Head of a Quant Trading Firm Handling 3 Trillion Won a Day Says, “Individuals Should Be Value Investors”

This is how Yongjin Kim, CEO of algorithm-based crypto trading firm Presto Labs—which I consider the only truly serious (“real deal”) emerging Korean financial firm I’ve personally met (I met with their CTO and a director)—answered a reporter’s question, “How should individual investors invest?” in an interview with The Miilk.

I don’t know the precise history of Presto Labs, but when we met two years ago I heard their daily trading volume was around 1 trillion won, and as of last year it was 3 trillion won. Despite more and more traditional financial institutions entering the crypto market, the firm appears to be steadily generating profits through algorithmic market making.

Market makers profit by exploiting the spread between bid and ask prices, executing high-frequency trading (HFT) and accumulating very small gains per trade. Renaissance Technologies’ Medallion Fund, which has posted annualized returns in the 60% range for decades by capturing countless uncorrelated arbitrage opportunities (trades where the prices of financial instruments are not linked; in such cases, even if the market moves sharply in one direction, losses can be avoided or limited) and applying roughly 10x leverage, can also be viewed as an algorithm-driven trading strategy.

Even Yongjin Kim, CEO of Presto Labs, which trades 3 trillion won a day, says, “As a quant trading firm, we can’t really claim that our systems are better than those of giants like Citadel or Jump Trading.” This remark hints at how the firm has been able to manage substantial capital using only its own balance sheet: their trading arena has been crypto.

Today’s high-frequency and algorithmic hedge funds in the U.S. are not earning returns as strong as many people imagine. Because the U.S. financial market is the largest in the world, there are countless competitors, and as a result, when an arbitrage opportunity appears, it disappears extremely quickly. At this point, speed—how fast you can complete trades using your algorithms—matters more than the algorithms themselves. The New York Stock Exchange (NYSE) even rents out space next to its own servers so hedge funds can colocate their servers there, and these additional costs only further erode hedge fund returns. Economists describe this phenomenon by saying that “the market is efficient.”

The reason crypto used to be well suited to algorithmic trading—what people commonly call “quant” strategies—is that there were few, if any, institutional market makers. The more retail investors there are, the more irrational market prices become and the thinner liquidity gets, which in turn creates more arbitrage opportunities. For example, most of the people who got rich during the 2017–18 bitcoin boom were not those who borrowed money to buy bitcoin, but those who repeatedly bought bitcoin overseas and brought it into Korea to resell. They captured and exploited what was called the “kimchi premium”, an arbitrage opportunity. You could argue that the kimchi premium itself was an artificial bubble created by foreign exchange regulations and related rules, but in any case, opportunities that reliably offer more than 10% profit per trade are extremely rare in the history of financial markets. I therefore suspect that the Presto Labs CEO’s modesty toward global top-tier quant hedge funds stems from the fact that he is trading in a relatively easier market.

Despite living in a world with such efficient financial markets, some finance influencers tell ordinary people—who have no access to proper data pipelines (which are extremely expensive if you want real-time data) or to algorithms that can discover statistical relationships and execute trades—that they can make money through quant investing. It is true that there are markets with such tiny spreads that large financial institutions don’t bother to participate. But for most people like us, my view is that it is virtually impossible to generate guaranteed profits using algorithmic trading or quant strategies—and it appears the CEO of Presto Labs, who trades 3 trillion won a day, thinks much the same.

This is why AWARE pursues value investing based on corporate fundamentals in the U.S. market. Because the U.S. financial market is already extremely efficient, it is difficult for individuals to capture arbitrage gains through short-term trading, but that same efficiency also reduces the likelihood that you will enter a position at a significantly unfavorable price in the short run. In addition, you can find many companies that are proactive about returning capital to shareholders and whose management teams and shareholders are aligned in their incentives.