Kenneth Griffin On Artificial Intelligence At Citadel; Calls Flash Boys “a great piece of fiction”

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Ken Griffin of Citadel spoke at Georgetown University  on September 12th 2017 about a wide range of topics including the future of the hedge fund industry – we have the transcript and video of the talk below – please note that this transcript may contain mistakes and is for information purposes only

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Here is an interesting excerpt:

[00:12:26] So the high frequency nomenclature is one of those those words that has taken on a very interesting character. In the days and age of the Flash Boys Book a great piece of fiction written by Michael Lewis wrote fascinating book and actually that nomenclature started the citadel. My colleague who has a physics background thought about the frequency of our trading strategy isn't this high frequency strategy this is a medium frequency strategy and this is low frequency sound because physicists use words like frequency and that that word caught on across the industry for better or for worse in the high frequency space for example in U.S. equities there's really two firms that make any money of note the whole story.

Mike Lewis writes is already ancient history. The end users have become much more sophisticated accessing capital markets. Goldman's algorithms are better credit suisse arms are better they've gotten better at how they actually tactically execute orders there's less money in market making as the banks have gotten better order execution. And then your traditional competitive dynamics between a number of firms have ended up driving most of the rents out of the marketplace and today for all intents purposes were down to two firms that make any money of note and high frequency trading and U.S. equities. This is how competition should play out. And we've gotten to a stable equilibrium United States right now which is a healthy one. Perhaps one day there'll be no money made by the high frequency shops as the Goldmans and Credit Suisse and Morgan Stanley get even better at strategies to execute customers. So the profit pool there's not. Never was the billions of dollars that Mike Lewis alludes to. It's a number that's order of magnitude in the U.S. (?) market maybe a billion billion five. It's a big number.

Video segments are from Investors Archive

Video Segments: 0:00 Introduction 5:45 What does Citadel invest in today? 6:34 How did you get started trading in statistical arbitrage? 8:24 Are algorithms better than human investors? 10:02 Role of Machine Learning and A.I in supporting human judgment? 12:08 What's the capacity for different strategy? 14:39 Are the technology advances more helpful than in quant? 17:50 How do you maintain meritocracy and culture? 19:17 Advice for going into finance? 21:22 Long/short term goals? 24:06 Start of Q&A 24:16 How is the volatility so low in 2017 compared to the political volatility? 28:46 Where do you see the future of active management? 31:06 How does Citadel compete for talent with tech companies? 35:12 How do you think about the change in liquidity? 40:23 Advice for starting a fund?

Good evening. I'm Rina Agawam vice provost for faculty for Georgetown. And I'm also the Robert McDonough professor of finance and the director of the Georgetown Center for Financial Markets and Policy. So today we are delighted to welcome and start our inaugural leaders of global finance speakers series. This is hosted by the Center for Financial Markets and Policy and also by the Stenton distinguished leaders Leadership Series. Just a little bit about the center the Georgetown Center for Financial Markets and Policy provides top leadership for global finance. The center offers innovative influential and thoughtful commentary conducts research that impacts practice and policy and we host dialogues and conferences involving scholars practitioners and policymakers to the center. We contribute to an informed public discussion regarding critical issues related to global financial markets. We invite you to learn more about the center on our Web site. So the series the leaders of global finance. This series brings together influential caulked leaders from the world of business to discuss trends in global financial markets and for this audience. They also talk about the skill set needed to succeed in today's global business environment. We are delighted to have Mr. Ken Gryffen as our inaugural speaker. Ken founded citadel in 1990 and has since served as the firm's CEO. Today's Citadel is recognized as one of the most respected and successful investment firms in the world. Citadel invests across all asset classes and is one of the largest hedge funds I went to the website and and the mission statement reads something like this.

