In March, a crypto unicorn was born.
Gauntlet, founded just four years ago, soared to the billion-dollar valuation milestone by offering risk-management and stress-testing tools for crypto-lending operations — tools that have become a hot commodity amid the boom in digital assets.
But the company also owes thanks for its turbocharged growth to a quirk of the paranoid and hyper-competitive world of Wall Street quant trading.
In 2018, its cofounder Tarun Chitra was working full time as a quant researcher and developer at the high-frequency-trading firm Vatic Labs and moonlighting as a consultant for crypto startups.
As demand for his crypto work soared, Chitra took a calculated leap: He quit to consult full time and began building a company of his own.
Ditching the world of quantitative trading, where six-figure salaries are but an appetizer for bonuses that mint millionaires with ho-hum regularity, was a gamble.
But Chitra had access to an unusual safety net endemic to the world of brilliant buy-side quant investors: a lengthy noncompete agreement that would pay him to vanish from the industry.
Because Vatic would continue to cover his base salary for two years, Chitra felt emboldened to gamble on uncertain and entrepreneurial ideas far afield of a trading floor, treating the noncompete like an insurance policy.
“I was like, I’ll be on noncompete anyways, so who cares?” Chitra told Insider outside an ice-cream shop not far from his Brooklyn home base.
The gamble paid off handsomely for Chitra, who sports chic Theo eyewear and a narrow blast of green in his otherwise brown long locks.
What do noncompetition agreements mean for Wall Street?
Noncompetition agreements that prevent employees from leaving for rivals are common across finance and corporate America — they’re imposed by banks, tech companies, and even sandwich shops like Jimmy John’s.
But few industries have clauses as restrictive and onerous as quant trading, where billions in profits hinge on technology, proprietary research, and exclusive trading algorithms.
Barring traders, researchers, and technologists from working for any conceivable competitor for as long as two years is increasingly the norm at quant hedge funds and proprietary-trading firms, according to industry sources.
“They’re getting a lot longer,” Dan Franco, a partner with the recruiting firm Durlston Partners who focuses on placing data scientists at quant-trading firms, told Insider. “Most HFT firms and funds are doing two years now.”
For departing employees, the blow of an extended stay on the sidelines is softened by cold hard cash. Just how much varies by firm and role, but a low-six-figure sum is common. It’s a substantial amount by most standards, though it pales in comparison with the usual earning power of Wall Street’s quants.
So long as they steer clear of any rivals, they’re permitted to do just about anything else. And the proliferation of the practice has opened the door for quants to experiment and deploy their mathematical gifts in projects outside the confines of Wall Street.
Chitra is among a growing number of systematic-trading specialists defecting from Wall Street and plying their trade building Silicon Valley unicorns. Rather than sit idle for up to two years, these professionals are increasingly testing the waters at startups, working on algorithmic homebuying, autonomous driving software, thorny medical problems, or even flying cars.
For quants, the proposition, while not risk-free, is simple: If the dalliance doesn’t work out, they can always head back to Wall Street once their noncompete is over.
“Even if all your stock options are worthless because the startup failed, you can go find another job in finance,” said Brandon Sim, a former quant researcher at Citadel Securities who is now the co-CEO of ApolloMed, a healthcare-technology company.
Budding unicorns like Gauntlet and tech giants like Google and Microsoft have become all too happy to capitalize on this dynamic to lure the most coveted brains in finance — even if only temporarily.
“Our first few hires were actually just people on noncompetes. That was our network. We also knew, and they knew, that they would just be sitting out doing nothing during that time period,” Chitra said of himself and his cofounder, Rei Chiang, who also worked in high-frequency or systematic trading. “It was a great way to bootstrap a startup.”
Tech firms once struggled to hire Wall Street quant traders
Opendoor Technologies, which uses algorithms to help people price and purchase homes, has seen record-breaking performance in recent quarters. While industry tailwinds have helped, the firm’s business benefited from the addition of some senior quant-trading firepower.
