Todd Simkin - Game of Trading at Susquehanna (EP.399)

25:43That I think is applying the art to the science. As you've been involved in training and educating traders that you brought in at a junior level over the years, what have you seen as the signposts of the ones that end up being successful? 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, they're all smart.

26:21They'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. And 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.

26:58And it has this additional factor in it. What does that factor mean? And the person who's digging in deep enough to pull up the mechanics in the machine to see how it's trading and to 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 it 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.

27:35So 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. How have you taken to the pursuit of different opportunities as you've grown and scaled?

28:07One of the things that I think we've been very good at is making sure that if we get into a business, we understand where we're going to stand in that business and we only pursue it if we think we can be excellent at it. We don't want to raise our hands and just be another participant in something that other people are doing. So we've had the good fortune of success. A lot of that, I think, from good practices and good policies internally, and certainly a lot of that from luck as well. And as we have been successful, that means that we've had more resources available to us that we can deploy in other venues.

28:41So we've moved into venture capital and private equity. We've moved into creating a sports trading unit that is trading on sports books in Europe, and that group is in Ireland. All of the growth has been in places where we have said we have a reason to think that we have internal resources that can support this in a productive way, and we're willing to put the capital behind it to be excellent at it. The other thing that's been really consistent is that in all the different products that we've gotten into, it looks different on its surface, but fundamentally we're talking about risk allocation or buying or selling risk at the appropriate price.

29:20Most recently in the last few years, we've moved into insurance, which is where I spend all of my time now is thinking about insurance products. And similarly, we've also recently did a partnership with CalSheft, where we are providing liquidity in event markets. Those sound like two different things. CalSheft's this binary payout on an exchange, and the events can be everything from financial events to things like Ariana Grande's album, Be a Top Seller. And that sounds very different than what I'm doing on the insurance side, where we're saying, what's the probability of two class four or higher hurricanes hitting Florida in the month of September?

29:58Those feel like very different risks. And fundamentally, they're different risks. But thinking about what we're doing, which is saying, we are doing some analysis to understand what the shape of that risk looks like, what our exposure would look like, how many times we're going to be to take on a similar risk and therefore diversify our exposure and then find the appropriate price for it. That's exactly what we're doing in the financial markets and have been doing since 1987. We are using the same grammar of trading and just applying it in these different markets. I'm curious how you think about this in a portfolio context.

30:31And let me preface that by saying, you mentioned getting into venture capital, which you could look at as buying call options. And you talk about insurance, which is selling put options. So when you put all this together, what's the frame of reference you bring to think about risk at Susquehanna as a whole? I like thinking about those products exactly as you talk about it. When we talk about it internally, we talk about our insurance business very much as being a short put business, which means basically the most we can ever win on the business is the price at which we sell the risk, but sometimes we can lose a lot.

31:05So we've got this asymmetric risk exposure that is one where we can lose a lot, but only ever win a little. and I agree that the venture capital business is one where you can only ever lose what you put into the business, what you buy in for, but sometimes you buy into a company like ByteDance and you happen to get in when it was not worth very much and now it's one of the biggest social media platforms in the world and you happen to be there at the right time. So you have this other piece of asymmetry where you can have huge upside, but you've got limited downside. That is exactly how we talk about the risks when we talk about it internally, but that does not mean because of the asymmetries that venture capital is a winning business because you've got this unlimited upside or that insurance is a losing business because you've got this unlimited downside.

31:47Ultimately, what it comes down to is appropriate price. So you can go broke in venture capital by always overpaying. If you were always paying too much just because you've got this big upside, eventually you just run out of money and these companies don't turn into anything and you've spent it all. Likewise, in the insurance world, there are certain risks where effectively we can have exposure to all of the outcomes at greater than 100 % probability. Then you can't lose. Even though you are short, you actually have no downside. So even though there are these asymmetries, what we ultimately care about at the end of the day is the fair value and making sure that we are either buying something below its fair value so that we have reason to believe that over the long run, with enough reps, we're going to realize it's fair value and win from where we bought it up to the average price that it's worth.

32:41And if we're selling something that we're selling it above the fair value. So if I sell enough of it, even though sometimes I'm going to lose the amount of money I'm taking in on all of the wins ends up paying for it. The other piece that I think is embedded in this that I haven't quite said is that these risks are uncorrelated to the extent that we are thinking of all of our businesses as a portfolio, in addition to all of our holdings being a portfolio. Our businesses being uncorrelated means that over the long run, I expect my profits to increase by the expected value of each of these businesses, but my variance, my standard deviation, only to go up by the square root of the number of businesses or exposures that we have.

