Jeff Yass used to see options trading as a “game”. Now he sees it as a “mission from God”.
The billionaire co-founder of Susquehanna International Group has claimed he was a socialist during his student days at the State University of New York, but now he talks about capitalism with the zeal of a convert.
“Throughout history, the money lenders have always been viewed with suspicion,” he told a student group dedicated to the promotion of free markets in 2021. “When you’re against finance, you’re fundamentally against all human progress.”
Having flown under the radar for years, Yass has recently gained prominence as a major donor to Republican political candidates and as one of the largest investors in ByteDance, the Chinese owner of TikTok.
But despite the newfound scrutiny, less attention has been paid to the trading business at the heart of SIG’s “mission”.
Most large trading firms now make markets in practically every asset class. But a disproportionate number of the most successful started as options traders. And few have a longer or stronger record in the options market than SIG.
On a given day, SIG’s gross exposure across all its long and short positions is upward of half a trillion dollars. Most of the positions offset each other, meaning it has a much smaller net exposure, but the gross number — which has been rising steadily in recent years — is another demonstration of its scale. At the end of the second quarter, SIG held more than $50bn of stock and options tied to Nvidia alone.
“Most of the viable prop trading firms in the world today had their origins in options, and Jeff Yass is the elder sibling of all of these players,” said Paul Rowady, research director at Alphacution and a former portfolio manager at options trader O’Connor & Associates. “Susquehanna is an extension of Yass’s fascination with probability.”
Options are a type of derivative that give the right, but not the obligation, to buy or sell an underlying asset at a fixed price in the future. Notoriously complex to price and often highly risky, they have boomed in the retail fervour that blossomed in the wake of the Covid pandemic.
Yass started trading them as an independent trader on the Philadelphia stock exchange in the early 1980s and quickly made so much money he encouraged a group of his college poker buddies to band together and start their own firm.
“I called them and said this game is unbelievable, come on down to Philadelphia,” he said in a SIG-produced video.
Today, SIG is one of the few independent firms left standing from that first “golden age” of US derivatives trading. It has grown from the “Susquehanna Six” into an organisation of more than 3,000 employees, making it the largest dedicated proprietary trader in the world.
Even by the standards of the market making industry, SIG is secretive. The group has never taken in external capital, is managed through a maze of subsidiaries, does not publish financial statements, and rarely speaks to the press. When representatives do speak publicly, it tends to be on pet topics such as poker, golf or libertarian politics. It declined multiple requests to comment on this article.
However, analysis of regulatory filings points to a firm that is hugely profitable and that has expanded rapidly in the past few years, even as its competition threatens to catch up.
Options were booming in popularity during the 1980s following the launch of the first listed contracts tied to stock indices in 1983.
But pricing them efficiently is complicated, which created opportunities for mathematically minded traders such as SIG. Within months of its launch in 1987, it had made tens of millions of dollars with a well-timed purchase of put contracts — options that protect against a market downturn — shortly before the Black Monday stock market crash.
More than three decades later, SIG has been a major beneficiary of another surge in volumes. Volatility at the start of the coronavirus pandemic led to a leap in trading across a host of assets, but nowhere has the increase been more pronounced — and more sustained — than in options.
Investors this year have exchanged an average of 47mn US-listed options contracts a day, according to data from the Options Clearing Corporation, compared with 19mn per day in 2019.
The bulk of SIG’s core US trading is handled by a unit called Susquehanna Securities, which traded 2.7bn options contracts last year — more than the entire industry in 2007.
Several traders at rival firms said a shift to short-dated options — high-risk, high-reward contracts popular with retail speculators — had reduced the profit that market makers tend to make on each individual trade, but the increase in volumes more than made up for it.
SIG does not publish detailed financial statements in the US. But filings by one of its international units show “members’ equity” — a measure of net assets, and the best available proxy for trading firms’ retained earnings — has historically been highly correlated with revenue and net profits.
By the end of 2023, members’ equity at Susquehanna Securities was up 65 per cent compared with the end of 2019 and more than double the end of 2017. Susquehanna International Securities, which is based in Ireland, reported net profit of $430mn and members’ equity of $1.1bn in 2022, the most recent year for which data are available. If the domestic business were anywhere close to the profitability of SIS, it would have generated annual profit of well over $3bn in 2023.
Initially, most observers assumed the pandemic-era options mania would abate as lockdowns were lifted and housebound retail traders returned to their day jobs. Many prop trading firms struggled when volatility and volumes dropped in the aftermath of the 2008 financial crisis, but this time volumes have continued to rise.
John Rothstein, chief operating officer at Optiver, another large market maker, said there had been a permanent shift in behaviour.
“We take nothing for granted . . . market conditions will vary,” he said. “However, I do think there’s a fair belief among practitioners that the low volumes of the post-GFC period are probably gone.”
As those comments highlight, however, SIG is not alone in benefiting from the rising tide of options trading, and competition is growing.
Susquehanna Securities’ members’ equity has consistently been larger than the main US units of its rivals Citadel Securities and Jane Street (although Citadel Securities tends to pay larger dividends). But its main competitors — as well as smaller rivals such as Chicago Trading Company and the US units of Optiver and IMC — have been growing more quickly over the past five years.