In late 2020, Opendoor hired Daniel Morillo — who previously oversaw a team of more than 70 as the head of equity quant research at Citadel — as its first chief investment officer.
Morillo says he joined the iBuyer because it offered a unique chance to apply his expertise in algorithmic trading to an antiquated and fragmented market.
“The things that get me out of bed and always did were how innovation in modeling and forecasting can have a big impact,” Morillo told Insider, adding that market-making in homebuying is at a high level not dissimilar to quantitative investing in financial markets.
Others have followed him, including Michael Tucker, who spent nearly 12 years at high-frequency trading firm Teza Technologies before joining Opendoor in October as a vice president of engineering for pricing and data.
Ditching trading for a Silicon Valley tech company hasn’t always been an easy sell to top Wall Street mathematicians, engineers, and data scientists, who are luxuriously compensated and — perhaps contrary to public perception — often fairly risk-averse.
One problem is that joining a startup generally means less cash comp in favor of more risky equity options.
“Very few startups can pay what they’re used to earning,” Franco said of Wall Street’s quants. “So they might take a 50% pay cut.”
“If you’re successful in the quant space, it’s hard to walk away,” said Chase Lochmiller, who had successful runs at Getco and Jump Trading before pursuing entrepreneurial efforts in crypto.
“There’s no job that’s going to pay you as well. You have to abandon your logical mindset and ignore the expected value of staying versus leaving in the short term,” said Lochmiller, whose startup, Crusoe Energy, harvests excess methane from oil fields to power energy-intensive computing such as cryptocurrency mining and AI research.
Another problem is location. Quant-trading firms hew close to New York and Chicago, while Big Tech makes its home in California, a state that bans noncompetition agreements.
“Historically, there’s been limited success in pulling talent out of quant,” said Brennan Hughes, founder of search firm Axiom Group, which placed Morillo and other senior personnel at Opendoor before the firm’s initial public offering via a special-purpose acquisition vehicle in late 2020.
But this is changing, said Hughes, who spent a decade recruiting in quant finance starting in 2009, including a four-year stretch in-house at Vatic, which has expanded beyond high-frequency trading.
Soaring equity valuations for technology companies have made pay packages loaded with company stock more enticing, as have more hospitable work cultures and the allure of new, more relatable challenges beyond the markets.
The COVID-19 pandemic has also played a role, eliminating travel — one of the most popular noncompete activities — and increasing the prevalence of remote work. Over the past two years that has helped neutralize the cross-country divide between Wall Street and Big Tech.
An analysis from Revelio Labs found that Alphabet, Amazon, Facebook, and Microsoft were the most common destinations for engineers, data scientists, and researchers exiting top quant-trading firms.
Revelio Labs, which uses publicly available employment records to identify workforce trends and insights, examined employment flows since 2008 for technical roles at nearly 20 market makers and quant hedge funds in collaboration with Insider.
The analysis found that while rival funds and trading firms were frequent destinations, at several companies — including Akuna Capital, D. E. Shaw, DRW, Jane Street, Jump Trading, Two Sigma, and Tower Research — Silicon Valley giants were the No. 1 destination for departing employees.
Denis Dancanet, the president of Cubist, Point72’s systematic-trading operation, said he’s noticed quite a few quants making the leap to companies like Facebook and Google.
“Doing forecasting and auctions for ads, the models there are not too dissimilar from quant finance,” said Dancanet, who spent several years at startups in between roles at PDT and Cubist.
To be sure, many of these trading firms also hire from the largest tech firms, and some of the departing employees are boomerangs returning to Silicon Valley.
But increasingly, startups are getting in on the action and banking on lengthy quant noncompetes to help supercharge growth.
