Lessons from Citadel’s “Market Lens” reports

Citadel Securities, one of the world’s preeminent market-making firms, occasionally publishes short reports as part of an ongoing “Market Lens” series. Although relatively short, they are easy to read and contain interesting and unique analyses which are probably difficult for non-HFT entities to reproduce. For example, they discuss topics such as the effect of tick size on bid/ask spreads, HFT overall on market liquidity, continuous trading vs. frequent batch auctions, and so on. Below, I will briefly highlight several interesting points from each of their publications.

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Legal justification of the backdoor & mega backdoor Roth

This document summarizes statutory provisions of the Internal Revenue Code in conjunction with IRS guidance pertaining to the popular “backdoor Roth” and “mega backdoor Roth” strategies. These strategies allow for fuller utilization of the tax-privileged retirement savings account known as the Roth IRA.

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Reading the classics: Black and Scholes (1973) on options pricing

I’d like to announce the first post in what I hope will be an ongoing series of short but fascinating expositions of classic papers.

In general, I think there’s value in reading classic papers that isn’t easily captured from modern treatments. Although textbooks, for example, typically have a measured pedagogical approach, they often fail to capture the historical context that preceded and motivated foundational work. Furthermore, older papers typically have a more concrete (and therefore more easily understood) approach, as opposed to modern approaches, which tend toward the theoretical. It is my earnest hope that you, the reader, will also come to appreciate the unique benefits of perusing classic literature.

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Theoretical advances in AMM understanding

Since the launch of Uniswap V1 in November 2018, decentralized exchanges (DEXes) with liquidity pool-based automated market makers (AMMs) have become a dominant model in decentralized finance with total daily transaction volumes reaching well into the hundreds of millions of dollars. Although liquidity pool-based AMMs had been described prior to Uniswap, most notably in Hanson (2002), Logarithmic Market Scoring Rules for Modular Combinatorial Information Aggregation, traditional financial markets have typically relied on central limit order books. In the context of decentralized finance, however, where on-chain state storage and computation are relatively expensive and slow, passive provisioning of liquidity pools that automatically ‘update’ after each order offers significant advantages.

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