This is a recap of my thread about Jeffrey Yass and his partners at Susquehanna International Group with some additional quotes and comments. I loved this story of six college buddies bootstrapping their way to success by marrying trading and gambling skills.
One of my followers met Yass in person and shared this wonderful quote of his:
“The beautiful thing about the market is that it's a poker table with unlimited seats. If you think you can beat me, there's a seat open. If you won't to take the seat, I don't care what you think.”
In 1987, six college friends made $30 million with their new trading firm. Today they're billionaires, having proven themselves on the trading floor, in poker rooms, on race tracks, even in startups.
"In the choice of fame and fortune, they chose fortune."
The story starts with Jeffrey Yass. Yass was born in 1958 in the Bronx and grew up in Bayside, Queens. His father was an accountant and also ran a small fintech firm called Datatab. When he received warrants in the company, he explained the instrument to his son and they studied the financial pages together.
Yass made first trade in high school, buying options on Alcoa!
"I'd see options in the newspaper and I would realize that mathematically they couldn't be right, that you could buy one and sell the other and the odds would be in your favor."
He enrolled at SUNY Binghamton and found a group of friends with similar backgrounds. They cared about math and games, played poker in the dorm, and bet on horses at the Monticello race track.
"People would give them money to take to the track. Whatever method they came up with, it was phenomenal."
"If it was a choice of going to class or going to the races, they would opt for the races and still get A's on tests."
"They were fascinating characters. They were sort of intellectuals but they didn't go about life that way. They were gamblers."
Yass applied what he learned about probabilities and game theory. He wrote a paper “An Econometric Analysis of Horse Racing” that was published in Gambling Times.
(I’ve looked for it without success. If anyone happens to have a copy of either the original paper or the magazine - would be an amazing artifact to share with the community).
Yass graduated with a degree in math but liked to joke he had been a poker major.
After graduation, the friends pooled $1,600 and rented a studio apartment in a "real seedy section of Vegas." Yass wanted to become a professional poker player.
"I took a lot of hard knocks," Yass says of his stint in Las Vegas. "But I learned a lot, had a lot of fun, too."
Yass played poker with a Comex trader who explained to him the business of market making and commodities exchanges. After a year in Vegas, Yass returned to New York to attend NYU. He met NYU alumnus Izzy Englander who would become famous as founder of the hedge fund Millennium Management. Instead of graduating, Yass was staked by Englander. Englander put up the capital to buy an exchange seat for Yass in exchange for a 50% revenue share.
In 1981, Yass bought a seat on the Philadelphia Stock Exchange for $30,000. He started as a market maker trading options before becoming a specialist.
Yass called up his old college buddies: “Come on out here, we're making a ton of money.”
"We'd go in and trade, go out to dinner at night, talk about trading, come in in the morning and trade."
The friends also pooled capital to take advantage of their handicapping skills. They called their syndicate RAMJAC after a fictional company in a Vonnegut novel. The syndicate bet at horse tracks, dog tracks, and something called a “Jai alai fronton,” a kind of ball sport venue that offered pari-mutuel betting.
They looked for asymmetric bets, then showed up with with duffel bags full of cash (I’m not making this up! You had to bring cash and they bet big.).
At a Miami Jai Alai spot they found a "Pick-Six" bet which required picking the right winners in six straight games. They bet on every combination and collected $752,778.
At race tracks they went after "Super Bet" cumulative jackpots that carried over between the races (like a lottery jackpot that increases every week). Once they reached a certain size, the bet became asymmetric and a big bankroll became an advantage. A $60,000 bet at Sportsman’s Park made them $600,000.
Eventually the tracks showed them the door.
"We'd go there (to race tracks) with a lot of money," Yass said. "We carried a lot of cash ... We tried to keep a low profile."
But trading remained their main game. In early 1987, they set up Susquehanna, named after the river in Binghampton.
"Our strategy is to take a very disciplined and detailed approach to trading. It's our strategy in all our business to hedge our risks so we can't lose drastically in any one trade."
Their first big win was a position of out of the money index puts. During the crash of 1987, the puts went up nine-fold, earning the group $10 million. As profiled by the Washington Post, the firm made $30 million that first year.
"There was no celebration at all. 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."
Yass and his partners continued to build the firm in options and equities trading. Within a few years the firm became a one of the largest program traders, accounting for up to 5-10% of the New York Stock Exchange on any given day.
"The business for Jeff to compete in was one where you have to make a decision under intense pressure and stress, and you're going to have incomplete information,” says Susquehanna cofounder Bloom. “Jeff was spectacular at processing that information and deciding how big to bet.”
Since then, the firm has grown without ever raising external capital.
With 20-25% market share it's the second largest trader of options in the US (BBG link) and a large market makers in stocks, ETFs, and other assets.
The group also reinvested earnings into startups in the US, Israel, and China. They set up a local team to source deals in China. That team backed Zhang Yiming and in 2012 bought bought a 15% stake in his latest company, TikTok parent ByteDance (WSJ Link). That stake today could be worth more than $30 billion!
I wonder whether they thought about their startup investments as yet another basket of mispriced bets.
Yass seems committed to a unique culture of at his firm, emphasizing an understanding of betting concepts and the right temperament:
“Susquehanna recruits traders from the math and engineering departments of schools like Columbia and the Massachusetts Institute of Technology by hosting poker tournaments, screening for future traders with acute problem solving abilities and even-keel temperaments.
Susquehanna’s offices are filled with casino-quality poker tables. The art and skill of the Texas hold-em is given an equal shift to trading models and options math in Susquehanna’s training of new hires.”
Three Susquehanna traders have won World Series of Poker bracelets, including co-founder Eric Brooks.
A book on the mathematics of gambling, 'Getting the Best of It' by David Sklansky used to be required reading (back in the 80’s). "That's their bible," one former colleague said. I just checked and it looks like after my thread the book sold out on Amazon! 😂
“All of sports betting, all of playing poker, and all of options trading is making sure you’re betting against someone you’re smarter than. If you’re not asking yourself, am I the sucker, or am I the [bait], you get arrogant and you get crushed.”
On having fun:
"These kinds of things are fun for us," Yass said. "It's intellectually stimulating. Some people like art history, I like probabilistic analysis. It's an interesting challenge. It's not work."
"We're not risk takers, which is what we consider to be a gambler."
"The difference," Yass added, "is a gambler is someone who enjoys risk. We don't enjoy risk. We ideally would like to take zero risk."
"We don't delude ourselves. We got lucky being in the right place at the right time," Yass said. "We were fortunate to have caught a business that was ready to explode and to be able to grow with it."
“Susquehanna is like a black hole. There’s no light that escapes.”
The group remains secretive but there are some good sources to learn more:
1989 Philadelphia Inquirer profile. I only have this one as a pdf. Can share via email if you’re interested.