Dialogue with Alameda Co-CEO Sam Trabucco: How to Develop Trading Strategies?

Original Title: 《Q\&A with Sam Trabucco》

Compiled by: Bu Er, Chain Catcher

Sam Trabucco, a graduate of MIT with degrees in mathematics and computer science, is now a quantitative cryptocurrency trader and co-CEO of Alameda Research. Before joining Alameda, he worked as a quantitative trader at Susquehanna International Group (SIG), focusing on bond ETF trading and sports betting services.

Q: How would you describe your investment strategy? How do you balance quantitative science with other inputs?

When I am active in trading, I try to pay attention to everything. Our automated trading bots trade on all major platforms, and I constantly observe what they are doing. If I notice any anomalies in trading, I investigate. If handled properly, there is an opportunity to maximize returns. Sometimes it reveals a parameter or system issue that is worth addressing. We also have internal tools to monitor premiums on various products, such as whether there has been significant volatility in tokens recently, or a large increase in trading volume or open interest or liquidations. I keep a close eye on these situations. I also monitor some social media accounts; for example, we get immediate notifications whenever Elon Musk tweets.

We have an internal system called Pointer that makes it easier to adjust certain factors in our quantitative models, including positions, interest rate parameters, decay parameters, and so on.

Although our trading is mostly automated, we make hundreds of such parameter changes every day. By using the Pointer system, we can control thousands of operational buttons and also use spreadsheets to manage some more complex aspects, such as model classes.

Q: For example, some traders have meticulous characteristics and professional habits. Do you have a daily trading routine?

I am not particularly disciplined. Each day after I wake up, I first check the priority list of tasks on Slack, then handle those tasks or actively monitor trades based on how busy the market is.

Additionally, I proactively pay attention to other interesting things, which helps me understand some background of the industry. If there is a significant change in market style, I can quickly decide whether to continue executing operations. I do not stick to routines.

Q: As market risks increase, how will your trading strategy evolve?

As the scale of investment grows (and cryptocurrency trading volume increases), we must consider more risks than ever before. For example, how much of a major contract's open interest are we willing to take on? Given the lack of data on counterparty risk, how can we justify how much capital to retain on each platform? We have created a framework to assess risk based on this imperfect framework. As investment scales increase and practical experience accumulates, this framework is continuously improving.

Q: What are your strengths?

I believe I am quite sharp-minded; when problems arise or the market changes rapidly, I can make quick decisions and execute plans, and I usually do very well. This is very important in cryptocurrency trading because the quantitative crypto market changes very quickly, and it can have a huge impact on profits and losses in just a few seconds. To some extent, I have become numb to some large trading numbers, so I do not focus on results. This mindset allows me to make more favorable investment decisions regarding large investments.

Additionally, another relative advantage I have is my intuition about how the market operates. This is hard to articulate, but spending a long time in this industry makes me more familiar with its rules, allowing me to better understand how to interpret the information behind events and what kind of impact they might have on the market.

Q: What differences do you see between the crypto market and traditional markets?

The biggest difference lies in volatility. Compared to traditional investments, the crypto market is highly volatile, especially in bond ETF trading. This is caused by a series of factors, including asset classes, trading structures, and 24/7 trading hours.

The lack of a centralized operating mechanism is also a significant reason for this phenomenon. If no one enforces that prices on two exchanges must be the same, investors can arbitrage on the same product, and futures spreads can persist. Of course, capital comes at a cost. The data quality and information transparency in the crypto market are lower than in traditional markets, but since no one regulates it, exchanges have no incentive to improve.

Q: How do you monitor market news and sentiment?

We have several ways to monitor market news. We frequently check Twitter and other social media to ensure nothing major is happening. We also have a channel called #urgent-trade-news, encouraging anyone in the company to quickly post anything they think might impact the market. This is a great supplement to keep us updated on important news and influential events in the market.

In terms of monitoring sentiment, one of our significant advantages is often being able to identify points where the market seems to overestimate the impact of news. These points are often when we make large, long-term bets because we feel we can predict market direction, as the market tends to correct itself amid changes. For example, in mid-July 2021, when BTC dropped to the $30K level after some news, we acted on this. The news was not entirely positive for cryptocurrency, but it was never as negative as the market treated it.

Q: What weaknesses or biases do you think you have?

I can be quite stubborn and generally may be overly confident, but I think this helps me. Overconfidence often leads you to try more things you think you "should" do, and sometimes these things go well, which happens to me often. Of course, this can also lead to problems; sometimes I overestimate my abilities and may pay a high price for it. I have many obvious weaknesses, such as not being an excellent coder; complex code can be overwhelming for me. Fortunately, my colleagues at Alameda compensate for this.

I also have a tendency to correct myself. For example, if I miss an opportunity in some recent trades due to being too slow, I might then lean too heavily towards making very quick trades for a while, but this also comes at a cost. While I have become quite adept at avoiding some obvious investment biases and minimizing their impact, there are indeed some investment biases I am uncertain about.

Q: What do you think are the shortcomings of this market?

To be honest, I think the cryptocurrency industry is the most interesting trading market in the world; it is a unique and constantly evolving market, and I try to stay ahead in it. I find some mechanisms frustrating, such as 24/7 trading, which leaves no time for rest; it would be great if that could change. But this also presents a great investment opportunity, which is what makes it interesting.

Q: What are your expectations for the future development of the crypto industry and companies?

I hope we can continue to maintain agility and a leading position. Our significant success is partly because we are always at the forefront of the market, quickly identifying the most important opportunities and being able to act swiftly, backed by a series of hard and tedious work that competitors have not done. For example, we saw that yield farming had significant investment value, so we built the world's largest yield farming operation system within days. We noticed that some long-term investment projects were undervalued, so we established a super active venture capital department.

The crypto market itself is developing rapidly, and we need to frequently adjust our automated strategies to quickly adapt to these changes. While crypto technology continues to evolve, this will still be the key to success, and we need to keep doing this to maintain our success. Through projects like Solana, I hope cryptocurrencies can fully realize their potential as the currency of the future.

Q: Lastly, and perhaps most importantly, what is your current strong market belief?

I do not often say that I have a strong long-term market belief. However, I do strongly believe that the market will continue to develop and perform in some way. For instance, the market is currently very sensitive to certain biased news, sometimes even overly sensitive, leading to quick reversals after impacts occur. However, as the market self-regulates, it will adapt more to this rhythm.

From recent regulatory trends, regulators are increasingly cracking down on some of the "less safe" features offered by crypto exchanges, and more exchanges are taking measures to reduce the maximum leverage available to users. The impact of these measures is to reduce liquidations and lower short-term volatility. In the future, large and extreme fluctuations will become less frequent (though not nonexistent), and I expect this to be a trend in the future development of the crypto market.