Monday, June 25, 2007

Rise of the money machines

As far as I could tell there was only one other physicist at foo camp, and he is CTO and head quant at a big hedge fund. He and Tim O'Reilly ran a discussion called Rise of the Money Machines :-)

From the Economist's review of the new Peter Bernstein book Capital Ideas Evolving (sequel to Capital Ideas, which was quite good).

Economist: ...Indeed, Mr Bernstein seeks to show how financial giants such as Barclays Global Investors and Goldman Sachs Asset Management have built on the insights developed by the academics. If there are ways systematically to beat the markets these days, they probably require men with physics doctorates and massive computer power rather than a smooth manner and the right contact book.

There is the equivalent of a technological arms race as modern fund managers vie to find the best computer models and to trade quickly before their competitors spot the same opportunities. ...

6 comments:

Sam Jackson said...

Hmm, speed speed speed. What I found fascinating, though I guess obvious, was that many firms are compelled now to move their servers et al geographically closer to shave minuscule fractions of seconds off trade times, not so much for that competitive edge, but simply to remain competitive! Crazy, crazy.

Dave Bacon said...

"There is the equivalent of a technological arms race as modern fund managers vie to find the best computer models and to trade quickly before their competitors spot the same opportunities. This race is making the markets more efficient, and so making the academics' models look more realistic than before."

Because of course speed makes markets more eficient? Huh?

Anonymous said...

"Competitive" is a hopeful word. There can be quite a drop off from first to second.

Three years ago I was a partner in a small equities arbitrage shop which had an extremely simple program looking for an obvious arbitrage. But getting to it required speed. For a while we had the fastest order entry which meant around $20M+ in profits per day. We were overtaken in the speed race soon enough, which put us in second place. Second place meant break-even at best: the winner gets the good stuff and the good exit, the runner-up gets the bad stuff and no exit.

We went from focusing on microsecond program run times to nanosecond RAM optimization and moving one of our severs to the exchange's data center in NJ. Anything for the edge! In the end, we were a technology shop which traded as a hobby, and couldn't keep up with the leaps and bounds of our competitors. At least it was fun while it lasted!

Anonymous said...

So Scott Aaronson didn't show?

steve said...

There's always an ambiguity in the use of "efficient" to describe markets. It might mean the speed at which the market reflects new information (nanoseconds very different from milliseconds, esp. for traders), but that isn't necessarily the same as the market finding the optimal allocation of resources for society (nanoseconds not very different from milliseconds, but bubbles very dangerous).

As far as I could tell Aaronson wasn't there, but maybe I just missed him.

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Coming home from very lonely places, all of us go a little mad: whether from great personal success, or just an all-night drive, we are the sole survivors of a world no one else has ever seen.

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