33:23The more businesses we can get into profitably that do not have any relationship to our other businesses, the more money we make. So we actually end up being in a better position in terms of risk reduction by having multiple positions or by being in multiple businesses. I'd love to ask how you think about scale. Susquehanna famously has never taken outside capital. And now you can Google search and say, even though it's a big mystery, sort of how big Susquehanna is, it's very, very large. Yeah, I think that's fair. How have you thought about managing an ever-growing pool of capital? One of the really nice things is that the owners, the holders of the capital, have understood from the beginning the necessary interconnectedness in order to have scale.

34:08Structurally, things have to look different for a large organization than they do for a small organization. There's an analog in animal biology, which is that if you were to take an ant and blow it up to the size of an elephant, it would not be able to hold itself up. The cross-sectional area of the leg is not big enough to support the increased mass. In the same way, if we were to have the same structure for Susquehanna at 3 ,000 people that we had at 35 people, or at however much money we're deploying in all the businesses that we have around the world now, versus where we were when the company started, we would collapse under our own weight.

34:47Either we wouldn't be able to get anything done because things would get held up in processes, or more likely we would just lose sight of the risk that we had and therefore would not be able to appropriately manage that risk. As we've grown, the ownership of the company has done a very good job of finding the appropriate infrastructure scaling as well to be able to support all the businesses that we have. The greatest pool of employees that we have is not traders, it's technologists because so much of what we do relies on good quality technology infrastructure and business infrastructure that our technologists are able to build out for us.

35:26How do you go about recruiting both on the trading side and the technology side when there is this area of mystique and opacity about the business as a whole? To some degree, I think that the mystique might be beneficial. It is on the trading side. It seems like people who are interested, college students who are interested in getting into trading, don't know the details, but they do know enough to know that people who come to Susquehanna end up being successful, both in their career at Susquehanna and for those who choose to leave or for whom it's not the right fit, those people still end up finding successful careers elsewhere.

35:57So I think that there, the mystique has helped us. Candidly, I think on the technology side, it has hurt us. People know that if you go to Google, you're going to be working as a technologist and they think they know what that means. Whereas they say going into financial services, am I just writing some pricing code that somebody is going to implement and not fully understand where that goes? I think we've done a better job recently of really explaining the growth and the opportunity and our use of really cutting edge technology with our prospective technologists. I think to some degree, they're also learning that going to some of the big technology companies might not be as rewarding as they thought it was going to be.

36:33What they end up doing is optimizing for ad sales and not saving the world like they thought they might have been. But it's a question that our recruiting team is frequently asking itself. How do we not only attract technologists, but how do we attract technologists and traders to the suburbs of Philadelphia as opposed to New York City or Silicon Valley? I think people come because there's a great quality of life. There's a great quality of coworkers that we, I think, can sometimes take for granted just how wonderful it is to work with smart, interesting, interested people day in and day out. And we get to do that at Susquehanna in a really lovely way.

37:09And then there's a nice work-life balance. And because of that, it's not the right place for everybody. There might be people who say, no, I want to go somewhere where I'm going to work for 18 months, and then I'm going to hop over to the firm across the street and work there for 18 months. And I think that that's how I want to build out my resume, and that's going to prove that I'm marketable. We're not for you, and that's okay. But someone who says, I want to build a career and I want to be somewhere where I can make an impact on the company that I'm working for. I can feel like I'm growing and learning every day and I can really enjoy the people I'm working with.

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38:22So leave the days of disjointed deal management behind and define your future with SRS Aquium, the smartest way to run a deal. Learn more at srsaquium.com. That's S-R-S-A-C-Q-U-I-O-M.com. And now, back to the show. As the markets have evolved over the 30 plus years you've been at Susquehanna, You've seen, say, in the hedge fund world, this growth of multi-manager platforms. How do you view yourselves competitively to some of the bigger people that you see in the markets? We've been in a really nice position of having the most patient capital of all. One of the problems with hedge funds is that they have to frequently manage to not just quarterly reports, but monthly reports or even weekly and daily reports.

39:18So they've got to show that they're staying with the strategy that they have outlined for their investors and that they're showing regular returns. Our investors, as we've said, are the principals of the firm. So they understand the risk. When we take outsized risks, they understand what they are. They're the ones who are driving it. If I want to put on a$100 million insurance risk where the full exposure is to the winner of the Super Bowl, I'm not worried that if we lose on that risk that I've got to now explain to a whole bunch of people why we just lost their money. Instead, I'm calling one person and saying, hey, are you okay with me taking this risk?

39:57Here's the edge I think I have. Here's the rate at which I can sell it. And he says, yeah, that sounds good. And he's monitoring it and he's asking about it and he's checking on the health of the quarterback through the season, all the things that you think would happen when you have that type of risk on. But because we've been able to be patient, we've been able to stay in businesses and grow businesses that have had downturns. And at the same time, we've been able to shut down exposures where other people would say, sorry, we have to have our long short equity exposure because that's what we do.