[00:02:29] The firm's mission is to have a positive impact on the global economy by deploying capital to reach its fullest potential. So for this audience I want to read out a few other comments. Citadel has been listed as one of the best places to work for young college graduates. Recent college graduates. And why is it a great place to work. I picked up some comments from recent graduates who have started working at Citadel. Here's what they said. So once said the three words that I would use to describe the forum's culture are meritocracy innovation and hustle. Another said I've been challenged with a tremendous amount of responsibility since my first day at Citadel. While the learning curve is steep just like it is at Georgetown it has been a rewarding experience that has allowed me to make important contributions from the very beginning. Another one said Citadel has great perks a speaker series featuring top entrepreneurs and top authors. We participate in a number of team sports volunteering community programs a great tuition reimbursement program and it goes on and on. So those a few will be looking to go out in the job market. This is one of the best places to work. I want to introduce professors A.S. and Doug Dillard. Teaching the hedge fund investing class to MBA. And they are very successful hedge fund managers themselves. They have. It's really amazing for us to have faculty like Doug and teaching our students and then on top of that bringing in this great group of speakers for the benefit of our students here at Georgetown. Now I'm going to introduce Professor ideas and Professor dilute and they are going to lead a conversation with Mr. citadel.

[00:04:50] I could go on and on about Citadel and about Mr. Griffin but I think this audience knows quite a bit about both the citadel and Mr. Griffin. So I'll hand it over to Doug and Ann. Please join me in welcoming our speaker.

[00:05:14] Thanks Rena and Ken. Thanks a lot for coming. Really appreciate it.

[00:05:18] One thing people don't know about is that he was the other half of a very successful peptalk team four years ago in south France where we dominated a lot of very serious including the World Champion Patang player so that's a little known fact about about Parvin and have never disliked by like that before.

[00:05:36] So I want to thank Ken for coming and who is teaching this class to be as a start and then I'll I'll chime in. So for those of you.

[00:05:47] Who don't know Citadel and its investments Prats can you could start with explaining what Citadel invests in today sure.

[00:05:56] So at Citigroup we have two large areas of focus.

[00:06:00] We were on a just shy of 30 billion dollar hedge fund that invest capital across five core strategies equities macro quantitative strategies commodities and credit and then Infidel's securities we run one of the largest market making efforts in the world. We are the largest trader of equities in the United States and in most foreign countries and one of the largest traders in the fixed income and foreign exchange markets globally.

[00:06:28] So the two key areas of focus at Citadel 2017 and Ken you are known to have started your career by taking knowledge of the computer sciences and applying them to the finance market to identify value and convert a wants and warrants. But how did you get started trading in this strategy of statistical arbitrage.

[00:06:52] So we entered into the statistical arbitrage business in 1994 and it was really at the pushing of Frank Meyer who backed me out of college. Frank was a very strong advocate of trying to expand the scale and scope with a platform. And I met a gentleman David Michel who ran a statistical arbitrage strategy for a competitor convinced to join us.

[00:07:14] And here's here's one of the great things that happened. I had a young colleague recently who graduated from from Berkeley Ph.D. and superstring theory and my young colleague decided that this idea of statistical arbitrage as practiced by this market practitioner was a bit dated. And so he used his background in analytics and mathematics from his years of experience logistics to create our core stat our business back in the in the mid 1990s. And it's actually in some sense parallel some of the stories of Rentech. So here you have an individual who had no traditional finance experience exposed to the concepts and ideas who had a much stronger toolkit of mathematics and of how to solve problems who took it upon himself to. I can do this better. And that gentleman James J. As he dealt today has been my partner for a long time when the most important people in the history of the firm a truly my partner in building citadel built our state our business starting there in 1994. Inspired by the shuttle that we hired with experience most of our competitors.

[00:08:24] Speaking of maths applied to investing we're talking a lot about algorithms running money today. Our algorithms better than flesh and bone investors and in ten years will robots run our savings my chance.

[00:08:42] So the core of our business our biggest business is what I refer to as good old fashioned stock picking single largest driver revenues at Citadel is our team of 90 acqui portfolio managers.

