Financial Market

FTX Is Where Gambling and Wall Street Collided


One of the sidelights to the the sudden collapse of Sam Bankman-Fried’s $32 billion crypto empire is the gambling-related tweets by Sam Trabucco, the former co-head of Alameda Research, the trading arm of FTX. Trabucco claimed to have learned his craft trading cryptocurrencies at the blackjack and poker tables. This revelation has been treated as a novelty, alongside reports that FTX’s company psychologist thought the 20- and 30-something employees were undersexed nerds and complaints that locals were priced out of Bahamian real estate when FTX was riding high. But I think Trabucco’s gambling history is worth more serious consideration if we want to understand what happened at FTX.

When I grew up in the 1960s the only legal gambling in the US was mob-controlled Las Vegas, plus some horse racing and bingo. Small-stakes recreational gambling was widespread and mostly tolerated — if illegal — but public attitudes toward people who gambled for meaningful personal stakes were strongly negative. You were either a winner or a foolish loser. Winners exploited the weaknesses of others at best and were cheaters at worst.

Attitudes changed considerably over the succeeding decades and a new stereotype was born: the advantage gambler who could win consistently without cheating and without exploiting weak people. The archetype was mathematics professor Ed Thorp, who wrote “ Beat the Dealer” in 1962 about blackjack card counting and “ Beat the Market” in 1967 (with Sheen Kassouf) about applying the same principles in financial markets. The sensationalized adventures of Massachusetts Institute of Technology blackjack teams and brainy game-theory experts displacing “leather-assed Texas road gamblers” at the World Series of Poker were some of the fuel for the new image.

The flood of high-stakes games players to Wall Street began in the late 1970s. Mortgage securities and derivatives required a level of mathematics beyond the capabilities of white-shoe bond and stock salespeople with Ivy League degrees (and not in math or science) who filled the investment banks and trading houses. But most people trained in mathematics lacked the intense focus on money, and the risk-taking and psychological skills, needed for successful trading.

The only available candidates came from high stakes advantage gamblers who had honed their skills in poker, blackjack, gin rummy, backgammon, bridge and sports betting. I once estimated for my book ‘ The Poker Face of Wall Street” that at one point, 40% of the traders on the American options exchange were games players recruited by a network of bridge and backgammon champions, and some of the other 60% were also games players.

The main reason these people were successful was not skill in math or psychology. It was the experience of living off high-stakes calculations. Most of them had gone broke a time or two, learned important lessons, and came back to win big. They knew that betting big when you had the edge is as important for survival as cutting losses. They were used to making shrewd decision under intense pressure and the highest stakes, where one gross miscalculation could wipe out the profit from a hundred good decisions or even end your career forever.

As the years went by, Wall Street found other sources for quants. The fall of the Soviet Union brought armies of communist-trained mathematicians, and the cancelation of the superconducting supercollider brought physicists. Wall Street became one of the standard career options for college students who were good at math. Many of these people had never gambled, or never played for high stakes, or never won consistently, or never lived off the winnings. They had to learn their risk lessons at Wall Street stakes, which I personally think was a bad idea.

Based on his tweets and other public information, Trabucco appears to have been a serious and winning gambler at poker and blackjack. He also traded for a couple of years at Susquehanna International Group, a firm known for cross-training its traders with poker and other games, and another reason to suspect Trabucco understood risk-taking. When Alameda was assumed to be a highly successful quantitative crypto trading firm, he seemed like exactly the kind of person you’d want in charge. The skeptics did not imagine Alameda was losing money, as it now appears. The speculation was that it was making too much money, cheating by front-running FTX exchange customers.

Trabucco quit Alameda in August, about three months before its losses became known. Public opinion shifted 180 degrees, as it is wont to do, from Alameda traders are the smartest guys in the room to Alameda was run by idiots who made highly levered bets that crypto would never go down. But the backgrounds of the people involved, plus the opinions of experts who examined FTX, are good arguments that the truth is somewhere in between.

At the moment, FTX’s biggest issue appears to have been misappropriated customer funds, although that has not yet been proven nor officially alleged (but enough money seems to be missing that it’s hard to credit alternative explanations). But a separate and interesting question is whether Alameda was good at trading or not. Did it take excessive and badly calculated risks from the beginning and use the FTX exchange plus the bull market in crypto to cover mistakes? Or did it make profitable risk-controlled trades until the rest of the firm imploded after Trabucco left?

To many people, Trabucco’s background  just reinforces the old notions about gambling and Alameda’s collapse is just another illustration of the ancient principle of gambler’s ruin. But in the modern attitude that recognizes the similarities between risk taking in the casino and the financial exchange, if Trabucco were a consistently winning high-stakes gambler, it makes the latter theory — that Alameda was a victim of FTX’s problems rather than their cause — more plausible.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Aaron Brown is a former managing director and head of financial market research at AQR Capital Management. He is author of “The Poker Face of Wall Street.” He may have a stake in the areas he writes about.

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