40:27That's the business we're in. That's what we've told our clients we're going to be doing for them. So even though that's not the strategy that's optimal right now, we still have to allocate whatever percentage of our portfolio to that. We get to shift dynamically. We get all of the benefits of having a large capital base with all of the benefits of having a small number of decision makers at the top who are weighing in. They're not putting artificial rules in place that we might've seen if we had ever taken outside money. So when you think about trading, even though the long duration capital is an advantage, you still think about relatively shorter timeframes.

41:02What is it about the traders at Susquehanna that have made the firm so successful in an extremely competitive market? I think there are a few things. One is that we focus a lot on the decision process, the information available, how we use that information, and then what trade we made, all of that way before we discuss the results. I think a lot of other people have that upside down. They say, how did you do? If you made money, great, keep doing what you're doing. If you lost money, that means that you took too much risk and that's a bad thing. Whereas our traders are focused on the decision process and the expected value first.

41:41And because of that, we don't do things that I've seen some of our competitors do that we would think would bleed away some of those profits. So if you do all of your work, there's no selection bias. So there's no reason to think that you've gained new information by being able to enter a trade and you got to buy an asset for $10 that you think is worth$20. That seems great. And then somebody comes along and they say, they'll buy it back from you for$19. Do you want to sell it? A lot of people at that point would say, well, that's great. I bought it for 10. I sell it at 19. I make$9. I put it in my pocket and I go away pretty happy and I sleep well tonight.

42:15Nothing bad can happen tomorrow with my position. I'm out of it and I've just made my money. And at S. Quahana, we'd say, no, if anything, if we're able to buy more at 19 and we still think it's worth 20, then we would. The fact that we got to buy it for 10 is great, sort of confirmed now by the fact that someone's willing to pay 19, but that doesn't mean we want to sell it and lock in this profit just because you have an opportunity to close a position. That is part of the culture of the firm. We're not going to give something up just to feel better in our small individual portfolio, which is part of this much, much bigger firm-wide portfolio.

42:50If the whole firm had the opportunity to do that and gave up 10 % of our profits every time we had a profit-making opportunity, that would be really costly. Somebody else is on the other side of that trade, picking up all that extra money that we'd be giving away. So part of the culture of the firm is one in which we are finding edges wherever we can find them, but then capturing all of it by either holding to maturity or holding to expiration or closing at that inappropriate rate when we have either new information or where the markets have changed. You and I had talked before about Roger Federer's recent graduation speech at Dartmouth College, where he's played whatever it is, 1 ,500 some odd matches of tennis over the course of his professional career, and he's won 80 % of them.

43:35But if you look at the number of points he's won, it's barely above break even he's won 54 of his points and you say well how can you make a career winning only 54 of anything it's because those 54 accumulate in a really nice geometric way to lead to winning 80 of his matches in the same way if we're winning on 54 of our trades and not doing something stupid like giving away 10 of those just because we want to get out of risk then we get to accumulate those 54 % over and over and over again across all of our hundreds of traders and our dozens of different trading areas and really accumulate the benefit over the long run.

44:14And that's what I really mean by the benefit of having the patient capital is that they're not saying close out of your risk. Let me see the closed risk sharps ratio return on this one position. Instead, I want to see us maximize our return over the firm. When you bring that very analytically rigorous mindset to all the trading. Where has luck played into the history of Susquehanna? One of my favorite quotes is a Thomas Jefferson quote, which is, I'm a big believer in luck, and I find that the harder I work, the more of it I have. And I think that part of it is that. That said, there have certainly been times where we've been objectively lucky, that the firm started in May of 1987, and in October of 1987, we had Black Monday, the stock market crash.

44:58and that would seem like a bad time to have gotten into finance. Anybody else who went into a trading business in May of 87 was very, very sad on October 19th. And certainly not the case that we as a firm were happy about the stock market crash. But one thing that was part of our philosophy from the start was looking at stock distributions and index distributions and saying that the Black-Scholes model, which is literally Nobel Prize winning math, this is amazing stuff, has assumptions built into it that we know are just wrong. Among the assumptions that are built in is a normal distribution of stock returns, which would lead to a log normal distribution of stock prices, which for any of the non-mathematically minded people, you might want to tune me out for the next minute or two, but that means that it's a right skewed distribution.

45:47And what that implies is that the median and the mode will be below the mean. Again, putting that in layman's terms, most of the time you would see the market drift down a little bit. Day after day, you would see it down a little bit. And sometimes you would see it just boom. You would see it double in value. What we've actually experienced with stocks is the opposite of that, that most of the time stocks are up a bit, that your best guess on the value of a stock three months from now is that it's going to be up a little bit more than where it is today. And sometimes it's going to be down a lot.

46:22And that's a left skewed distribution. And in order to use the Black Shulls model and get that pricing, you either have to lie to the model about what the volatility is at different strike prices or find some other adjustments to make to say, we think that the value of these out of the money puts, this downside protection, these options that pay more when the stock crashes, we think the value of that is higher than what you would find in the Black Scholes model. And we think that the value of the out-of-the-money calls, this is before meme stocks and FOMO, so this might have changed a bit, but we think that these out-of-the-money calls are going to be overvalued by Black Scholes, and therefore we'd be willing to sell them at the Black Scholes value and buy the puts at the Black Scholes value.

47:04That was the philosophy from early on, part of the observation from the founders of the firm. And because of that, they said, we've got this big option portfolio. Let's make sure that we are never short the downside. Let's make sure that if anything, we are long the downside, because that's the protection we need to make sure that we stay in business if we're right about the appropriate shape of the distribution of stock returns. They certainly didn't anticipate that that was going to happen five months into the life of the company. But five months into the life of the company, they ended up having a big win and really put themselves on firm footing financially and had the additional benefit that at the time when they were now in a better financial position because they had protected their position appropriately, other people who had not protected their position appropriately were out of business.

47:48They'd lost their money in the stock market crash. So now they were in a better financial position at the same time that there were more opportunities because there were fewer competitors in the market. Similarly, I alluded to being fortunate enough to invest in ByteDance when it was a several million dollar company before it became a several billion dollar company. It'd be great in hindsight to say, we are so good at figuring out what social media platform is going to be the winner take all platform that we knew was going to be TikTok and ByteDance. But that's not true. This was part of a portfolio.

48:20It was part of a collection of risks that we were willing to take. We thought at the appropriate level that we thought we're getting paid an appropriate amount for the risks that we were taking. And we happened to get tremendously fortunate there. That ended up outperforming our expectations, certainly. And we've had other places, certainly, where we've gotten unlucky. I think on balance, we've won more of our coin flips than we've lost, that we've gotten lucky in a few places. And I think that to the point of my Thomas Jefferson quote, I think that we've worked hard to put ourselves in position to be on the right side of luck when it's presented itself.

48:51When things have gotten wacky, we've been in a spot where we win to the wackiness, not lose to it. But even with that, sometimes you get lucky. I'd love to dive into some of the strategic initiatives you mentioned earlier with that lens of how you think about it. Venture capital is a great place to start. What is the framework that you've used to think about this concept of expectancy within venture capital? You're absolutely right that in some ways, this is different than the framework for expected value in option trading, for example. If I got to stand in a crowd and observe volatility and things like that, I'd be pretty comfortable trading options on a company if I didn't know what the company did.

49:30I wouldn't recommend it. It's not a great strategy, but I'm protected by the confines of the market. There's a lot of visibility into what the world thinks. There's a lot of visibility into arbitrage bounds on what something could be worth. And I can use that to my advantage if I'm trading options. Venture capital is very much a figure out what the current value of the space that this company is in. So technology or social media, whatever it might be. And then how good is the technology that this company has? And then how good are the people who are managing this? Because for the most part, I'd argue the most important thing with all of the venture capital and growth equity companies that we've invested in hasn't been the technology, although it's mattered, hasn't been the business that they're in, although it's mattered.

50:13It's been the people that have been running it because ultimately they need to be able to adjust appropriately when market conditions change. They need to be able to pivot at the right time and stay the course at the right time and all the things that go into running a company, not for today, but for the future. So betting on the right people has been a big part of what we've done there. That means that the skillset that we need to bring to bear in order to be successful in venture capital is one of being able to correctly assess talent, find the right people, remove people from portfolio companies who shouldn't be there and bring in better people who we think can move the business along where appropriate.

50:51All of these things are a different skill set than somebody that is trading in trades that are measured in seconds or microseconds or nanoseconds. It's just a very different timeframe and very different set of information that you were assessing. At the end of the day though, the question that we have is, okay, we've done the assessment. Here's what we think the prospects look like. Here's what we think the range of outcomes could look like. So here's what we think the distribution of our exit could be, our exit being where can we close out of our risk. With all that said, are we being paid an appropriate amount to take on this risk?

51:27It's the same question at the end of the day. It's just with a very different set of factors that go into us building out what we think the expected value is. The process for figuring out the expected value also takes a lot longer in venture capital. We're calling suppliers and calling customers and figuring out what the long-term can look like as opposed to looking at the immediacy of relative value between different stocks on the stock market or between different option series in the options market. How do you think about your confidence in a type of assessment that's so much more qualitative than say options trading?

52:02Yeah, it's funny. You said confidence and I wasn't sure if you mean strength behind convictions or if you meant what are the bands around how wrong you could be. Confidence as in statistical confidence intervals versus confidence as in your bravado and walking in and saying, I just hit a home run with this investment. And why I say it's funny is because as I'm sitting here parsing your question, I realize it's the same question. The swagger piece comes from how sure you are that your bans about your uncertainty are appropriate. This now comes back to the asymmetries of the payouts is what we are unsure about is sometimes the upside or the exit.