[00:08:55] Organized by industry specialty who understand the businesses that they invest in cold years that our businesses are very good at picking up small short term inefficiencies in the marketplace but they will never replace the judgment and decision making of humans that are interacting with management teams interacting with customers interacting with the supply chain. We're able to create a much better mosaic of what's really taking place with respect to a given business so that our businesses are very good at addressing short term market inefficiencies. They are incredibly powerful that no human can't look at a screen of 3000 stocks and go ha based on how IBM and Apple just moved. HP should be up 2 basis points. Humans don't do that. But computers can do that and they can do it very well in the short run. But on the flip side computers will never in my opinion replace the judgment and intellect and the ability to connect dots that people do who are world analysts in equities.

[00:10:02] And if that's the case what the role of artificial intelligence machine learning and helping to support this human judgment that portfolio managers are applying.

[00:10:11] So those are two words that we use today as if they are the same and they are very different. Machine learning is pattern recognition at the core. Machine learning is about pattern recognition and where you see patterns you see applicability for machine learning and in financial markets there are certainly some patterns and we can detect those machine learning techniques and we can seek to profit from that pattern recognition. No ifs ands no buts. But when the world changes such the patterns will be different. Machine Learning breaks down utterly. So if we think about Brax it machine learning worthless from just price data and understanding what's going to happen on the Brexit vote or the vote in France over who would lead France and we would talk about this it's sort of like the great case studies or machine learning just breaks down entirely. You can use that sort of thing about how to forecast voters but you can't think about how financial markets will react to the vote outcome. So Machine Learning Works really well when you have consistent persistent patterns. Works great for Google in search it works great for autonomous cars. Unless it's snowing and then all of a sudden the backdrop is changing and changing very quickly the patterns very fuzzy hard didn't really know where to go it's a bit of a problem. So machine learning has its limitations. Artificial intelligence is not just machine learning it's not just pattern recognition and it's well beyond the scope of computing power today for computers to actually conceptualize problems and solve problems in a free form way is still 10 15 20 years away.

[00:12:00] It's a long time out from where we are today. It's not on the horizon of forces that are impacting finance here now.

[00:12:08] No class today we talked about different types of quantitative investing based on their time horizon so hype you couldn't see milliseconds midweek and see maybe days and low frequency months perhaps even years. What's the capacity in each of these two entities.

[00:12:26] So the high frequency nomenclature is one of those those words that has taken on a very interesting character. In the days and age of the Flash Boys Book a great piece of fiction written by Michael Lewis wrote fascinating book and actually that nomenclature started the citadel. My colleague who has a physics background thought about the frequency of our trading strategy isn't this high frequency strategy this is a medium frequency strategy and this is low frequency sound because physicists use words like frequency and that that word caught on across the industry for better or for worse in the high frequency space for example in U.S. equities there's really two firms that make any money of note the whole story.

[00:13:10] Mike Lewis writes is already ancient history. The end users have become much more sophisticated accessing capital markets. Goldman's algorithms are better credit suisse arms are better they've gotten better at how they actually tactically execute orders there's less money in market making as the banks have gotten better order execution. And then your traditional competitive dynamics between a number of firms have ended up driving most of the rents out of the marketplace and today for all intents purposes were down to two firms that make any money of note and high frequency trading and U.S. equities. This is how competition should play out. And we've gotten to a stable equilibrium United States right now which is a healthy one. Perhaps one day there'll be no money made by the high frequency shops as the Goldmans and Credit Suisse and Morgan Stanley get even better at strategies to execute customers. So the profit pool there's not. Never was the billions of dollars that Mike Lewis alludes to. It's a number that's order of magnitude in the U.S. acqui market maybe a billion billion five. It's a big number.

[00:14:17] But keep in mind the U.S. actually market turns over ballpark I don't know you say that's a complicated 120 million dollars a day.

[00:14:30] So as a percentage of total dollars traded irrelevant for the market making community as a whole King going back to the technology issue it's probably surprise a lot of folks to hear you say that kind of good old fashioned stock picking as your bread and butter.

[00:14:46] Given how well-known you are for technological advances and being ahead of the curve and use of technology do you feel like the that the technology advances are as helpful or more helpful and good old fashioned stock picking as it is in kind of the more what we think of as technological areas.

[00:15:05] So I think that the application of technology to support the decision making process of our portfolio managers is really helpful. Let me just put in plain English what their job looks like. They pick stocks. If we look at earnings data is a notable date in terms of measuring their skill their win loss ratio how right percentile the right versus wrong my colleagues that walk on water are 53 47. If they were brain surgeons they'd have very few patients. All right. They go to work in a job where you are literally wrong almost exactly half the time. That's the day they live in.

[00:15:50] You live this world. It's very humbling not to lose you. It's very very cool. It's incredibly humbling.

[00:15:59] So a key part of the analytics suite that we give our portfolio managers is around giving them transparency in their portfolio what's taking place what's driving change in the portfolio valuation spot like right here right now. So is momentum causing your portfolio to have losses or is there a shift towards companies with lower price to earnings ratios or the market's discounting stocks that have higher accruals or other signs of accounting issues. What's what's what dynamics are playing through the market right here right now and real time when we do this to bolster the confidence of our portfolio managers who really have a tough job because you're wrong half the time. And how do you keep people engaged in a problem where they are so often I don't see humiliated betrayed or humiliated they get to report every day. That's enough. Now it happens to be that 53 47 still is very profitable in finance but it's still it's a tough report card. How many people in this class have taken home a test in the last eight years where they got 53 percent right. Right. We hire the best and brightest. They go from having 90s as their average test score to 53. And every tool we can to make them better we put in front of them. We also do a lot to help them understand the quality of the research done by their analysts. So we score their Aylesworth product. We scored the decision making of the analysts we do a lot of work with big data to help forecast trends in consumer behavior. Lou sales outperform expectations or not Starbucks same store sales.

[00:17:35] How does that look so technology's intertwined in our decision making her mistakes and in helping our portfolio managers both understand the world and stay confident in a world that's always awash in uncertainty.

[00:17:50] You've talked a lot about hiring and how important it is to have a meritocracy. So you've gone from three to 2300 employees around the world. How do you maintain that meritocracy in the culture that you guys have built so well with that many employees in that many places.

[00:18:05] It's a huge challenge. It's a huge challenge and I copy one of the business practices from Google. So the CEOs of Google signed off on every single hire at Google I literally get on every single new hire a one page summary key accomplishments in life career history and depending upon where they are in the hierarchy of employment their Executive Assessment Report which is we have somebody spent four hours with the candidate and talk about their career history. So those are three of the inputs that come across my desk after they've gone through the entire interview process the vetting process. We're going to hire this person. I still retain an open ultimate veto right. And I use it if I don't think the person has the qualities that we're looking forward to be the foundation of our future. I would say no drives my colleagues nuts. But nothing is more important than maintaining that standard of excellence in who we choose to hire. And you know people Tom how much time we spent interviewing. I've interviewed over 10000 people my career.

[00:19:13] It's just what's required to succeed so based on that. What advice would you give for folks here that are interested going into finance.

[00:19:24] Make sure your interest in going to finance for the right reason. If you think it's a way to get rich find another career. I've seen plenty of people in my career for whom the external benefits of finance I'm there make a lot of money. It's going to be great. It's the calling card. Virtually none of the people ever make any money because you've got to compete with somebody who loves finance. Why are my acqui portfolio managers so good. They they outworked the competition. They're reading that 10k on a Saturday. They're at the conference that Monday morning. I mean you've all seen the movie Wall Street and you have it. I don't dishwasher not you know it's the glamorous life of working on Wall Street. There's nothing glamorous about the local residents in in no name Arkansas where you're visiting a company to meet with management. There is nothing glamorous about that at all. It is a lot of hard work and you are competing with. By and large the best and brightest in America who go into finance. You just look at our top schools the percentage of students that go to the Goldmund is the morgue and the Citadel's. It's a it's a pretty significant percentage. So if you're looking for external rewards go somewhere else. I mean when my colleagues went off to some janitorial services company he's probably like those that are named billionaire. We've never heard of because he's competing against people who have less talent on average than you have in finance.

[00:20:50] If you love this problem said if you're really interested in business models will make businesses work.

