Nerds on Wall Street E-Book

David J. Leinweber

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 531

Veröffentlichungsjahr: 2009

Beschreibung

An intriguing look at how technology is changing financial markets, from an innovator on the frontlines of this revolution Nerds on Wall Street tells the tale of the ongoing technological transformation of the world's financial markets. The impact of technology on investing is profound, and author David Leinweber provides readers with an overview of where we were just a few short years ago, and where we are going. Being a successful investor today and tomorrow--individual or institutional--involves more than stock picking, asset allocation, or market timing: it involves technology. And Leinweber helps readers go beyond the numbers to see exactly how this technology has become more responsible for managing modern markets. In essence, the financial game has changed and will continue to change due entirely to technology. The new "players," human or otherwise, offer investors opportunities and dangers. With this intriguing and entertaining book, Leinweber shows where technology on Wall Street has been, what it has meant, and how it will impact the markets of tomorrow.

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

Dedication

Foreword

Acknowledgements

Introduction

No Hedge Fund in My Tree House

A Concept Map of the Book

Flat Is the New Up

Tag Clouds

Web Site

Notes

Part One - Wired Markets

Chapter 1 - An Illustrated History of Wired Markets

Notes

Chapter 2 - Greatest Hits of Computation in Finance

Financial Technology Stars

Hits and Misses: Rational and Irrational Technology Exuberance

The Crackpot as Billionaire

Future Technological Stars

Mining the Deep Web

Language Technology: Your Tax Dollars at Work

EDGAR: The SEC Gets the XML Religion

Greatest Hits, and the Mother of All Greatest Misses

Notes

Chapter 3 - Algorithm Wars

Early Algos

Algos for Alpha

Algos for the Buy Side: Transaction Cost Control

From Order Pad to Algos

A Scientific Approach: Mathematics, Behavior, and Discovery

Job Insecurity for Traders

So Many Markets, So Little Time

Known Unknowns and Unknown Unknowns

Models Aren’t Markets

Robots, RoboTraders, and Traders

Markets in 2015, Focus on Risk

Playing Well with Robots and Algorithms

Seeing the Big Picture in Markets

Agents for News and Pre-News

Algorithms at the Edge

Notes

Part Two - Alpha as Life

Chapter 4 - Where Does Alpha Come From?

Alpha from Innovation

Alpha, the ARPANET, and the Internet

Summary

Notes

Chapter 5 - A Gentle Introduction to Computerized Investing

Indexing 101

Active Management

What Do Quantitative Managers Do?

Active Management on Steroids: Market Neutral Portfolios

Finding Information and Inefficiencies to Produce Alpha

All the Stocks, All the Time

Jumping the Trading Cost Hurdle

Putting the Pieces Together

Does This Really Work?

Notes

Chapter 6 - Stupid Data Miner Tricks

“Your Mama Is a Data Miner”

Strip Mining the S&P 500

Enough Regression Tricks

Is There Any Hope for Data Miners?

Summary (and Sermonette)

Counting the Kiddies

Notes

Part Three - Artificial Intelligence and Intelligence Amplification

Chapter 7 - A Little AI Goes a Long Way on Wall Street

Prehistory of Artificial Intelligence on Wall Street

AI People Can Use

Where’s the AI?

Real Charting

Virtual Charting

Descriptive Programming

Information Flows and Displays in MarketMind and QuantEx

Integration with Real-Time Feeds and Historical Databases

Composing Syntactically Bulletproof Programs

From Indications to Orders to Executions

Vapor No More

Future Plans for AI in Finance (in 1995)

Notes

Chapter 8 - Perils and Promise of Evolutionary Computation on Wall Street

The AI Spring?

Genetic Algorithms

Evolving Financial Models

An Early Lesson: Intelligence without Learning

Arbitrage and Predictive Strategies

Maximizing Predictability

Chromosomes for Forecasting Models

Fitness Functions for Forecasting Models

Use of the GA for Coping with a Combinatoric Explosion of Models

Genetically Optimized Forecasting Models in Hindsight

Genetic Algorithm Warning Label

Notes

Chapter 9 - The Text Frontier

Ten Pounds of News in a Five-Pound Bag

Pre-News and Disintermediation

More Pre-News on the Internet

Notes

Chapter 10 - Collective Intelligence, Social Media, and Web Market Monitors

Investing with Crowds

Never Met a Data Vendor I Didn’t Like

Santa Claus Is Coming to Town

Counting Messages

Whisper Numbers—Ruined by Success

Monitoring Web Activity: No GUI, No Glory

More Web, More Warnings

Notes

Chapter 11 - Three Hundred Years of Stock Market Manipulations

The Power of Manipulation

A Classic Market Manipulation

The Very Model of a Modern Market Manipulator

Bluffing

How Communication Changes Market Manipulation

Anatomy of a Successful Manipulation

The Internet Era: A Manipulator’s Paradise

Cyber-Manipulations

It’s Not Just Micro-Caps

Where Are We Headed?