52:40And I think, again, this is where patient capital has really helped us. If we had entered our ByteDance position and it was in a fund where the investors needed to get paid back in five years, we would have closed out of that position and made a little bit. It would have been happy day in the office and we would have been out of the position. And then eight years down the line, they would have seen what ByteDance became and said, oh my gosh, could you imagine if we had held on to that? So we get to revisit these decisions with new information to update our confidence over time. And that's part of my answer to your question of where do we get the confidence from is that we don't have it on day one.

53:15Sometimes what we are doing is R &D type investing. We are putting money in so that we have an embedded option to keep our money in. That what we are buying is in the parlance of economics professors, a real option. And the real option is that we don't have to sell when we get to the next checkpoint, when we get to the next quarterly report or when we get to the next management meeting. We get to then reassess with all of the information we've had up to that point and whatever the then current state of the world is. So we get to improve our confidence over time because we get more data, more feedback, more information, not just about the company in which we've invested, but either our portfolio of companies or their sea of competitors.

53:56And we get to see what the competitive space looks like over time. I'd love to turn to prediction markets and what you're doing with CalC. How are you participating in those markets? So Kalshi's got a great product. We've been talking about binary outcome futures products for, gosh, at least 20 years. And a big part of it was finding the appropriate technology for it and finding the appropriate outreach while also doing it in an appropriate regulatory and compliance environment. And Kalshi has solved for those problems in a lot of really good ways. They've done a good job of finding ways to quickly register new products with the CFTC, the Commodity Futures Trading Commission, so that there has been a rapid turnaround when people have risk that they want to transfer on the Cauchy platform to them being able to list it and it being tradable.

54:44The binary outcomes, and not all of their products are binary, but a lot of them are, is really nice in terms of interpreting what it is that you are trading. So by binary outcome, I mean that the trade will settle at a price of either zero or one. So I'll use elections as an example because they are not tradable on Calci and they are not tradable by the CFTC. So this way I'm not talking about an actual product, but Ted, let's say that you and I are running for next president of the United States, because I don't think anyone really wants to talk about the actual politics right now, but let's say it's a two man race between you and me and we can go on Calci and look at our pricing and you're trading at a price of 67 cents that's going to settle to a dollar and I'm trading at a price of 33 cents.

55:26That means that implicitly you have a 67 % chance of winning and I have a 33 % chance of winning. If you were trading at 67 cents and I was trading at 40 cents, it wouldn't make a whole lot of sense because there can't be 107 % chance that one of us is president. Likewise, it wouldn't make sense if you were trading at 67 % and I was trading at 20 % if we were the only two people that were possible to be elected. So having a price that you can immediately turn into a probability really leads to improved communication about the underlying risk in a way that you don't have even in the financial markets.

56:00What does it mean for a stock to be trading for$117? You have to make some assumptions or build in some other bounds in order to understand what pricing means in any other asset class. This asset class is super clean. We know very clearly what bet is being made. We know very clearly what opinion is being expressed in the marketplace based on the price. And then we can ask ourselves again if that's the fair price. What we are doing is usually not looking at prices and deciding if it's fair, but we are showing two-sided pricing. So in the case where you're two-thirds to be our next president, which honestly, I think everybody listening would rather hear to be true, in that case, we might be willing to say we'll pay 60%.

56:42We're willing to say that we think it's greater than three-fifths chance, and we're willing to sell it at 75%. So that means that we think in the long run, we're going to come out ahead if we're able to trade on those markets. But also the world gets to say, I think that Ted's a great guy. Who wouldn't want him to be president? I think he's 80 % to win. I'll buy 75%. We're showing two-sided liquidity. And because we've partnered with Cal Sheen and agreed that we are going to show the markets we show are a lot tighter than 60 % to 75%, but because we're willing to show two-sided of liquidity. The world gets to come in and express an opinion and get paid if they're right about it.

57:17And we've helped drive volume and eyeballs to the platform. Is that similar to how you're participating in the sports betting markets? That is exactly how we're participating in the sports betting markets. It is the same thing. We're doing that in, like I said, with our sports trading group out of Dublin. We're doing that on European sports books. The big driver behind that really was the Supreme Court decision of 2018, where up until then, by law, the only place you could play sports bets were in Nevada, which didn't make any sense. So New Jersey and a bunch of casinos sued. And the ruling was, each state gets to regulate this on their own.

57:53If Congress wanted to make a law at the national level, they could, they haven't. Therefore, this is a state's rights question. Each state gets to do this. We said, well, if that's the case, lots and lots and lots of states are going to come around and find appropriate ways to manage sports betting. We've already seen since 2018, about$250 billion has been bet outside of the state of Nevada. We've already seen that people are finding legal access to these betting markets. We want it to be in a position where when that happened in the United States, we had already established the right systems, the right compliance, the right risk management, all the things that we talked about before with how do you grow and maintain the appropriate infrastructure.