[00:20:55] You enjoy the investigative aspects of trying to understand supply chain customer preferences. How do I think about Netflix subscriber churn I'll call 25000 Netflix subscribers and ask every month do you plan to renew your Netflix account. You're willing to do things like this. Finance can be a lot of fun. But if that's not interesting to you go do something else.

[00:21:16] There's a lot of different areas in our economy that are that are incredibly fast and to be a part of your last question before opening up to floor what your long term short term goals are for Citadel short term is like December 31 is about 12 weeks away.

[00:21:33] And we'd like to put another good Euro. I mean I do live in a world of I get a report card every single day and my investors make capital decisions every single year. And we have 200 investors around the world. Let me tell you I get fired every single year by somebody. All right. There's no there's this sort of myth that you can be self-employed. It's a myth. You get fired all the time by your client. So I need to deliver my clients and like corporate America that has to whine about short term performance. I've got to deliver short term performance. So first I is on the 12 31 let's have a good year and stay focused we've had a good year so far keep complacency down keep focus up keep the eye on the prize of continuing to invest our capital thoughtfully and carefully for the next 12 to 14 weeks till we get to your longer run. The big focus is I'm going to win by having the best team in the world of talent. That's how we're going to win. We're going to assemble the team of the greatest talent in the world. We're going to manage that team thoughtfully. That's the one two combination that's going to sustain our business for the next 50 years.

[00:22:40] And if you look at Goldman Sachs which has had such a great run of success they've always been on campus a firm that wins in the head to head competitions against the other banks. And when I beat them for a candidate and I beat them quite a bit these days I'm trying to skip class where they been historically in the U.S. financial system. The destination for the best and brightest go to work. And if we manage this human capital well we worked together as a team we stay focused are all of the problems we keep the political dynamics down bureaucracy out of the business manage the complacency that goes with success. We will have a very bright future ahead of us. But as Lloyd Blankfein has put it to me I won't know if I've been successful till the day I retire because whether or not my firm is there five years post our retirement is actually old that mark of the success of my career. Not planning to go anytime soon. But those words haunt me. So I have to think long and hard about. Are we creating the dynamic where that next generation of leadership panels being groomed and developed that one day I pass the baton onto one of my younger colleagues. I've seen this do this time and time again we've been in business for 27 years. But one day I need to pass the baton over and I need make sure that we have a dynamic that creates the opportunities and experiences for people to learn how to run a global financial services firm.

[00:24:05] So we have the floor for a couple of questions for Forkan these run. We have a microphone here to Maitreya's wait a second. Thanks.

[00:24:16] Good afternoon sir. Thanks for taking time. My name is Rob him from the corp School of Public Policy. When I look at the extraordinary low volatility we've seen in the stock market in 2017 one of the questions I have is how is the volatility so low when you match that up with the political environment of uncertainty. And I was wondering what your thoughts were specifically in the market making section of your company. Because it must be hard to make those profitable edges when volatility is so low.

[00:24:46] So there's two very different questions in that question. We are in a very low period of volatility. This is actually very calm and towards the end of the business cycle so this is not inherently unusual when you're in that sort of seventh eat into the business cycle the rate of change the underlying economy is also lower. Right we're seeing the challenge of low productivity for example right now we're seeing businesses not change as fast as they do. And the backdrop of a financial crisis. Right. So the business cycle financial crisis happens companies shed workforce they re rationalize their capital investment winners and losers emerge pretty quickly from a strategic and financial perspective. And then as you move through the business cycle that rate of dynamics falls in the economy and you see it falling volatility. Now the political gridlock in Washington Jefferson Hamilton they're like toasting each other right now. They designed they designed a political system that was designed inherently designed to be slow moving. We do not have the parliamentarian system in the UK where when you sweep into office you really have the reins of political power to make fast change. The American founding fathers were very skeptical of government. They wanted a government that was very unwieldy and well they got it all right. They got it. And so you know I was in Washington today meeting with leadership on tax reform issues that were about to make a whole series of changes to our underlying economy on the back of that. And you watch the wheels of Washington grind so slowly. And that's what our founding fathers wanted.