Notes

Part Four - Nerds Gone Wild Wired Markets in Distress

Chapter 12 - Shooting the Moon

To Protect and to Serve: Market Transparency

Stupid Engineering Tricks

Stupid Financial Engineering Tricks

Take Them Out and Shoot Them

Tech Hall of Shame

Quants Who Saw It Coming

Notes

Chapter 13 - Structural Ideas for the Economic Rescue

Fractional Home Ownership

New American Bank Initiative

Still Mad, but Ever Hopeful

Notes

Chapter 14 - Nerds Gone Green

Accelerating Innovation

From the Vault: Bits, Bucks, and BTUs

Billions of Dollars and Millions of Tons of Carbon

Epilogue

Notes

NOWS Companion Web Site

Index

About the Web Site

Additional Praise forNerds on Wall Street

“New technologies are exploited first by “alpha geeks,” folks with the skills to push the envelope. This is as true on Wall Street as it was on the web. Leinweber was one of those alpha geeks, but is also the first to chronicle the innovation process from early adopter to mainstream acceptance.”

Tim O’ReillyFounder & CEO O’Reilly Media

“Nerds on Wall Street is a thoughtful, funny, and comprehensive history of the overlooked role geeks have played in our financial markets from the earliest days of telegraphy, to the current crisis.The book is an irreverent “I Was There” chronicle of how markets were formed from silicon, savvy and software. Highly recommended.”

Paul KedroskyInfectious GreeTen Asset Management and Kauffman Foundation

“Clear, light language and wry humor mask David Leinweber’s exhaustive compendium of technological innovations for and impacts on asset trading. Leinweber brings an entrepreneur’s experience and an academic’s perspective to financial technology; and has produced the definitive work, as up-to-date as it is encyclopedic.”

David K.WhitcombFounder and Chairman Emeritus, Automated Trading Desk andProfessor of Finance Emeritus, Rutgers University

“For decades Dave has not only understood more investment technology than anyone, but with patience and a great sense of humor, he has made the effort to explain it to his less tech savvy friends. Nerds on Wall Street is a home run for us all.”

Richard RosenblattCEO, Rosenblatt Securities

“Nerds on Wall Street is a wild, funny ride though the technological changes that underpin modern financial markets. You will find yourself laughing out loud at what could otherwise be a dry subject. And, if you’re not careful, you might even learn something!”

Richard R. LindseyChairman, International Association of Financial Engineers;Principal, Callcott Group LLC

“If you’re interested in what computers are doing with your money, then this book is for you.”

Richard Peterson MDManaging Director, MarketPsy Capital LLC;Author, Inside the Investor’s Brain

“In David’s words, the stock market is a “victim not a cause” of the great mess of 2008. It’s refreshing to read a book with such insight during these difficult times. I applaud David Leinweber for this timely masterpiece.”

Bill AroninCo-founder Quantitative Analytics, Inc;Sr. Manager,Thomson Reuters

“Dr. Leinweber continues to be a patron saint of any nerd who stumbles onto Wall Street. Many of his most insightful ideas are here in this book, the utility of which are only matched by the humor of their presentation. As the markets have changed in 2008, the need to collect, process, and understand novel information sources has never been greater.”

Jacob SiskQuantextual Nerd Extraordinaire, Infoshock,Yahoo!

“Who says there is neither wit nor wisdom on Wall Street? This account of the evolution of quantitative finance is an invaluable guide for anyone seeking to understand everything from how indexed investing works to the nature of that elusive concept, ‘alpha’.The accessible style and dead-pan humor make this a book that even those with an advanced case of fear of mathematical formulae can understand and enjoy.”

Suzanne McGee, Journalist, Wall Street Journal & Barrons

“Thoughtful insights covering trading, investment practice and system design encased in humor by an expert in all four: a good and practical read.”

Evan Schulman“Father of Program Trading”, Founder,Tykhe, LLC.

“David is one of the top practitioners in the fields of textual analysis and sentiment and its application to trading. Leveraging “smart” machines to parse and extract signal from massive quantities of textual data is hard, and David’s work has put him at the vanguard of the next wave of alpha generation.”

Roger EhrenbergInformation Arbitrage, and IA Capital Partners

Copyright © 2009 by David J. Leinweber. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

Chapter opener images courtesy of www.wordle.net

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty:While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials.The advice and strategies contained herein may not be suitable for your situation.You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Leinweber, David, 1952-

Nerds on Wall Street : math, machines, and wired markets / David J. Leinweber.

p. cm.

Includes index.

eISBN : 978-0-470-50056-9

1. Investments—Computer network resources. 2. Wall Street (New York, N.Y.) I. Title.

HG4515.95.L43 2009

332.64’273—dc22 2009008848

To my parents, Pearl and Phil Leinweber, for theirbottomless encouragement and support, and fortheir tolerance of any number of chemical and electrical mishapsthat would have persuaded many people to encouragetheir son to take up the violin.

Foreword

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 credentials (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 delivered 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 education will come with images, illustrations, and humor you will not soon forget. It will be love ... at first sound bite!

Theodore R. Aronson Managing Partner, Aronson+Johnson+Ortiz Past Chairman, CFA Institute

Acknowledgments

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 kickers, 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 founders 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 material 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.

Introduction

I hope people think of this book as sort of a Hitchhiker’s Guide to Wired 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 earlier 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 become general all-around Wall Street BSDs.1 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

I am, no doubt, high on the list of poseurs, and I will be the first to admit it. Information technology applications in financial markets aren’t physics and closed-form solutions; they fit more in the zone of engineers and experimental guys, but they’ve been around forever. At the top of the heap we find Thomas Edison and Tim Berners-Lee, inventor of the World Wide Web. At the low end, they include more than a few potentially dangerous tinkerers like this guy: