Read Online The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It by Scott Patterson - Free Book Online Page A
Authors: Scott Patterson
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eye-popping $40 million, then $50 million in 1987. The group started to gain legendary status on Wall Street, in part due to its CIA-like secrecy.
In 1986, Tartaglia hired David Shaw, a computer whiz teaching at Columbia University, to head APT’s technology unit. The Stanford-educated Shaw was an expert in a hot new field called parallel processing, in which two or more mainframe computers crunched numbers on the same problem to ramp up speed and efficiency. Shaw had virtually no trading experience, but he was a quick learner, and soon became interested in the group’s unique trading strategies. His colleagues found him shy, nervous around women, and self-conscious about his looks. Tall, thin as a spider, Shaw dabbled in the early computer dating services springing up in the 1980s—in other words, he was a classic quant.
Morgan had hired Shaw with the promise that he’d be able to develop his own trading strategies, where the real money was to be made. But as Tartaglia steadily took over the group, making every effort to keep the lucrative trading platform to a chosen few, Shaw realized that he wouldn’t have the opportunity to trade.
He decided to take matters into his own hands. One day in September 1987, the group was giving a presentation about its business model and trading strategies to senior management. Shaw’s presentation on parallel processing and high-speed algorithms was proceeding normally. Suddenly, he started to expound on complex mathematical bond-arbitrage strategies. As the meeting ended, APT’s traders and researchers sat fuming in their chairs. Shaw had crossed the line. Programmers weren’t supposed to trade, or even think about trading. Back then, the line between programmer and trading strategist remained firmly in place, a boundary that steadily dissolved as trading became more and more computerized.
For his part, Shaw had hoped that Morgan’s higher-ups would see the value of his ideas. He’d also approached upper managementon his own about creating an entirely new research unit, a scientific laboratory for research on quantitative and computational finance. But his ideas fell on deaf ears, and Tartaglia wasn’t giving any ground. The weekend after the presentation, Shaw decided to quit, informing Tartaglia of his decision the following Monday. Tartaglia, possibly perceiving Shaw as a threat, was happy to see him go.
It may have been one of the most significant losses of talent in the history of Morgan Stanley.
Shaw landed on his feet, starting up his own investment firm with $28 million in capital and naming his fund D. E. Shaw. It soon became one of the most successful hedge funds in the world. Its core strategy: statistical arbitrage.
Tartaglia, meanwhile, hit a rough patch, and in 1988, Morgan’s higher-ups slashed APT’s capital to $300 million from $900 million. Tartaglia amped up the leverage, eventually pushing the leverage-to-capital ratio to 8 to 1 (it invested $8 for each $1 it actually had in its coffers). By 1989, APT had started to lose money. The worse things got, the more frantic Tartaglia became. Eventually he was forced out. Shortly after, APT itself was shut down.
In the meantime, Bamberger had found a new home. One day after he’d left Morgan, he got a call from Fred Taylor, a former Morgan colleague who’d joined a hedge fund that specialized in quantitative investing.
“What’s it called?” Bamberger asked.
“Princeton/Newport Partners,” Taylor told him. “Run by a guy named Ed Thorp.”
Thorp, Taylor explained, was always interested in new strategies and was interested in looking at stat arb. Taylor introduced Bamberger to Jay Regan, and the two hit it off. Thorp and Regan agreed to back a fund called BOSS Partners, an acronym for Bamberger and Oakley Sutton Securities (Oakley and Sutton are Thorp and Regan’s middle names, respectively). Bamberger set up shop in a 120-square-foot twelfth-floor office on West 57th Street in New York. With $5
In 1986, Tartaglia hired David Shaw, a computer whiz teaching at Columbia University, to head APT’s technology unit. The Stanford-educated Shaw was an expert in a hot new field called parallel processing, in which two or more mainframe computers crunched numbers on the same problem to ramp up speed and efficiency. Shaw had virtually no trading experience, but he was a quick learner, and soon became interested in the group’s unique trading strategies. His colleagues found him shy, nervous around women, and self-conscious about his looks. Tall, thin as a spider, Shaw dabbled in the early computer dating services springing up in the 1980s—in other words, he was a classic quant.
Morgan had hired Shaw with the promise that he’d be able to develop his own trading strategies, where the real money was to be made. But as Tartaglia steadily took over the group, making every effort to keep the lucrative trading platform to a chosen few, Shaw realized that he wouldn’t have the opportunity to trade.
He decided to take matters into his own hands. One day in September 1987, the group was giving a presentation about its business model and trading strategies to senior management. Shaw’s presentation on parallel processing and high-speed algorithms was proceeding normally. Suddenly, he started to expound on complex mathematical bond-arbitrage strategies. As the meeting ended, APT’s traders and researchers sat fuming in their chairs. Shaw had crossed the line. Programmers weren’t supposed to trade, or even think about trading. Back then, the line between programmer and trading strategist remained firmly in place, a boundary that steadily dissolved as trading became more and more computerized.
For his part, Shaw had hoped that Morgan’s higher-ups would see the value of his ideas. He’d also approached upper managementon his own about creating an entirely new research unit, a scientific laboratory for research on quantitative and computational finance. But his ideas fell on deaf ears, and Tartaglia wasn’t giving any ground. The weekend after the presentation, Shaw decided to quit, informing Tartaglia of his decision the following Monday. Tartaglia, possibly perceiving Shaw as a threat, was happy to see him go.
It may have been one of the most significant losses of talent in the history of Morgan Stanley.
Shaw landed on his feet, starting up his own investment firm with $28 million in capital and naming his fund D. E. Shaw. It soon became one of the most successful hedge funds in the world. Its core strategy: statistical arbitrage.
Tartaglia, meanwhile, hit a rough patch, and in 1988, Morgan’s higher-ups slashed APT’s capital to $300 million from $900 million. Tartaglia amped up the leverage, eventually pushing the leverage-to-capital ratio to 8 to 1 (it invested $8 for each $1 it actually had in its coffers). By 1989, APT had started to lose money. The worse things got, the more frantic Tartaglia became. Eventually he was forced out. Shortly after, APT itself was shut down.
In the meantime, Bamberger had found a new home. One day after he’d left Morgan, he got a call from Fred Taylor, a former Morgan colleague who’d joined a hedge fund that specialized in quantitative investing.
“What’s it called?” Bamberger asked.
“Princeton/Newport Partners,” Taylor told him. “Run by a guy named Ed Thorp.”
Thorp, Taylor explained, was always interested in new strategies and was interested in looking at stat arb. Taylor introduced Bamberger to Jay Regan, and the two hit it off. Thorp and Regan agreed to back a fund called BOSS Partners, an acronym for Bamberger and Oakley Sutton Securities (Oakley and Sutton are Thorp and Regan’s middle names, respectively). Bamberger set up shop in a 120-square-foot twelfth-floor office on West 57th Street in New York. With $5
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