[00:26:35] Our business community actually in some sense is so successful because of that we have relatively high stability on the playing field with which we can make longer term investments in the business community. If we actually thought things could radically change very quickly be much harder to create capital formation or country. If the political rules of engagement were very flexible and take a step back. If we look at the Western world what percentage of innovation has happened in America as compared to Europe over the last 30 years.

[00:27:12] Now the European educational system baseline is frankly better than America.

[00:27:18] Our colleges are still the best in the world. Our universities are still the best baseline education Stronger in Europe. Why is it that we beat the European it's our culture for a culture of being a country of risk takers and entrepreneurs it's OK to fail in America. It's not OK to fail in France and our political system when it's also done is broken as it is is to one of the best in the world. Strong Rawan our courts and stability on the playing field that allows for longer term investment decisions profitability of a market maker these days Bellata. If you read the Wall Street Journal you'll see all the market makers closing out and again it's the competitive dynamics I talked about earlier. The end users are getting more sophisticated Matchett orders of out market makers in essence and with lower volatility there's less need for risk intermediation and there's therefore fewer market makers. So we're seeing consolidation in the industry right here right now. That's part of a business cycle. And that dynamic cism of that those firms shutting down that town gets released into the broader ecosystem will hire some of those individuals. They'll bring new ideas and insights into how we run our business. They'll make Sedat more effective. And that mobility of our labour force really important to the success of American business.

[00:28:46] It name have shrunk from finance student here at the business school. I have two quick questions. Number one where do I see the future of active management with everything that's going on on the past side and you know Rowe advisors cetera and into APTA gone versus surveyor you know what are the different strategies there and where do you see that going.

[00:29:04] Thank you. Two hugely different questions I answer. One a little bit like the one very short. All right. So let's just mental model for a moment. All the money in the U.S. actually markets PASSOP what happened to price discovery we happened to price formation like the mental model of 100 percent passive just Artley breaks down. Right. So passive works so long as you have a sufficiently robust active community that drives towards price equilibrium. The Vanguards of the world are enjoying the free lunch of the work of my equities team. That's what they do and that's that's actually totally fine. We don't need to have all the money in our economy either active or passive but you need some mix you need some mix and the market has Soll for that. And if there were to be more money Pasley managed market efficiencies would on the margin increase induce more profitability for the ACT managers would be more of them we'd have a new clearer over time.

[00:30:14] So I'm not I'm not terribly worried about that dynamic. It gets talked about a lot but markets find equilibrium over time. We run multiple equities team you mentioned surveyor APTA gone global. We said citadel. It's about it's about the personalities of our leaders given head of a business can manage 20 to 30 portfolio managers that's their effective span of control and there's a lot of very talent that we PIMS the world. And they self-selecting to our various teams based upon their rapport with other teams and the management. There's no effective difference in these businesses day to day other than who do you work for and who do you work with. Those are the big differences.

[00:30:57] Yep.

[00:31:02] One more after this and then sloes main competition retelling has to do with Apple and Google not necessarily IB's right. So how does Silvo compete for talent with those tech companies. And my second question is how do they keep down motivated like executives motivated afterwards.

[00:31:23] So there's two great questions there. There's a presupposition that our primary competitor for counts Apple and Google. And it's not it's not. They are a big competitor for talent. But ultimately if somebody comes in and says they're really interested in search then go to Google. And one of them one of the best women who ever worked for us she was two years into her career. For us her boss comes to my office more like partners and says she wants to go to medical school. And you've got to convince her to stay. And I said oh no no no no. When she walks in my office I will offer to write a letter of recommendation. The world desperately could use another great doctor. I don't need another great options market maker but I need another great doctor. We all do. All right so strong competition in financial services leaves fewer people in financial services we accomplish the same work with fewer people. We free human capital to the rest of the economy. And I don't want to try to steal the person who is extraordinarily excited about like the iPhone 15. I don't they don't need to be my team. And by the way I'm not being facetious. Like my iPhone is over they are charging right now and we've all looked at the new iPhone 10 announced today. We're excited about it. We need people to do that. So I'm looking for somebody who has that tactical toolkit to solve the kinds of problems that we need to solve who has an interest in the kinds of problems we're trying to solve.