Citadel Securities already claims the largest market share in the US options market on its preferred measure, and at the end of last year, analysis by Alphacution showed that the total value of Citadel Securities’ options market exposure surpassed Susquehanna Securities’ for the first time.
“There is a very good group of trading firms out there that are creating a very competitive environment,” said a senior trader at another market maker. “We do [expect] a long-term increase in investor participation and therefore long-term growth in markets. But on the other hand you also see that the cost of doing business rises very rapidly as well, so it isn’t easy.”
In its early days, SIG was wary about growing too fast. Co-founder Steven Bloom said in 1989 that the firm was concerned about losing the “intimacy” of one managed by a group of old friends.
Today, SIG maintains some remnants of its dorm room roots. Traders in its Bala Cynwyd, Pennsylvania headquarters still dress more casually than their rivals at Ken Griffin’s Citadel Securities, and it has a reputation for being insular. New traders, usually hired straight from college instead of poached from rivals, go through an intensive training programme to inculcate them in the ways of Yass’s focus on gaming and decision-making.
“You get paid a little less, but some people like that suburban lifestyle,” said an employee at a rival trading firm.
Staff turnover is low — helped by a history of using aggressive non-compete clauses. But even occasional exits have helped to spread Yass’s attitude around the industry.
Most famously, Jane Street — now one of Susquehanna’s largest rivals — was founded by a trio of former Susquehanna traders who emulated its attitude to secrecy, obsession with games, and empire-building ambition. Industry lore has it that Griffin first got the idea to create a market maker while he was a student in the late 1980s, after angrily finding out he had made less money than he expected on a trade against Susquehanna.
Any reservations about expansion have long since been cast aside. In its own words, the firm is now active in “essentially all listed financial products and asset classes”, from bitcoin trading to using its “strong fundamental understanding of weather prediction” to bet on energy and power markets.
Unlike Griffin, who started with a hedge fund — Citadel LLC — before building his market making firm Citadel Securities, Yass started with a market maker before expanding into areas traditionally more associated with a hedge fund.
The different heritages means Citadel’s securities business has a stricter focus on pure market-making strategies whereas SIG makes more directional bets that have more in common with Citadel LLC. As early as 1996, for example, Susquehanna established a unit called Heights Capital Management to manage direct investments into listed companies.
It is also a big player in private markets. Aside from its well-known investment in ByteDance, its venture capital private equity arms have invested in hundreds of groups including UK-focused retail brokerage eToro, while another unit lends to real estate developers and mid-sized companies.
Citadel Securities and Jane Street are both occasional investors in companies and projects linked to their core businesses such as new stock exchanges or artificial intelligence start-ups, but SIG has gone much further with its venture capital and private equity investments, pumping billions of dollars into projects from agricultural gene editing to the moving company College Hunks Hauling Junk.
One of the few expansion plans Susquehanna has discussed publicly is its attempt to become a powerhouse in sports gambling, particularly in-play betting — gambling on games after they have started. Golf and American football may seem like less obvious markets for a financial firm, but they combine several of the same features that initially drew Yass to options: hard-to-price, time-limited trades and potentially massive scale.
“It all ties back to his fascination with probability,” Rowady said. “The kind of question that you ask about the life of an option — what is the likely outcome here? . . . It’s the same question you ask about the outcome of a Texas hold ‘em game, or that is now being inserted into the sports world. What’s the probability that somebody catches this pass or throws that touchdown?”
So far, Susquehanna’s gambling efforts have been limited in scope compared with the billions it has spent in other areas. It formed SIG Sports Analytics in Dublin in 2016, whose staff include Yass’s son Doug, and is building out a team of quantitative sports researchers in Dublin and at its Pennsylvania headquarters. It makes markets on exchanges such as Betfair, but trading profits have been volatile, swinging from a $59mn gain in 2020 to a $30,000 loss in 2021 and back to a small profit of $3.1mn in 2022, the most recent year for which data are available.
The Yasses have said the real goal of the Dublin business, however, is to build expertise ahead of a long-anticipated relaxation of betting rules in the US. Sports gambling has already exploded in popularity since a supreme court ruling in 2018 overturned a long-standing ban, but restrictions on interstate betting have prevented the creation of nationwide betting exchanges such as Betfair in the UK.
The other obvious attraction of sports for Susquehanna is the fact that most other participants in the market are using far-less sophisticated techniques.
Given the intense competition for skilled quant traders and programmers, Susquehanna presents itself to prospective employees as a workplace that combines intellectual stimulation with fun — recruitment videos highlight poker tournaments, summer happy hours on its suburban campus and holiday parties in Philadelphia nightclubs. But Yass senior has not been shy about some of the more aggressive aspects of its culture, and has said one of his central tenets is “making sure you’re betting against someone you’re smarter than”.
A devotee of the Chicago School economist Milton Friedman, Yass has little time for trends such as environmental, social and governance principles, thinks the Federal Reserve’s control of the money supply is “a violation of our basic freedoms”, and opposes most regulations.
Asked about protections for retail traders during his 2021 speech to the student group, for example, he acknowledged that some would inevitably “bet more money than they can afford to lose”, but said it was the price of living in a free society.
“It comes down to do you believe in liberty or not,” he added. “If you’re not adult enough to go buy or sell stocks, if you don’t have the freedom to do that, how much freedom do you really have?”
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