58:31We did that in a test market with Europe so that we'd be able to do it in what we thought was going to be a pretty big market in the United States, and we'd be ready for it when it came. What's the fundamental expertise that you need to bring to bear once you have the systems in place in a market like sports betting to make sure that you're accurately assessing odds of whatever the bet is? This is again that marriage of art and science. So some of it is being a good handicapper, being able to look at Jared Goff and decide how strong is he as a quarterback with this certain receiver core. That's part of it.

59:06And that is what we would refer to is the inside look, the inside view. Then the other part that matters a lot is the outside view, which is just sort of understanding statistically how well do offenses do in general against the various teams that the Lions are going to play this year. You need to understand all of the statistical relationships, how much variance there can be in that, and then applying the appropriate art in doing the handicapping with the inside view. So it's a combination of really making sure that you understand the underlying risk and then tailoring it to whatever makes this risk unique as opposed to another risk with a different team, different player, different score, whatever it might be.

59:46As you've more recently dived into creating Sig Re, we'd love to hear the impetus for that and what's happened. Yeah, so Sig Re is our Bermuda-based reinsurance company, our class 3A reinsurer in Bermuda. And we got into that business partly because of our sports book, partly because of risks that we were seeing there that we could not put up as sports risks, but that really needed to be handled as insurance and therefore needed reinsurance coverage if we were going to take on the risk. And partly from other businesses that we had that, again, in order for us to take the risk, we could sometimes take it on as a derivative, but most of the time we were going to have to take it as insurance.

1:00:23We said, in order to do this, we could either pass on taking these risks, and we don't want to pass on it if there's opportunity, especially when it's uncorrelated to the rest of our business. And we said, the right thing for us to do is to set up a reinsurer because that reduces our costs, lets us take all of these risks that we want to take, and we get to do it at a lower cost than by renting out a seg cell from another insurance manager or whatever it might be. That was the start. That was like, why should we show up in Bermuda and set this up? The follow-up then was, okay, now we have it set up.

1:00:55Now we've built this processor for this risk, wouldn't it be a shame to let it sit idle? Shouldn't we find ways that we can drive risk through this engine that we've built, especially if we feel comfortable analyzing it, especially if we feel comfortable that we're going to be able to make a profit on our underwriting as most insurers really make their money, not on the insurance that they write, but on the assets that they gather. They take in all these premiums and then they go and invest those premiums and they get a return on it. For us, any premium that I'm using, any assets that I'm using, I'm taking away from our trading business.

1:01:28So I need to make sure that I'm getting a return on that by appropriately underwriting it. And the good thing is because we built this sports analytics engine, any risk that we found in the insurance space that was related to sports, I had a big team of underwriters, not technically insurance underwriters, but effectively people who are able to underwrite that risk that I could rely on for appropriate pricing, if it was an economic risk, like we've looked at a couple of different commodity risks that we were insuring. Well, I've got a commodity trading desk that is minute by minute, day by day, looking at commodity markets, understanding the fundamental drivers of value that I could turn to and talk to about those risks.

1:02:07We have some weather derivative risk that we take. Well, we've got a weather derivatives trading desk and we have a meteorologist on staff. And I was emailing with our meteorologist this morning because a company is looking to run a promotion where if it snows on a certain day, then they're giving away products for free. Well, in order for me to know how to analyze that, I want to make sure that I'm talking to an expert. And again, I've got it on staff. So building out SIGRI was really a product of saying, we already have the analytical resources in-house that we can rely on. Now all we need is to get exposure to the appropriate risks and build relationships with brokers and MGAs, which are managing general agents or managing general underwriters, all the people in the insurance world who do not necessarily have a tie to the finance world, build those relationships, but then we get to still bring the financial resources and capital to bear that we have from the parent company.

1:03:01What are some of the most fun to talk about risks that you've underwritten in Sigri? So I can't talk about specifics because of NDAs, but in general, I'll say that the most fun risks that we have are related to sports outcomes. For me, they're the most fun because I love thinking about and talking about and pricing the sports outcomes. And it's usually not the fun of if this person wins a major, they get paid a million dollars. That's fine. And we love taking those risks. We're happy to talk to the sponsors about that. Those are great risks and enjoyable. But the ones that I really like are the promotional ones, like finding ways where a company is better off because they get to tie their fortunes to the outcome of something like a sporting event or a lottery or something where they get to really multiply and magnify the benefit that they give to their customer.