[00:32:50] That's who I'm looking for and I do compete for those individuals with a large variety of industries in America. But if you don't love what we do don't come to sit it out. Go go Saule go somewhere what you do makes a big difference. I spoke earlier in the class and this is important to think about what a very different economy today than our parents grew up in or our grandparents. It was the fifth biggest maker personal computers in the world.

[00:33:16] They're actually like number two or three. No one knows no one even cares. No one cares. Fifth biggest source of online music. Who cares. We live in a world today of more and more winner take all and those winner take all firms are so successful because of the breadth they have today. The number of people they can touch that and people they can solve problems at one point in time I solve a problem. The capital markets and my market making business. I can bring that out across 40 different countries in three months or less. All right we have a world today where it's winner takes all. I need a small number of people who are highly gifted who are highly passionate who are going to carry us forward in this winner take all world. And we can't misstep for a moment. So if you're not that path from what we do I don't want you on the team. It's that simple. The second part of the question was. How do I say I can't keep them you know what you're 40 years old you've got a worth of nine figures. Do you want to do with your life. And shockingly them choose to stay with me. Some go off to be the the treasurer of the state of Delaware. God bless. I mean I'm totally serious. When

[00:34:31] my colleagues has to shoulder with a drop of milk kills the kid it came to me says look I'm going to retire I'm going to commit my life to trying to find a cure for my children. What

[00:34:44] do you say to that.

[00:34:45] You say God help you so I hope that my executives are wildly successful and I hope as long as their passion passionate finance they're on my team and I hope when they find another calling in life they enjoy all the years that they put into helping to build one of the great companies in MySpace and they enjoy the fruits of their labor.

[00:35:06] One more question here.

[00:35:13] Griggs has a business school. How do you think about how liquidity has changed kind of over since the financial crisis in terms of products that have been introduced that have Mitsch mismatches between buying investments and what's being offered to investors. Blackstone recently GSO rolled some of the opening stuff into closed and funds and delimited number of market makers outside of your firm that are still existing in the market to the same extent that they used to be. And then if you could maybe you've obviously seen a lot of firms in your career maybe one private equity and one hedge fund firm that you admire outside of your own firm. It's like three or four questions there.

[00:35:51] When it tries to one answer.

[00:35:53] Now look there's absolutely a growing degree of mismatch between the liquidy nominally offered by a variety of products and the underlying liquidy of those markets. And that's a cause for concern. If I were the S.E.C. theme about policy issues I would be thinking about that issue long and hard because you can't unwind a huge junk bond portfolio overnight. It takes weeks it takes maybe even months and the amount of money raised in open end products where the underlying instruments are less liquid I think is cause for concern. I think it's completely legitimate. So you might want to think about how those funds deal with the Parubiy around in the bank. So they started being kind to they distribute in kind by date of seeking liquidity. How do they start to deal with that liquidity mismatch and ultimately our investors. How are investors going to deal with the losses that they'll incur when you get sudden market gyrations as these funds try to exit the door simultaneously. So I think there's some legitimate concerns there in a public policy sense of the word. Right. That's that's number one. Number two was.

[00:37:09] Let's market. You know what. How many how many market makers do you need.

[00:37:14] I mean how many do you need.

[00:37:18] I took 20 percent of. I'm every day five. There you go. We five firms. All right. And I'm I'm more or less serious like you don't need 55 when you five firms five well run firms that have the technological capability we need more than one because we do have technology problems. We sometimes go down these are bad days but we need more than one. But we don't need 50. We don't need 40 we need 5 and we're seeing that globally in a number of products the drive towards 5. How many major players are there an interest rate swaps today. There were 23 years ago we entered the market 18 months ago were down to seven of Consequence today.

[00:37:55] We took 13 second tier players out that's the march of progress.