Even as short-term rentals, quants are ideal employees for tech startups
OpenStore, a rapidly growing platform that acquires the businesses of Shopify merchants, has staffed key roles with former Wall Street math wizards from Citadel and Two Sigma. The similarity to Opendoor in naming convention — and hiring strategy — isn’t a coincidence: Keith Rabois, a general partner at the venture-capital firm Founders Fund, is a cofounder of both companies.
When asked about his penchant for hiring quants, Rabois demurred, saying in an email, “I am not sure I want to reveal my secrets on why this is the best pool to hire from.”
Though some quants have the explicit intention to return to investing after their noncompetes run out, a short-term rental can be worthwhile for both parties.
“That person is not worried about career growth or politics; they just want to work on interesting problems to stay busy. That makes for a great employee,” said Peter Friedman, who founded Integra Advisors and has served as a senior headhunter and consultant to quant-trading firms since the early 2000s.
For startups, the ability to deploy this level of talent on projects even as short as six to nine months can be a significant benefit.
“Yes, these people self-selected to go into trading,” Hughes said. “But they have the capability to go and solve most any problem they put their mind to.”
Put another way: People who’ve spent their lives maxing out their brain capacity and competing at the most elite academic levels aren’t wired to sit still.
“You really think these people who spent 20 years in academic things are suddenly going to sit on their thumbs and go to Cabo and sit on the beach? No way,” Chitra said, referring to the tourist enclave in Mexico. “That’s a misunderstanding of human nature.”
More recently, quants have found the siren song of crypto companies like Gauntlet irresistible.
Several companies working on self-driving-vehicle technology, such as Ghost Locomotion, have also found Wall Street quants a natural fit for their predictive-modeling needs. Lochmiller’s Crusoe Energy has hired high-frequency-trading specialists to build out its network, which taps fiber-optic cables and microwave towers to connect the 86 mobile data centers it’s deployed to remote oil fields.
“For people who are sitting out, it’s just a big positive,” said Matt Moye, the founder of the boutique search firm Monochrome and a nearly 20-year veteran of quant recruiting.
“They can go there and work on something interesting and get equity,” Moye said, adding that he’s seen mandates for fintech clients like Rift Finance, a Series A blockchain company working with smart contracts, surge over the past three years.
While tech firms offer appealing perks, the noncompete clause isn’t a trivial recruiting factor.
“All the guys we’ve been able to recruit, it’s been the noncompete crowd,” said Friedman, whose firm in recent years has added mandates for VC firms and tech startups to its repertoire. “When they don’t have noncompetes, it’s challenging.”
A buffet of alpha: The allure of old-school industries and tangible problems
After spending four years at Citadel Securities, Brandon Sim quit in 2019 without a game plan. He hoped to find work that was more personally meaningful, and the two-year paid noncompete provided a stress-free avenue to experiment and figure it out.
Sim, 28, ended up as a project manager at Apollo Medical, a company that provides digitization and support services to primary-care practices — he described it as a bit like Shopify for independent doctors.
The company, which also acquires and helps scale independent medical practices, paid him $58,300 a year to start.
In speaking with Insider, Sim raved about Citadel Securities, which he said had a culture of hiring the “absolute smartest, best, driven folks.” But the competition in systematic trading is so fierce that you might spend weeks or months unearthing even a small amount of edge. For every 10 ideas, maybe one might produce meaningful alpha.
At ApolloMed, it was the opposite: There was alpha lying around everywhere he looked. He went to work using data and technology to improve services and add efficiencies, including automating its claims system.
“For me, it was almost a dream come true,” said Sim, whose automation efforts catapulted him to co-CEO and substantially boosted the firm’s revenue and stock price. “I really gorged, having starved on morsels of alpha for years.”
It’s also paid off personally for Sim, who got a raise with his ascent to the C-suite. He was paid nearly $9 million last year, consisting primarily of long-term restricted company stock — recognizing performance from both 2020 and 2021 — but also nearly $1 million in cash, according to company filings with the Securities and Exchange Commission.
Like Sim, Morillo was attracted to an old-school industry with tangible problems to solve.
