Math, Machines, and Wired Markets.
I wish I could tell one of those stories about how when I was in the eighth grade, I noticed a pricing anomaly between the out-of-the- money calls on soybean futures across the Peruvian and London markets and started a hedge fund in my tree house and now I own Cleveland.
Quantitative finance is not a topic usually associated with laughter. That is about to change with the publication of Nerds on Wall Street.
I was first exposed to Dave Leinweber’s wit when he delivered a speech entitled “Nerds on Wall Street.” I believe the event happened 20 or 25 years ago at a CFA Institute conclave. He was a dude obviously knowledgeable about the investment business, with impressive creden- tials (MIT, Harvard, RAND), alluding to technical aspects of numerical finance and getting into the minutiae of electronic trading. Certainly on Wall Street such qualifications aren’t unique. But, oh, how he deliv- ered his message! His rapid-fire sense of humor was worthy of Henny Youngman or Shecky Greene.
Dave’s speech was augmented by equally hilarious visuals. (Unfortunately, some of Dave’s props are so rare they are no longer available. Rats!) On a particularly memorable occasion (one of ITG’s famous conferences), Dave did his shtick with a drummer punctuating his one-liners with rimshots. I kid you not! The crowd, loosened up by cocktails, was reduced to tears from laughter.
Now, decades later, I’ve heard Dave deliver numerous speeches and presentations with various titles. But they are always roughly the same subject—yup, you guessed it—“Nerds on Wall Street.”
So sit back and be prepared to be educated by a master.The educa- tion will come with images, illustrations, and humor you will not soon forget. It will be love . . . at first sound bite!
The most recent of the essays in this book were written in December 2008, while others go back to the start of electronic markets—a span of over 20 years, so there are a lot of people to thank.
In more or less chronological order, Karen Goldberg, of the MacArthur High School math department for letting me play with what passed for a computer there, Henry Kendall of MIT, for letting me play with a real one, Harry Lewis at Harvard, for suggesting that my empty course brackets be filled at the Business School; Bruno Augenstein and Willis Ware, at RAND Corporation, for getting me interested in real-time artificial intelligence; Steve Wyle at LISP Machines and Don Putnam and Lew Roth at Inference Corporation for encouragement and assistance to hammer the square peg of early artificial intelligence into the round hole of finance; Dale Prouty,Yossi Beinart, and Mark Wright of Integrated Analytics for rounding off the peg into MarketMind and later QuantEx; Ray Killian and Frank Baxter of Jefferies and ITG, for noticing that the rounded peg now did fit the finance hole.
All of the MarketMind and QuantEx users, observers, and tire kick- ers, who let me get an unusually broad exposure to investing and trading, particularly Evan Schulman, Blair Hull, David Shaw, Blake Grossman, Ron Kahn, Richard Rosenblatt, Steve Snider, Mike Epstein, Bill Pasqua, Chris Dean Andrew Lo, Robert Schwartz, and John Mulheren. Henry Lichstein for his push-the-envelope ideas on machine learning and text; Rob Arnott, John Dorian, and Tan Pham at First Quadrant, where we got to push many envelopes; Larry Russell, Eric Feigen, Scott Steadman, Jacob Sisk, Lew Roth, and others who helped start the “ahead of its time” textual firm Codexa, along with return engagements by our board members, Harry Lewis, Henry Lichstein, and Dale Prouty; John Leyard and Dave Porter at California Institute of Technology, where found- ers of firms ahead of their time are welcome; and my similarly inclined Berkeley colleagues, Hayne Leland, John O’Brien, Terry Hendershott, and Richard Lyons, for their help launching the Center for Innovative Financial Technology at the Haas School of Business.
Thanks go to authors and coauthors of previous versions of mate- rial appearing in Nerds on Wall Street, Ananth Madhavan, Salman Khan, and John O’Brien; and to John Wiley & Sons editors Pamela van Giessen and Emilie Herman.
In particular, the blue-ribbon, five-star, summa cum laude, golden oak-leaf cluster of author thanks goes to Marguerite Moreno, a Codexa co-conspirator, who in addition to being married to me for 22 years, bearing two children, and feeding them in addition to three dogs, took on what turned out to be the large and extensive task of organizing a book that has hundreds of pictures, quotations, and conceptual flotsam, every single one of which requires at least two permissions interactions to include here. I advise aspiring authors to quote no one and draw your own pictures. Marguerite (who also answers to SWMBO) wants me to emphasize that although she has read and commented on the manuscript way too many times, all errors are mine.
Ihope people think of this book as sort of a Hitchhiker’s Guide toWired Markets. There are no robots parking cars for six million years, but there are robots trading millions of shares in six milliseconds, so maybe that’s close enough.
In 2006, I got a call from another nerd on Wall Street (NOWS), Rich Lindsey. At the time, Rich was president of Bear Stearns Securities (Bear Stearns’ prime brokerage company) and a member of the board of the mother ship firm. I had met him nearly 10 years ear- lier when he was in charge of market surveillance at the New York Stock Exchange (NYSE). A former Yale professor, Rich is a veritable poster boy for nerdy Ph.D.’s who break out of the pure geek world to
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become general all-around Wall Street BSDs. He was putting together
a book called How I Became a Quant: Insights from 25 of Wall Street’s Elite, and invited me to write a chapter. Proceeds were going to the Fischer Black Foundation for needy students. I knew this was for real, and not like those offers high school kids get to be in the Who’s Who of American Teens, and then they have to buy five copies. Plus the book had the kind of flattering title that gets people to write for free, but is more subtle and less of a bald-faced lie than, say, Insights from 25 of Wall Street’s Hottest Hunks. No one does a free chapter for Another Bunch of Middle-Aged Financial Guys.
The other people writing for the book included some of the smartest kids on the block and some old friends, so I said yes on the spot.There are chapters by pillars of the quant world, authors of the standard texts, and writers of oft-cited papers. Others did interesting and rewarding things with technology and markets. Emanuel Derman, author of My Life as a Quant: Reflections on Physics and Finance ( John Wiley & Sons, 2004), made this point in the first line of his review for the Wall Street Journal: “By my reckoning, several of the 25 memoirists in How I Became a Quant are not true quants, and they are honest (or proud) enough to admit it.”2