[00:38:01] And by the way those five are actually doing really well. Like even though the markets more competitive than ever been as spreads are higher than ever and users are more engaged than ever about the products the products cheaper in a trade it's a more competitive market dynamic markets healthier. So good competition increases value for consumers drives up use of the products that play and leave is a good environment behind. So we don't need 20 firms we need 5 global players in capital markets provisioning and risk management.

[00:38:34] Had the private equity fund right now. Now the Standard Pacific has gone a hedge fund that you admire.

[00:38:40] That's a great question.

[00:38:43] And it's I mean of course I have great admiration for you. You always have the problem of being too close. Right. There are. Let me just I'll close with this. I have great admiration for Paultre. Jones is a close personal friend of mine. He was one of my inspirations. When I was young college Paul was on top of the world on top of his game that was one of the firms I really admired at Thorby in the same category ran Princeton were partners and a private equity had you got to take your hat off to Steve Schwarzman the team of Blackstone. You just do Jonathan Grey runs real estate business. He's my contemporary outstanding outstanding thinker leader. He'll run that firm on a certainly one day. So I give a lot of credit to Steve Nali for having built a great firm but for having individuals in that firm that clearly have the talent to run it and the hedge fund space we don't have as many succession stories. That's been one of the challenges in the industry is how do you create the succession story that Steve's created Blackstone you know KKR just announced a new leadership team. I wish Henry all the success in the world. When I was in college there is no doubt that KKR and Henry Kravis reading private equity was one of my inspirations. I actually if you ask me when I was 19 years old what I do I do private equity not that totally wrong. It's ok worked out OK for me. But Henry was my was my ultimate hero.

[00:40:08] That's why I wanted to be when I grew up. Great admiration for both him and the team in Blackstone Ken.

[00:40:15] Thank you very much. Really really appreciate it. And one more question. All right.

[00:40:24] OK. My question for you is USDAW a salad dish college on 19 and then you start your phone at 22. What advice would you give to people to start your own bond.

[00:40:36] What advice I give to people who start their own fund set is that the question.

[00:40:44] Well number one is there's a great myth about being an option. You do not own your business your business owns you. So just be prepared for that reality if you don't want to sign up for that. Don't start a business but your business will own you. It's amazing how many issues you can deal with 24/7 365. Number two is the best advice I've ever had in my life. Hire the best people you can possibly hire. I mean if I if I just look at what has been the story of Citadel over 27 28 years it's the story of how remarkable my colleagues have been on their ability to change the landscape of U.S. financial markets. My partner who runs our securities business is roughly 34 years old. He gripped mainland China. He grew up in Beijing. He grew up in a country where his neighbors traded futures contracts was a capital offense. Stable was discovered for doing this. Arrested and summarily executed. He grew up in a world that you and I can't imagine. And today he runs the biggest market making business in the U.S. Sakovich market. He's 34 years old. So what I would say that story My career has been the story of the incredible accomplishments of my colleagues the young man who went to Berkeley who was exposed to superstring theory you saw that our business said I can do this better. Those stories have made Citadel what it is. Time and time again so be prepared for the reality that your business will own you.

[00:42:14] And be absolutely willing to hire people around you who are better stronger smarter than you are. I will leave with this story. I was in my conference room about two weeks ago with some of my best guys are my guys Gisors most gifted at mathematics pauses for a moment to answer a question. And he looks at me he goes. It's sometimes painful to try to find the simple English to explain a concept to you can you. Wow okay that put me in my place. But that individual drives a hugely successful business for me and it's totally okay with me. If he can run circles around me with math I have no problem with that. I need individuals like that. And by the way when he has a hard math problem and he's one of the best mathematicians in the world he actually knows who to call in Switzerland to solve it. It's like this is really hard. I'm thinking myself a God must not be solvable. I know who will solve this over the weekend and I'm torturing it over the weekend. Like this guy whose math skills are mind boggling. Months. Monday we have an answer. Okay. That's a team that wins. But you need to have around you that mosaic people with complementary skills talents different than you and you have to be perfectly comfortable in not being the smartest person in the room on a litany of issues day in and day out.

[00:43:36] That's how you create a great business. Thank you so much for the time.


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