Garlic Cartel: Markets, Credit, Code

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Speaker 11 Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

Speaker 11 I'm Matt Levine, and I write the Money Stuff column for Bloomberg Opinion.

Speaker 12 And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

Speaker 11 What are we talking about today, Katie?

Speaker 12 We're going to talk about farmers' markets, we're going to talk about private credit,

Speaker 12 and then we're going to talk about stealing some trade secrets and moving to China.

Speaker 11 Sounds good.

Speaker 12 I printed out the pricing charts for like beef. So we have a meaty section.

Speaker 11 I was at one of the farmer's markets near me. I go to two farmers markets per weekend now.
Oh,

Speaker 11 I was recognized by a person working at one of the stands

Speaker 11 who

Speaker 11 works in financial media and also works at a farmer's market to get her mind off things. And she's apparently a fan of mine and offered me free garlic.

Speaker 12 Did you take it?

Speaker 11 No comment.

Speaker 12 So you took the free garlic and then you undercut some farm stand, some farmer who like put in the labor and you knew what to charge because this is before I knew anything about farmers market pricing.

Speaker 11 I was a babe in the woods in terms of oh I thought this was like last weekend. No, it was like three weekends.

Speaker 11 Okay.

Speaker 12 If only you had known.

Speaker 11 I do not honestly pay that much attention to pricing at the farmer's markets, but I am aware of the disparity in garlic pricing at the different stands.

Speaker 11 There is a stand where I have seen, but not purchased, garlic for $3 a head, which seems really high for garlic. But also, the farmer's market garlic is so good.

Speaker 11 Like, I know only at farmer's market, garlic, and probably pay 5x what I'd pay at a grocery store.

Speaker 12 Me, not $3 a head. Me trying to think of something relatable to say reminds me of the arrested development scene where Lucille's like, it's a banana, Michael.
How much could it cost?

Speaker 12 Or something like that. Yeah, I feel like if you're at a farmer's market, you're kind of a price-insensitive buyer of produce.

Speaker 11 I'm pretty close to the ideal price-insensitive buyer of produce, but even I was like, $3 garlic, hold on. Whoa.

Speaker 12 It's too rich for my blood. Well, what a timely conversation that we're organically having about pricing at farmers markets.

Speaker 11 It's all I think about. Yeah.
Sorry, I just said it's not anything I think about at all, and I'm totally price-insensitive, which is closer to the truth.

Speaker 11 But now I'm thinking about pricing at farmers' markets.

Speaker 12 Yeah, so is Cornell University, question mark?

Speaker 11 Great transition. Yeah.

Speaker 12 Why don't you tell me about what they're doing?

Speaker 11 They're aggregating prices for farmers.

Speaker 11 They have like a website that publishes free information on prices of various agricultural goods for farmers at farmers markets to basically help them set their prices.

Speaker 11 Because basically, if you're a farmer at a farmer's market, you

Speaker 11 are in the business of working the land, growing the produce, and you're maybe not like a savvy. pricer of produce at farmers markets.

Speaker 11 And, you know, the buyers at farmers markets are not necessarily savvy pricers of produce either. So you could probably charge them a lot more than you do.

Speaker 11 And Cornell is helping you charge them more than you do by telling you what the actual price of garlic is.

Speaker 12 Seems like a real antitrust concern, potentially.

Speaker 11 You know, you know. I sort of half-jokingly suggested that.
People got kind of mad at me, like from two perspectives. One is like, no, it's not an.

Speaker 11 No, no, no, like just my regular readers. So it was like, no, it's not an antitrust concern, which it is not really an antitrust concern.

Speaker 11 But the other thing is like, I made that suggestion because the Justice Department a couple of months ago sued RealPage, which is like,

Speaker 11 I'm going to exaggerate and say, this, but for landlords, right?

Speaker 11 It's like a software product that tells landlords how much other landlords are charging for rent so they know how to set the rent on their apartments.

Speaker 11 And the Justice Department said that RealPage is fostering collusion among landlords and reducing... competition in the rental space and raising prices for tenants.

Speaker 11 And I sort of tongue-in-cheek compared this farmer's market stuff to RealPage. And people got mad because they're like, but the RealPage case is real.
Like there's, there's more stuff there, right?

Speaker 11 Like the Real Page case, the farmer's market stuff, they're essentially using fairly straightforward technology to aggregate prices at a bunch of farmers markets and also supermarkets.

Speaker 11 RealPage is getting private information from landlords, right? So it's like they get more information than just like what's available to the public.

Speaker 11 And they're also using it to suggest to landlords, or this is what the Justice Department alleges, they're using it to suggest that landlords raise their prices.

Speaker 11 And like they've explicitly said things like a rising tide lifts all boats. It's like they're like, you know, in the business of trying to make landlords charge higher rents.

Speaker 11 This one is, you know, based on publicly available prices. It's harder to get mad at it.

Speaker 11 It seems to me that there is a real continuum and that it just used to be the case that it was hard to be sophisticated about knowing your competitors prices in like all sorts of areas because yeah, your competitors prices weren't like easily available on the internet.

Speaker 11 And now it is so much easier to like aggregate public data about prices. And so now you can, anyone can be more sensitive to like what their competitors are charging.

Speaker 11 And the Justice Department gets nervous about that. Not the farmers, but in general.

Speaker 12 The goal here for the farmers is explicitly to raise prices.

Speaker 11 Yeah, that's true.

Speaker 12 Like there's a quote from someone involved. In other words, to give them a better day at the farmer's market because they're going to be there for eight or six hours, whether they make $400 or $800.

Speaker 12 So we're looking for how we can help them earn more in those hours. So that's the goal.

Speaker 11 That is the goal.

Speaker 12 They want the farmers to charge more. We should say this is from a marketplace article.
It was a really fun read. It was fun.

Speaker 12 I realized, so I was reading your RealPage column, and it occurred to me that perhaps I'm being naive. I just don't see...
any situation where there wouldn't be a race to the bottom.

Speaker 11 What do you mean a race to the bottom?

Speaker 12 Like in terms of like, okay, we're all only going to charge $3,000 per month, guys.

Speaker 12 That's the bottom. I feel like, why wouldn't you just undercut that?

Speaker 11 Right. I mean, these cases are weird, right?

Speaker 11 This notion of like tacit collusion or algorithmic collusion is different from a classic cartel where you get together in a room and you're like, none of us are going to charge less than $3,000.

Speaker 11 And if you do, we'll break your legs. There's no suggestion of breaking your legs here, right? This is just.

Speaker 12 Well, not written down, no.

Speaker 11 I don't think at all. Maybe.

Speaker 12 You're joking. They're not going to to break your legs, Matt.

Speaker 11 We'll get to a story about that. But there's no explicit cartel, right?

Speaker 11 It's just like everyone wants to charge as much as they can, and they're limited by competitive pressures where they have to charge less.

Speaker 11 And there is this suggestion that if you know your competitors' prices, it is easier to not undercut them or to undercut them less, right?

Speaker 11 Like if you don't, like, if you don't know what everyone else is charging, you might be like, I want to be the low-cost provider, and so I'll charge $2,700.

Speaker 11 But if you know what everyone else is charging, you can be like, I'll charge $2,999, right? Like you can, it's a little bit easier to coordinate on the same price if you have complete information.

Speaker 11 This is a theory. It's not necessarily true.
And the Justice Department has been interested in the idea of like price sharing.

Speaker 11 Because there's this theory that if competitors in an industry are getting together and sharing prices with each other, it's because it's anti-competitive, right?

Speaker 11 You don't have to know exactly what they're doing at the price. You have to be like, well, if they're sharing prices with each other, that's probably not good for consumers.

Speaker 11 Like they're probably doing it for a reason that involves maximizing their profits. And the Justice Department has like long been interested in that.

Speaker 11 And they had guidelines that were like, certain kinds of price sharing are okay, including if it's aggregated and not like broken down by a competitor.

Speaker 11 Because by the way, if you know what each of your competitors charges, then like you can break the legs of the one who charges it the least, right?

Speaker 11 Whereas if it's just aggregated, it's like a little bit more just informational. But, you know, they said like aggregated data is okay and data published by a third party.

Speaker 11 So like a trade magazine publishing prices rather than the competitors getting together and sharing prices. They said that stuff was okay.

Speaker 11 And recently there's been a change in their guidance where they're like, we're going to actually look at that stuff more closely.

Speaker 11 And I think the impression is that they are worried that machine learning algorithms are going to make companies better at using this data to price at the maximum level to extract profits.

Speaker 11 And like the sharing of data is going to make industries less competitive.

Speaker 11 So there's also this interesting paper from a couple of months ago by Jun Young Jiang of University of North Carolina called Salaries on Display, Unintended Consequences of Wage Disclosure.

Speaker 11 There was a paper about, you know, like there's a lot of states have wage transparency laws where like when you advertise a position, you have to say

Speaker 11 exactly. And Zhang finds that those seem to lead to lower wages.
Hmm. Because if you don't have information, like the market is going to have disparities, right?

Speaker 11 And like some people are going to pay more than others because they're ignorant, right? Whereas like if you know what everyone else is paying, you're not going to pay any more.

Speaker 11 You'll pay like a dollar more, or you'll be a little competitive, but there will be no outliers.

Speaker 11 And so, I think that's the same intuition with pricing stuff: where if everyone is sharing information, you won't have any outlier cheap providers because everyone knows, like, you know, the market price is this.

Speaker 11 I shouldn't charge less.

Speaker 12 That's interesting. The thing that I think the wage disclosure laws lead to is just super wide salary ranges that make no sense, but that's a

Speaker 11 like they don't seem to tell you that much.

Speaker 12 But yeah, do you want to talk about some meat prices? Sure.

Speaker 11 I actually looked at the

Speaker 12 website from Cornell. This is monthly data, so I don't think it's the weekly data.

Speaker 11 It's going to be a long podcast where you read out the price.

Speaker 12 Well, I think it's interesting.

Speaker 12 So at the farmers market in September, we're looking at price summary statistics across multiple meat products collected from 10 farms selling in 21 different farmers markets in New York State.

Speaker 12 For Chuck Roast in September, your weighted average price per pound was $9.60.

Speaker 12 Can you guess what it was was from the grocery store?

Speaker 11 $7.20.

Speaker 12 $8.25.

Speaker 11 I don't know if I was close.

Speaker 12 I think you were doing it, but that's the average price per pound versus the weighted average price.

Speaker 11 So farmer's market's barely charging more than the grocery store. Well, and like the experience can't be beat.

Speaker 12 Hold your horses there, my friends.

Speaker 11 A big farmer's market proponent.

Speaker 12 Non-organic bacon from the farmer's market in September, according to this data, $17.21 per pound. What do you think it was from the grocery store?

Speaker 11 $7 per pound.

Speaker 12 So close. $7.98 per pound.

Speaker 11 I almost said eight.

Speaker 11 So quite a markup on your bacon. Like that farmer's market bacon is going to be delicious.

Speaker 12 Is it? I don't know. I'm not a bacon person.
I'm a big farmer's market guy.

Speaker 11 Great experience, great food.

Speaker 12 Yeah.

Speaker 11 Garlic cannot be beat. The ginger I got at my local farmer's market, astonishingly expensive.
So good.

Speaker 12 We were driving back from Albany this past weekend and we went to a rest stop, and there was a farmer's market outside, like on the highway.

Speaker 11 I'm sure that was great.

Speaker 12 I got some dried beet chips, and I got these.

Speaker 11 I know that stand, but okay.

Speaker 12 Yeah, it was on the cusp of New Jersey.

Speaker 11 No, I just mean like

Speaker 11 there's like stands that you see at a lot of people.

Speaker 12 Were you also at the rest stop on the highway?

Speaker 12 Yeah, but I don't think I'm a farmer's market person. I don't think I have the patience.
Anyway, that was a robust discussion.

Speaker 11 I want to add one more thing, which I did write about, but I love it so much. Yeah.

Speaker 11 I got an email from a reader about the Ottawa farmer's market, where this reader sold strawberries for a while. Yeah.

Speaker 11 And like Ottawa's farmer's market had explicit price fixing where like the rules of the farmer's market said you couldn't undercut the prices that were agreed on.

Speaker 11 And he didn't say that legs were broken, but a little bit implied.

Speaker 11 He found a loophole where it was like, you know, a four liter container of strawberries had to cost this much.

Speaker 11 And he realized that if he sold the two and a half liter container, a non-standard size container, he could undercut because there was no rule about selling that size container. Wow.

Speaker 11 So he would sell two and a half liters for less for half the price of four liters and get more business.

Speaker 11 The kicker to the story is that he's now a data scientist at a tech firm because I assume that like a tech firm recruiter is like walking through the market and being like, this guy knows how to price at auctions.

Speaker 12 I wouldn't have guessed that the pipeline worked in that direction, but that's pretty cool.

Speaker 11 You're right. It would normally go.
And like, I don't know if he was a data scientist taking a break by selling strawberries, but maybe he was on gardening leave

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Speaker 12 So private credit in the sober world of private credit,

Speaker 12 there's a lot going on. Is there, or are there just a lot of headlines?

Speaker 11 I don't know. There was a really interesting Financial Times story.
The title of something like State Street is Shopping for a Private Credit Manager.

Speaker 12 That's exactly what it is.

Speaker 11 Photographic memory. Amazing.

Speaker 11 The thing that I thought was interesting is that the CEO of State Street is like, yes, we're desperate for a private credit manager. Do you know any?

Speaker 11 I need to buy one right away. It's just like the intensity of the search for every big asset manager really wants to buy a private credit manager, which is just like, what a great position to be in.

Speaker 11 A few years ago, launched your private credit firm. People are like, oh, that's weird.
What does that do?

Speaker 11 There was a little bit of time where private credit was like, you know, like a little bit in the wilderness, like a little bit of a niche strategy.

Speaker 11 And now it's like all these managers are like, State Street is kicking down their door.

Speaker 12 Yeah, I wish that that's how I had spent my pandemic, but here I am recording this podcast.

Speaker 11 But I don't know great.

Speaker 12 I kind of like the honesty and the aggression. So, this is the CEO of State Street Global Advisors.
It's their asset management arm.

Speaker 12 She said, This area is so well established, and given the size of our clients and their need to build and invest in a meaningful size, I think it just makes more sense for us to either partner or take a stake in a much more established firm where it's one plus one equals three.

Speaker 12 That's interesting rather than trying to do it organically. They're like, we're behind already.
Let's go.

Speaker 11 By the way, do it organically isn't even a thing because do it organically means like pay huge guarantees to the people you hire, right?

Speaker 11 There's no like the market for people in private credit is just really pricey, whether you're hiring them or buying their firms. Yeah.

Speaker 12 I started thinking about Apollo because she also said we're shopping for either a full acquisition or a minority stake combined with product partnerships.

Speaker 12 And they have a planned product partnership with Apollo, that ETF filing heard around the world between Apollo and State Street for a private credit ETF, which I don't know if that one is going to launch.

Speaker 12 There's a lot of skepticism over that, but that's interesting.

Speaker 11 Oh, sure. But like, they want a private credit offering for their institutional clients, right? Like, they want to be able to chuck.

Speaker 11 billions of dollars of institutional money into a private credit offering. And everyone wants that.
Yeah.

Speaker 11 You know, if you are running a private credit firm, you're raising funds and like you're getting all these offers from all these traditional firms. Yeah.

Speaker 11 You know, there's another article in the Wall Street Journal about BlackRock looking for alts managers, like private credit or other like alternatives. And the reason for it is so clear.

Speaker 11 Like you can charge like roughly one order of magnitude more in fees for running alternatives than for running traditional long-only money.

Speaker 12 Well, to the point that State Street be shopping, BlackRock has been shopping in a big way. I mean, they bought Pre-Quinn, for example.
That was, you know, for data.

Speaker 12 Global Infrastructure Partners that finally closed.

Speaker 11 By the way, I think I forget if it was the State Street or something else, but like one of the articles was like, they're shopping for private credit or infrastructure.

Speaker 11 But it's like, yeah, anything in Alts. Yeah, let's do it.
Yeah.

Speaker 12 As long as it's alts. And also, maybe BlackRock is going to buy HPS.
I don't know.

Speaker 11 There's a fascinating story about HPS a while back. HPS is like nominally preparing an IPO, but like also shopping themselves hard to

Speaker 11 probably BlackRock, but also like there's talks of talk of like JP Morgan is like maybe looking.

Speaker 11 Like Jamie Dimon, like I think was asked about buying a private credit firm and he's like, no, we would never do that. And then like came back later and was like, my team tells me we might.

Speaker 11 Yeah. My team, I've been informed.
Yeah, yeah. Like they're like, they like pulled him back.

Speaker 11 But a lot of ways that HPS could go, but one of those ways is selling themselves to BlackRock for an enormous premium.

Speaker 12 This strategy has worked out for BlackRock. They have like $450 billion in alts.
At least $116 billion

Speaker 12 is coming from GIP, for example. So it's a really easy way to just scale up.

Speaker 11 Yeah. I mean, like scale up, like, you know, is like, what, like 4% of BlackRock's assets, right? But it's like the very juicy 4%, right? It's like the

Speaker 12 4% that makes... a lot of money.
Yeah.

Speaker 11 You charge, it makes a lot of the money and it gets a higher multiple. And it's like, yeah, it's just like really attractive.

Speaker 11 And like, you know, saying we're a giant index fund provider is just less appealing to investors now than saying we're a giant alts provider.

Speaker 12 I have have some numbers.

Speaker 12 In your column, you referenced this Wall Street Journal article that pointed out that BlackRock's market cap is similar to those of Blackstone, Apollo, KKR, et cetera, even though BlackRock manages like 11.5 trillion and they manage a fraction of that.

Speaker 12 I wrote about this in mid-October following BlackRock's earnings, just about how much money they make per dollar of AUM.

Speaker 12 And for BlackRock, it's like, according to Bloomberg Intelligence, they have an annualized fee rate of 14.6 basis points. You compare that to Apollo and it's something like 52 basis points.
So

Speaker 11 I would have guessed a higher number for Apollo?

Speaker 12 Well, apparently for Blackstone and KKR and Aries, that figure ranges from 50 basis points to like 100 basis points.

Speaker 11 Right. So I mean, you know, classically 2 and 20, right? Yeah.
But like, it's a much, much, much richer

Speaker 11 fee product. And like a lot of the stories about private credit are like, wow, there's so much more money in this.

Speaker 11 Oh, my gosh.

Speaker 11 This is a Bloomberg article from September. Bonus-starved bankers are jumping ship for private credit riches.

Speaker 11 Yeah.

Speaker 11 Why wouldn't you do that? That makes sense.

Speaker 11 You know, all of these like private credit funds are started by people who were like, you know, Lev Finn bankers at Goldman and like went to start their own funds when that was like a somewhat contrarian move.

Speaker 11 And now they can sell their firms for billions of dollars to BlackRock.

Speaker 12 If I I could do it, I would.

Speaker 11 It's just like, you know, one thing I wrote about this is like, it seems hard to run a private credit fund now from the perspective of like being an investor.

Speaker 11 Josh Harris said to David Rubenstein the other day that like a lot of these alts funds are like the beta of alts, right? Private credit, like at its core, is like direct lending to leverage buyouts.

Speaker 11 And so you are in a business of like being friends with 20 private equity sponsors. And when they do a buyout, they call you and they say, would you like to lend us the money?

Speaker 11 And you say yes, because you say no, then they stop calling you. And then you don't have the paper to feed your hungry investors.

Speaker 11 And so there's this sense in private credit that like it is hard to be a disciplined investor.

Speaker 11 It is hard to look for value and make do really careful credit work because you're essentially in the business of saying yes to every buyout that gets offered to you because you just have to do deals.

Speaker 11 But it's a great time to be selling your private credit firm, right?

Speaker 11 Like, you know, it's this huge boom that like any any huge boom makes it hard to be like a careful investor because like you have to deploy a lot of money, but like it's a great time to be a seller.

Speaker 12 Yeah. I was actually just having this conversation with a private credit person and this person was talking about how there's private credit beta right now and

Speaker 12 you have to get more esoteric to find the alpha, et cetera.

Speaker 4 Because you don't have to find the alpha.

Speaker 11 You can charge 2% and

Speaker 11 you can charge 50 basis points and you can sell it.

Speaker 12 At least this person would like to.

Speaker 11 That's why I'm saying it's hard because everyone is like constitutionally wants to be doing good deals and not doing bad deals. But there's a lot of money in doing like private credit beta.

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Speaker 12 Let's talk about some trade secrets.

Speaker 11 So there's a Bloomberg story about Xiao Zhang, who's the founder of Pinestone, which is a big and very very successful quant fund in China.