1:03:51An example might be that you sell widgets and you know that you sell$100 ,000 worth of widgets a month. And in order to attract more customers, you decide that you're going to give everybody a 10 % price reduction on your widgets. And you're hoping that because of that, you're going to go from selling 100 ,000 widgets to 120 ,000 widgets because of your price reduction. And I say to you, how about this? How about you don't give a price reduction? Instead, the$10 ,000 you were going to spend on that, you give that to me, and I will now backstop your promotion. And your promotion is going to be that if the Eagles win the Super Bowl, everybody gets their widgets for free.

1:04:29From your perspective, it costs you the exact same amount of money, except that now you're not hoping to go from$100 ,000 to$120 ,000 a month. You're hoping to go from$100 ,000 to$500 ,000 a month because anybody who ever was in the market for a widget, now's the time to buy it because embedded in it is this call option, this outsized payout that they might get for an outcome that everybody wants anyway. Who doesn't want the Eagles to win the Super Bowl? And particularly if you're in the Philadelphia area selling this, that is definitely the case. That promotion does not sell well in Chicago for the Eagles to win the Super Bowl, but it sells great in Philadelphia.

1:05:06So you get to really tailor it to your audience. You get to say, you guys are going to care about this. Let me run a promotion that's going to be exciting. And then we get to help you both develop that promotion. And you might say, you know what? I love the idea, Todd. I would love to do that. I can't afford 10 % of my sales to do it. I can only afford 5%. So I said, okay, let's keep it as the Eagles to win the Super Bowl, but they have to win by seven or more. And now it's like, okay, you get to run what looks like almost the exact same promotion. It just has the extra little wrinkle in it, but it's now marketable at a price that you can absorb.

1:05:37And it's still an exciting way to run a promotion. Those are the most fun for us. And we're really making a push to get that idea in front of as many people who have not thought about running a promotion like that and really magnifying, upsizing the promotional window that they can give to customers. Tom, what does SIG look like in five or 10 years from now? It's a great question. And the only thing I know about my answer here is that I'm going to be wrong, which is exciting. If you had asked me five years ago, I'd be wrong about where things have grown today. The one thing that I would have been right about then, that I think I'll be right about with this prediction, is that we are going to stay dominant.

1:06:10That because of our approach to risk management, because of really a conservative approach to growth, where we're not leveraging other people's money, where we're not leveraging the future in order to do stuff, but we're really growing from what we have, that we're going to be bigger. We're going to stay dominant in the areas that we're in. And we're going to keep finding unique ways to take risk. And I think we're going to keep having fun doing it. All right, Todd, I want to turn to a couple of closing questions. Before that, I want you to take me way back as an example of how you think and talk about your time on Jeopardy.

1:06:42Okay. Yeah. So this is over 20 years ago now, but I was fortunate enough to be a contestant on Jeopardy. And it's not just how I think, but I think this is a good indication of what matters in the decision framework at Susquehanna. At the time, Jeff Yoss, one of the founders of Susquehanna, walked into my office and said, look, nobody cares if you know anything about American history, but if you mess up the betting, don't bother coming back on Monday. And I knew that he mostly didn't mean it. And part of him would have been pretty upset if I had messed up the betting. When I got back from my trip to LA, he walked into my office and said, I know that you can't disclose the scores or whatever.

1:07:20Just tell me what each person had at the end of double jeopardy. And I'll tell you what the right bet should have been going into final jeopardy. I was on for two nights. So I won my first night and I lost my second night and I told him the score. So at the end of the first night, Charles had 11 ,400. I had 10 ,200 and Peter had 1 ,600. And the other thing that's worth knowing is that without knowing the final jeopardy category, everybody's a favorite to get it right. I'll pause the beat in case you want to figure out what you think I should bet with my$10 ,200. So the thought is that if you're Charles, so if you're the guy in the lead with$11 ,400, looking at my$10 ,200 has to be afraid that I'm going to double my money.

1:08:06And if I double my money, I go to$20 ,400, which would mean that he would have to bet more than$9 ,000 in order to cover my double. If he does that and gets it right, then me doubling up doesn't do me a whole lot of good. If he does that and gets it wrong, then he'll have something just below$2 ,400. If he bets$9 ,001, he'll have$2 ,399 left. So I have to make sure that I bet enough that even if I get it wrong, I still beat him at$2 ,399. But there's also Peter to think about, the person in third place with$1 ,600. And if he gets it right, so if he doubles, if he bets everything he gets it right, he goes to 3 ,200, it would be really tragic to get it wrong, beat Charles who got it wrong, but lose to Peter who doubled.

1:08:53So I have to bet so that I still beat Peter if he gets to 3 ,200, which means that for me being at 10 ,200, I have to bet just under 7 ,000 so that I will beat Peter even if he gets it right. If Charles gets it right, it doesn't matter what I bet. So I need to beat Peter if he gets it right or Charles if he gets it wrong, which meant that I wanted to bet$6 ,999, which is exactly what I bet. And fortunately, exactly what Jeff said I should bet. So he and I were in agreement on that. And it happened exactly that way. Peter got it right. Charles got it wrong. That took me to the second night where after a tragic loss in Daily Double, where I added a letter to one person's name.

