given y, your trades, and infinite x, tell me what f is in f(x) = y. Not possible without you giving me more information other than trades which we don’t have access too.
We liquidate desks. So we would take the opposite book to yours and when your boss is ready to fire you, we cross all your positions and your out. It’s just life.
We scale desks for anyone who doesn’t want to take the risk but their boss does. So a pm might want to scale the analyst, we scale it and attribute it to the pm. If a business head wants to scale a pm we do that. If god wants to scale a business we do that too. This is basically saying hey xyz doesn’t want to take more risk because they have a mortgage to pay and don’t want to risk it, we step in.
We alpha capture. Give me your positions across pods in the same sector and I can use some quant methods to figure out a better more optimal portfolio. This is just combining convictions across pods. See the odd lots pod cast. This stuff is really cool.
He hedge out the business at any level by building out a hedge portfolio and attributing to that pod, business, etc.
They can also do central trading, which is just filling orders and crossing trades etc. basic stuff here.
Now about who pays for slippage and transaction costs. We are an independent team with our own pnl stream. We simulate and attribute the t costs to pms and to ourselves. These models have to be agreed upon by more than ourselves. We can’t just put all the costs onto the pms because then the business head will step in and push back. It’s a checks and balance system.
This is a central team for the most part. There might be some extra small things I am missing here and there.
Awesome reply, thanks so much!
Liquidating PMs is savage - didn't know that happens
So in your mind, a PM gets fired and his positions stay on forever?
I wrote: they will try to reverse-engineer your alpha (talking about non-quant equities) to the extent possible;
You wrote: We alpha capture. Give me your positions across pods in the same sector and I can use some quant methods to figure out a better more optimal portfolio. This is just combining convictions across pods.
We are kind of saying the same thing. Yours is the sales pitch version. You are optimizing on something, and that something is IP, and this is why it is annoying to PMs.
What do you mean when you say I am “reverse engineering your alpha”? Give us an example of this. Because to me this means I know your strategy so as a business manager I don’t need you anymore because I stole your edge and I have it programmed.
Difference between stock selection and portfolio mgmt/position sizing
What would you say the expected comp for a quant in this position would be at a top fund (let's say with 10 yoe).
I work in a non-equity product and central books are basically a feature at any established trading organization now. I am glad the poster who worked at one explained in depth what they do but their core function is scaling in/out and it is a valid function.
That said, I am with the other PMs who mention how central books front-run/reverse engineer alpha somewhat. Give you an example when a firm speaks to someone like me they hear my high-level strategy and then they go and check things like sharpe/liquidity/volatility/scalabity this is typically very late in the discussions but near final sign-off. Then once I start they are going to get exposure to a whole host of products/structures they may have seen potential in the volatility/sharpe before but never fully considered. Then once I start trading they are now able to hone in on in a specific structure/timeline and so on. Do that over and over and add in quant identifiers while they may never be able to duplicate the idea generation. They sure are able to come close to duplicating how to manage a position around a pre-conceived idea already.
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