Markets provide quick and concrete feedback, but they can feel abstract. Homebuyers or sellers are often propelled by significant life changes — starting a new job, having a baby, or downsizing after children leave the home.
All-hands meetings at Opendoor start and end by highlighting the experiences of real customers, something that resonated with Morillo “after 20 years of a very abstract sense of impact,” he said.
“That piece of it has been incredibly rewarding to me,” Morillo said.
Quitting the ‘moneymaking optimization engine’
The trend of quants leaving for more-entrepreneurial endeavors could continue to accelerate. There are no signs of a détente among quant-trading firms wielding noncompete agreements, and tech giants and startups will likely continue to court such talent.
But it’s not a given.
For one, quant professionals and recruiters say some firms are expanding the companies they view as competitors to include more tech firms, especially crypto startups. Jump Trading, for instance, was a crypto newcomer in 2017, but that didn’t stop it from suing Lochmiller, alleging he violated his noncompete agreement by joining Polychain Capital, then a small crypto-investment startup. (The case settled out of court; Lochmiller declined to comment on it.)
The pandemic helped amplify the trend, and while remote work is likely to remain a strong inducement, traveling the world will again become an attractive way to spend noncompete periods.
It may also prove tough to keep top quants indefinitely away from Wall Street, where markets present an irresistible and highly lucrative challenge.
“You don’t get the same feedback loop in tech that the markets give you,” Franco said. “Most people who go into tech are itching to get back into finance.”
Dancanet, one of the most high-profile quants to leave for a startup, is already back on Wall Street with Point72.
“I wasn’t scratching any quant itch there. I missed that after some time,” said Dancanet, who joined Theorem, a company applying data science to underwriting and investing in consumer loans, as its head of research after leaving PDT in 2016. He also cofounded Jetoptera, a startup working on jet-propulsion-powered flying vehicles.
He said that his responsibilities included high-level business development and that he missed the fast-paced, ever-changing problems in the markets.
The most intractable roadblock, however, might be psychological: Risk aversion is endemic to the trade.
Many quants, especially those focused on high-frequency, ultrafast strategies, aren’t open to the uncertainty andinherent to tech startups. Their daily grind involves obsessing over volatility and maximizing their Sharpe ratio, the measure of how much money they’re making on trades compared with the risk they’re taking on.
“They’re so unwilling to do something with a tiny amount of risk,” Chitra said. “That’s sort of built into people’s mindset.”
Chitra, who now has a billion-dollar company on his hands, said he thinks quants would benefit from learning to live a little and take a calculated career gamble every once in a while.
“Life is a little too short to be always focused on that,” Chitra said.
Lochmiller can attest to that as well. The 36-year-old Colorado native has spent noncompete periods trying to complete the so-called Seven Summits, climbing the tallest mountain on each continent. He climbed Mount Vinson in Antarctica in 2013 after leaving Getco. An attempt at Mount Everest in 2014 was cut short after the deadliest accident in the mountain’s history.
In 2018, after leaving Polychain, he tried again and scaled Everest. It was during his two months in Nepal, with no job lined up and nothing to think about, that he formulated some of the ideas that eventually led to Crusoe Energy.
“What was beautiful about that was it gave me this entirely free space and time to think about what I wanted to do,” Lochmiller said.
“At the end of the day, what you’re building is a moneymaking optimization engine,” Lochmiller said of quant-trading firms. “At some point I thought, if I look back on my career 20 years from now and I just did this, I think I’d be disappointed with the impact I had on the world.”
Lochmiller says Crusoe Energy’s current fleet of data centers can repurpose up to 650,00 metric tons of flared gas a year, the equivalent of 140,000 gas-fueled cars.
Just last month, the company — which has projects underway with Exxon Mobil in North Dakota — raised another $350 million in funding at a valuation of $1.75 billion, becoming the latest unicorn born from a Wall Street quant.