1:09:36So going into Final Jeopardy, instead of me being in the lead, like I would have been if I had gotten that daily double right, I was behind. So I had 3 ,600 and both of the other players had 8 ,200. So now you have this different question of what do you do knowing that they are tied with each other and I've got 3 ,600. So here my mind was spinning a bit more. Any thoughts? I would think you have to get into the conditional probabilities of the likelihood of you getting it right and them getting it wrong. But if it's all the same probability, you'd probably bet zero. And I bet zero. That's exactly what I did.

1:10:15So I said, they have to worry about each other. Again, it would be pretty bad for either of them if they didn't bet at all. They both got it right and still lost. So I figured that they're both likely to bet everything. If they don't bet everything. It's because they're betting enough so that they beat me if I double up anyway. So doubling up doesn't do me any good. And there's some chance that they're going to bet in such a way that they beat me if I get it wrong, no matter what I bet. So betting zero felt like the right way to go. And that way, I also got to give an answer, which was a nonsense answer, which was my college roommate.

1:10:45I got to ask who is Clay Spencer, who was my college roommate. So yeah, I bet zero. The other two both got it wrong. One of them bet 8 ,200. They bet their full amount. And the other person bet$1 ,800, which would not have won if I had doubled up. It didn't make sense to me at all. And I was more perplexed by that than I was by the actual answer to the question. And we were walking back to the green room afterwards because they film show after show. And I turned to her. Her name was Jen. I said, Jen, why did you bet$1 ,800? I'm trying to make sense of your bet in Final Jeopardy. And she said, well, because then if I got it right, I would have had$10 ,000.

1:11:22And$10 ,000 is a lot of money. Totally true. That's absolutely right. If you are the winner, you walk away with the money. And I could see that that was part of the answer. But I was like, but you only get that if you win. I could not make sense of it. And that was one of the disconnects between going in thinking like a gambler, thinking like a better, and going in thinking like most people, which is a very reasonable thing. $10 ,000 is a lot of money. All right, Todd, I want to ask you a couple of closing questions. What is your favorite hobby or activity outside of work and family? I've got two answers to this.

1:11:51One is my solitary answer. The other is my group answer. So if I'm alone doing something, I want to be hiking out in nature. I love a solitary morning hike before anyone else is even on the trail. If I'm going to be with people, it is singing. I sing in two core groups, one that has 130 people in it, another one that has 40 people in it. And being in a room where I get to turn off my phone and not think about work or family or anything else other than the difficulty of singing a Verdi oratorio is how I like spending time with others. What's one fact that most people don't know about you? One thing that I don't talk as much about is I think the best decision that I've made in my life, which is as a father, I've got five children and I've wanted to make sure that I have a relationship with each of them.

1:12:36So with each of them, when they turn 10 years old, I've done a one-on-one trip with just me and that child. I think that's something not a lot of people know but it's the best piece of advice I have for parents everywhere. That's great. What's your biggest pet peeve? People driving too slow in the left lane on the highway. And too slow, by the way, is just slower than the car behind you, no matter what that speed is. Which two people have had the biggest impact on your professional life? One is Arthur Danchik, one of the founders of Susquehanna, who has been an amazing mentor for me in many ways for many years.

1:13:14But the way he had probably the biggest influence was early on in my career where he introduced me to another trader when I'd been trading for three months and said, Todd's going to run the firm one day. Hasn't happened yet. I'm still going to hold him to it. But the vote of confidence mattered a lot throughout times of doubt in my career. And the other one is the person who has very much been the partner in allowing me to develop my career and spend the time and energy that I have on it, who is my wife. We've had the philosophy from early on that she was going to maintain and manage our home life so that I could spend the time necessary to build the career that I have.

1:13:50So Arthur Danchik and Shelley Simpkin. What's the best advice you've ever received? So it was advice 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 on these accounts. So this idea that you cannot be closed-minded if you expose yourself to a broader range of people. Todd, all right, last one. What life lesson have you learned that you wish you knew a lot earlier in life? Nobody cares in a really positive way.

1:14:29The goofy thing that you love, singing in a choral group with 130 people, maybe this is going to be embarrassing. Nobody cares. Nobody's looking at you. Nobody notices that stain on your tie. Nobody else is thinking about you because they're all too worried about themselves. Do what makes you happy. Well, Todd, thanks so much for giving us this great insight into the thinking and activities at Susquehanna. This has been an absolute pleasure. Thank you for your time, Ted. Thanks for listening to the show. To learn more, hop on our website at CapitalAllocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more.

1:15:12Have a good one, and see you next time.