Speaker 11 He was charged criminally in Boston, federal court in Boston, for allegedly, he had a former job at an American asset manager and he like allegedly downloaded all the models and like left for China.

Speaker 11 Actually, he left for China and then downloaded all the models.

Speaker 12 He was out of the country first.

Speaker 11 Out of the country first, which is smart. There's another story a while back about a guy who did the reverse.
He downloaded the models and then he left the country that night.

Speaker 11 And by the time he landed, they had him detained and

Speaker 11 it didn't work out for him. But this guy left the country first, wasn't supposed to be able to get into his corporate hard drive, but

Speaker 11 used the VPN to somehow log into work from China, which I think is probably not technically feasible anymore at most quant firms, but he allegedly did it and he allegedly downloaded all the models.

Speaker 11 And it's an indictment. It's not full of detail.
There's a suggestion that he used these models to set up his now very successful Chinese quant font.

Speaker 11 I don't know if that's even what they're charging, but there's a hint that these things were useful in his subsequent career.

Speaker 12 Well, I would like to know his returns.

Speaker 11 Well, they're great.

Speaker 12 Well, you point out in your column that the U.S. market is different than the Chinese market.

Speaker 11 It's very different.

Speaker 11 You know, there have been a lot of stories about Chinese quant funds getting wrecked in regime changes where the Chinese government is like, oh, you can't bet against stocks or whatever.

Speaker 11 And your long short fund just

Speaker 11 explodes because you can't be short anymore.

Speaker 11 You think of a quant fund stereotypically being trained on some relatively recent history and being bad at like adapting to sharp changes and like how the world works. Yeah.

Speaker 11 It's like probably an overly simplified stereotype and like some quant algorithms are really good at adjusting to new information. But like, you know, that's the stereotype.

Speaker 11 And like it does seem hard to run a quant fund that is like, these are the returns of going long this basket of stocks and going short that basket of stocks.

Speaker 11 And then like you update it for you can't short stocks anymore.

Speaker 11 Like it just seems hard yeah or the government comes in with like a ton of stimulus and just completely changes the narrative right exactly right the development which we saw a couple of weeks ago right it's not it's not necessarily regulatory that's right like the the economic environment can change rapidly and it does seem very hard to deal with that and like there were a lot of quant funds that blew up and as a sort of like amateur tourist reading those stories i'm like

Speaker 11 The lessons of like the sort of classical development of like quant investing in the U.S. might not apply perfectly to China, but presumably people know that, right?

Speaker 11 It's like, well, they stole the code. But like, by the way, his firm is doing great.
If he just stole the code and like plugged in like U.S.

Speaker 11 trading to Chinese markets, like either that worked really well or like there's something we're missing there.

Speaker 12 Perhaps he tweaked it a little bit. You could draw parallels to another case we've talked about.
That was Jane Street and Millennium's trade secrets. Tell us about the nuances here.

Speaker 11 Well, I mean, one thing is like, there's actually a lot of these cases where the person gets charged criminally.

Speaker 11 I was going to say arrested, but this guy's not been arrested because he was out of the country. But like, a number of them get arrested.

Speaker 11 You know, like the one that is famous is Sergei Ilanikov, who allegedly stole code from Goldman Sachs and got arrested and spent quite a long time in jail before his, like, I think his convictions were ultimately overturned.

Speaker 11 And he was like, he had kind of a rough go of it. He was arrested roughly the time that I left Goldman.
And although I did not steal any code, I like...

Speaker 12 Do you want to say that again?

Speaker 11 I did not steal any code

Speaker 11 to be clear. But I was worried because I was going into media and I was like, what if they get mad at me and say that I stole code?

Speaker 11 There's a real time of like,

Speaker 11 looked like Goldman could have you put in prison if they didn't like you. Or it looked to me like that because I was parented.
Anyway, they put him in prison.

Speaker 11 But like, you know, the Jane Street stuff, no one's going to get put in prison for a variety of reasons, but a big one is like there's no allegation of code stealing, right?

Speaker 11 There's a difference between stealing ideas, which is like a really fuzzy area, right?

Speaker 11 Like Jane Street is like convinced that these traders stole a proprietary, complicated trading strategy that was developed with like much work and investment at Jane Street and belongs to Jane Street.

