The “grammar” of trading with SIG’s Todd Simkin

SIG’s Todd Simkin went on Ted Seides’ Capital Allocators podcast recently. I’m biased but Todd’s interviews are some of the best you’ll find in finance (also SIG interviews are rare to come by). Come for the discussions of risk and trader education, stay because his personal stories are highly thought-provoking.

My notes on his prior interviews are some of my most-read podcast summaries.

Notes From SIG’s Todd Simkin (35 min read)

5 Takeaways From Todd Simkin on The AlphaMind Podcast (11 min read)

I didn’t do a full breakdown of this one but I’ll point you to a few key parts.

Ted asks, “When someone’s learning and getting up the curve, what are some of those most important questions that a more senior trader might ask someone that they need time to learn to ask themself?”

If I had a script for it, it’d be easy, because then I would just give people a script to use as a checklist, like a pilot does when they’re starting up their plan, or like a surgeon does when they’re starting a surgery. I don’t have a script, and I wish I did, because then I could hand it off to somebody.

Instead, it’s more like a grammar. There are things that you know how to do grammatically that you could not describe. If I were to say to you that I have eight large red French soccer balls, you would know what I mean. It makes sense. And if I were to change the order of the adjectives, it would sound crazy to you. If I moved one adjective and I said I have “eight red French soccer large balls”, I would certainly not sound like a native speaker.

You’d have a hard time explaining what the right order is for adjectives. A lot of people have gone through and tried to describe the rules here, and it comes down to number, opinion, size, age, shape, color, origin, material and purpose, I think, is the right ordering for the way you use adjectives, and you just know that.

You know that because you’re a native English speaker, you’ve been using the language long enough that something sound right and something sound wrong. In the same way, when junior traders talk about trades, they might point out something that just feels like it doesn’t matter compared to something bigger that does. And I don’t know which question to ask them a priori, I don’t want to say what you need to focus on is the size of the order before the price. Or you really need to focus on where the order is coming from before you look at the underlying rhythm. There’s not a simple answer to it, other than to say it definitely sounds wrong when a junior trader gets it wrong and a senior trader knows it and feels it because they know the grammar. They know what goes into making appropriate decisions for risk allocation under conditions of uncertainty.

What are the signs of a someone who will become a good trader?

I think it actually goes back to the first thing we were talking about with my desire to learn sign language. It was something that I did not have mastery of and I wanted to know it better, and it was entirely self-serving. It was just for me. Nobody else cared whether or not I learned sign language. Nobody was grading me on it.

Everybody that we’re bringing in as quantitative traders is smart. They’re all capable. They are all straight A students in finance or physics or computer science or whatever it might be. What differentiates the ones who end up being great from those who end up being fine are the ones who just really, really want to dig in and get it and understand it and win the game.

You’ll see people that will come up after a mock trading session and say, “Okay, I understand the basic options model. I understand these adjustments that we at Susquehanna make to the basic options model. And I pulled up the formula that we use to plug into the machines that are trading our automated strategies, and it has this additional factor in it. What does that factor mean?”

The person who’s digging in deep enough to pull up the mechanics in the machine to see how it’s treating and see how that differs from what we’re teaching them in an open outcry environment.

That person is not doing it because they’re getting paid an extra X dollars to do it. They’re doing because they just really want to beat the rest of the people in the room at their trade. They want to understand it well enough to know this also might matter. So there’s a drive and an intrinsic curiosity and an extrinsic one.

And then the other part that I’ve already alluded to is that they then talk about it. So when they are curious, they don’t have enough information to learn it on their own. But once they start talking about what they’re curious about and where their questions are, that they are finding the appropriate resources internally, and we have plenty of them to be able to point them in the right direction. To learn more, and then when they learn more. They actually have more questions, not fewer. Those are the people that have a big impact not only on their own trading, but we get to leverage those questions and really improve, best practices across the firm.

Todd tells the story of when he was on Jeopardy and after recording(but before it aired) all Jeff Yass cared about was that Todd bet the right amount in Double Jeopardy, joking that nobody cared if he didn’t know trivia but if he bet the wrong amount he shouldn’t bother coming to work on Monday. Jeff said “Just tell me what each person had at the end of double jeopardy, and I’ll tell you what the right bets, should have been going.”

Todd did indeed get it correct. He lets Ted try by setting up the problem:

Charles had 11,400. I had 10,200 and Peter had 1,600.

The other thing that’s worth knowing is that without knowing the Final Jeopardy category, everybody’s a favor to get it right. Figure out what you think I should bet with my 10,200.

The best decision he’s ever made:

I’ve got five children, and I’ve wanted to make sure that I have a relationship with each of them, so with each of them when they turn ten years old, I’ve done a one-on-one trip with just me and that child. It’s the best piece of advice I have for parents everywhere.

The best advice he ever received:

The advice was passed on to me by my eighth-grade English teacher, John Patterson. But the advice comes from Mark Twain, and it is his famous quote about travel, which is: “Travel is fatal to prejudice, bigotry and narrow mindedness, and many of our people need it sorely.”

It’s this idea that you cannot be closed-minded if you expose yourself to a broader range of people.

What life lesson have you learned that you wish you knew a lot earlier in life?

Nobody cares. [I mean this] in a really positive way. The goofy thing that you love — singing in a choral group with 130 people, maybe it’s going to be embarrassing. Nobody cares. Nobody’s looking at you. Nobody notices that stain on on your tie. Nobody else is thinking about you. They are all too worried about themselves. Do what makes you happy.

Don’t miss some of the fascinating sections I didn’t cover:

• why Todd majored in deaf studies
• the art vs science in trading
• Their new insurance business and some of the most fun or interesting bespoke risks that they underwrite
• Making markets in prediction markets (they are market makers on Kalshi) and sports
• The mistakes competitors who take LP money make and the advantage of permanent capital (You will recognize the thinking of If You Make Money Every Day, You’re Not Maximizing)
• Todd won his first night on Jeopardy and lost the second night. The betting strategy for the second night was trickier. Tune in to find out how that went and also why he answered the Jeopardy question with his roomate’s name.