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 B
Authors: Scott Patterson
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million in capital, he hit the ground running, cranking out an annualized return of about 30 percent his first year in operation. By 1988, BOSSwas running about $100 million in assets and generating consistent double-digit returns.
BOSS, like APT, hit a dry spell in early 1988. Toward the end of the year, Bamberger decided he’d had enough of Wall Street. He wound down BOSS and moved upstate to teach finance and law at the State University of New York at Buffalo. He never again traded stocks on a large scale.
But his strategy lived on, and not just at Princeton/Newport. Traders who’d worked for Bamberger and Tartaglia fanned out across Wall Street, bringing stat arb to hedge funds and investment banks such as Goldman Sachs. As D. E. Shaw raked in profits, other funds started trying to copy its superfast trading style. Robert Frey, who’d worked as an APT researcher, took stat arb to Jim Simons’s fund, Renaissance Technologies, in the early 1990s. Peter Muller, the singing quant who triumphed at Wall Street Poker Night in 2006, appeared on the scene at Morgan a few years after Tartaglia was ousted and started up his own stat-arb money machine, one that proved far more robust. Ken Griffin, who kept a keen eye on everything Thorp was doing, adopted the strategy at Citadel. Stat arb soon became one of the most popular and consistent ways to make money on Wall Street—too popular, in fact, as its practitioners would discover in August 2007.
Ed Thorp’s influence was spreading across the financial universe in other ways as well. At MIT, a team of blackjack card counters sprung up, the group that would eventually inspire the bestselling book
Bringing Down the House
. An early member of the group was a young math hotshot named Blair Hull, who’d read
Beat the Dealer
in the early 1970s. By the end of the decade, he’d parlayed $25,000 in winnings to jump-start a trading career in the Chicago options trading pits, having also read
Beat the Market
. In 1985, he founded Hull Trading, which specialized in using quantitative models and computers to price options on a rapid-fire basis. Hull eventually became one of the most advanced trading operations in the world, a quant mecca that transformed the options world. In 1999, Goldman Sachs shelled out $531 million for Hull, which it developed into one of Wall Street’s premier high-frequency trading outfits.
For Thorp and Regan, meanwhile, everything had been running smoothly. The fund had posted solid gains in 1986 and was surging ahead in the first half of 1987, helped by BOSS’s gains. Then stocks started to wobble. By early October, cracks were forming in the market that would turn into a full-blown earthquake. At the heart of the disaster: the quants and the Black-Scholes option-pricing formula.
Sometime around midnight, October 19, 1987, Leo Melamed reached out a sweaty-palmed hand, picked up the phone in his nineteenth-floor office at the Chicago Mercantile Exchange, and dialed Alan Greenspan. The newly appointed chairman of the Federal Reserve, Greenspan was staying at the upscale Adolphus Hotel in Dallas to address the American Bankers Association’s annual convention the next day. It was to be his first major speech as chairman of the central bank.
The speech would never happen. The Dow industrials had crashed, losing 23 percent in a single day. Other exchanges, including the Merc, were in chaos. Many players in the market were bankrupt and couldn’t settle their bills. Greenspan had been fielding calls from executives at nearly every major bank and exchange in the country. His single goal: make sure the markets were up and running Tuesday morning.
Greenspan wanted to know if the Merc would make it. Melamed, the exchange’s president, wasn’t sure. The Merc had become a trading hub for a new financial product, futures contracts linked to the S&P 500. At the end of a typical trading day, traders who’d lost money on any contracts would transfer cash to the
BOSS, like APT, hit a dry spell in early 1988. Toward the end of the year, Bamberger decided he’d had enough of Wall Street. He wound down BOSS and moved upstate to teach finance and law at the State University of New York at Buffalo. He never again traded stocks on a large scale.
But his strategy lived on, and not just at Princeton/Newport. Traders who’d worked for Bamberger and Tartaglia fanned out across Wall Street, bringing stat arb to hedge funds and investment banks such as Goldman Sachs. As D. E. Shaw raked in profits, other funds started trying to copy its superfast trading style. Robert Frey, who’d worked as an APT researcher, took stat arb to Jim Simons’s fund, Renaissance Technologies, in the early 1990s. Peter Muller, the singing quant who triumphed at Wall Street Poker Night in 2006, appeared on the scene at Morgan a few years after Tartaglia was ousted and started up his own stat-arb money machine, one that proved far more robust. Ken Griffin, who kept a keen eye on everything Thorp was doing, adopted the strategy at Citadel. Stat arb soon became one of the most popular and consistent ways to make money on Wall Street—too popular, in fact, as its practitioners would discover in August 2007.
Ed Thorp’s influence was spreading across the financial universe in other ways as well. At MIT, a team of blackjack card counters sprung up, the group that would eventually inspire the bestselling book
Bringing Down the House
. An early member of the group was a young math hotshot named Blair Hull, who’d read
Beat the Dealer
in the early 1970s. By the end of the decade, he’d parlayed $25,000 in winnings to jump-start a trading career in the Chicago options trading pits, having also read
Beat the Market
. In 1985, he founded Hull Trading, which specialized in using quantitative models and computers to price options on a rapid-fire basis. Hull eventually became one of the most advanced trading operations in the world, a quant mecca that transformed the options world. In 1999, Goldman Sachs shelled out $531 million for Hull, which it developed into one of Wall Street’s premier high-frequency trading outfits.
For Thorp and Regan, meanwhile, everything had been running smoothly. The fund had posted solid gains in 1986 and was surging ahead in the first half of 1987, helped by BOSS’s gains. Then stocks started to wobble. By early October, cracks were forming in the market that would turn into a full-blown earthquake. At the heart of the disaster: the quants and the Black-Scholes option-pricing formula.
Sometime around midnight, October 19, 1987, Leo Melamed reached out a sweaty-palmed hand, picked up the phone in his nineteenth-floor office at the Chicago Mercantile Exchange, and dialed Alan Greenspan. The newly appointed chairman of the Federal Reserve, Greenspan was staying at the upscale Adolphus Hotel in Dallas to address the American Bankers Association’s annual convention the next day. It was to be his first major speech as chairman of the central bank.
The speech would never happen. The Dow industrials had crashed, losing 23 percent in a single day. Other exchanges, including the Merc, were in chaos. Many players in the market were bankrupt and couldn’t settle their bills. Greenspan had been fielding calls from executives at nearly every major bank and exchange in the country. His single goal: make sure the markets were up and running Tuesday morning.
Greenspan wanted to know if the Merc would make it. Melamed, the exchange’s president, wasn’t sure. The Merc had become a trading hub for a new financial product, futures contracts linked to the S&P 500. At the end of a typical trading day, traders who’d lost money on any contracts would transfer cash to the
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