Speaker 11 And like Millennium is like, no, these guys like, you know, they learned how to trade options and now they're trading options for us. There's nothing proprietary about that.

Speaker 11 And I think probably the truth is somewhere in between. But like, even if Jane Street is right, that kind of like know-how, you can get mad.
You can get sued.

Speaker 11 You can be like stopped from working at the new firm. You can like have to pay them back.

Speaker 11 But like, you're not going to go go to jail for that probably not legal advice whereas like if you like download code from a vpn like yeah you could go to jail yeah if you're caught well

Speaker 12 this guy what's gonna happen to him because he is in china nothing so this is interesting does but you take him back to the us like it's like a real consequence yeah that is a consequence does his firm get to keep doing great and using these models i think there's a widespread assumption that like this stuff decays.

Speaker 11 Yeah. Like maybe he downloaded like the whole like framework for how to build a quantitative trading firm, but like that stuff is kind of public domain.

Speaker 11 To the extent he downloaded like signals, those decay.

Speaker 11 No one thinks that like three years after you've stolen stuff from your firm, it's still, I mean, maybe if it was Renaissance,

Speaker 11 but like, yeah, for the most part, like this stuff decays.

Speaker 11 And so there's like, there's this notion that like you have to be stopped from using it for some period of time, but then after that, it's probably not worth worrying about. Yeah.

Speaker 11 Like you see that in the Jane Street case where it's like

Speaker 11 whatever secret trade they're doing,

Speaker 11 options in India.

Speaker 11 But options in India doesn't tell you very much about the trade. Like, Jane Street will say, it's like some very complicated, you know, clever implementation.
But

Speaker 11 no one thinks that's going to make $100 million a year forever.

Speaker 11 It's like Jane Street had some window

Speaker 11 in which to do that trade. And then Millennium butted in, and now they, you know, have to split the profits or the profits go away.
Probably that's what's happening here. But also,

Speaker 11 this guy can't be

Speaker 11 shooting the lights out, trading quantum China solely with stolen models.

Speaker 12 He's only 33. Yeah.
Yeah. And he stole these secrets allegedly in 2021.

Speaker 11 That's the other cool thing is like the indictment says that he was an associate and was not responsible for these models. Like often

Speaker 11 you have some dispute about like whether the person was like

Speaker 11 downloading their own work. Yeah.

Speaker 11 But like here, the implication is kind of like he like showed up as an associate, did the training, and then like downloaded all the models and left.

Speaker 11 You know, there's like an implication that like he was, he was just taking other people's work.

Speaker 12 This did prompt a response from your readers, as I understand it.

Speaker 11 Oh, yeah. So I wrote about like the high-level problems with doing this, right? Like you just download code and then go start your own firm.
Like the big problem is that you get arrested. Yeah.

Speaker 11 So I was like, you know, moving to China solves that problem. But then a secondary problem is like you're crowding a trade that is, there's not that much profit in it necessarily.

Speaker 11 So like if you and your old firm are both doing it, like you both make less money.

Speaker 11 One reader pointed out that actually the biggest problem with this, besides getting arrested is raising money clients yeah because like if you work at a hedge fund and you download their code then like how do you raise money you're like i stole code from the old hedge fund like no one's gonna invest with you that or you can be like i'm just really smart i have some great ideas but it's like or you could be like

Speaker 12 i'm gonna undercut that hedge fund and I'm gonna give it to you at a cheaper price, which gets us neatly back to farmers markets.

Speaker 11 It does, but I do think that that pitch,

Speaker 11 while it might work for garlic, is very bad for a hedge fund client. Yeah.

Speaker 11 Because you're just like, you're taking on a lot of like operational and regulatory and reputational risk for like saving some money.

Speaker 11 Because like, you know, like this hedge fund strategy fell off the back of a truck and I'll give it to you for cheap. Like, that's not, that's not a good like long-term strategy for like an endowment.

Speaker 11 But moving to China and saying, hey, we've developed our skills at like a leading U.S. institution and now we can apply them to this somewhat like less fully efficient market.

Speaker 11 That's a good pitch. And if you're like nudge, nudge, wink, wink, also we stole the models, like that's a fine pitch too.
I don't know. Yeah.

Speaker 11 And that was the Money Stuff podcast. I'm Matt Levium.

Speaker 12 And I'm Katie Greyfeld.

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