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Totally Clueless

The BBC delves into another facet of the financial problem: Mathematicians’ role in market mayhem

The financial markets are increasingly dominated by a new breed of highly mathematical traders, known as quantitative analysts or “quants”.

Whilst some celebrate the fact that empirical techniques are now applied to trading, others blame the quants for the current credit squeeze.

According to recruitment consultant Matthew Hall, having the social skills to communicate with less numerate colleagues is essential for those who want to get a job as a quant in a bank.

But there is also a market for the intellectual recluse. Many of the quant hedge funds are looking for raw intelligence and little else.

When I telephoned one fund to ask if we could interview some of their quants, the receptionist told me that I was unlikely to get permission, partly because of the secretive, commercially sensitive nature of their work but also, because many of them in that fund are autistic.

The real, underlying problem is that these people are theoretical mathematicians and they are creating their models based on the data from their employers. Their employers all tend to be financial people who graduated from a limited number of schools, and therefore make very similar sorts of assumptions about how things work. These models are programmed in the computers that are actually making the trades and will react to the same types of stimuli in the same manner.

This environment tends to produce wild swings in the market because all of the programs are buying or selling based on similar facts, and they do it in bursts that no human can follow. The companies that use these programs don’t understand the programs, and the people who designed them don’t understand economics. The only checks on these programs is whether they make profits. The only real accomplishment of quantitative analysis is that it make the markets even less comprehensible, and some market swings might be the result of a misplaced semicolon [sorry, geek joke].


1 The Culture Ghost { 11.27.07 at 12:09 am }

Did you ever read “When Genius Failed: The Rise and Fall of Long Term Capital Management” by Roger Lowenstein or see “Trillion Dollar Bet” the NOVA episode about Long Term Capital Management? Absolutely fascinating. I have watched “Trillion Dollar Bet” several times and it still boggles, mystifies and thrills (It’s like watching “Titanic” – you just know that damn ship is going to hit that damn iceberg).

To this day I am stunned by the re-emergence of hedge funds after the near global catastrophe precipitated by LTCM in the 90s.


2 hipparchia { 11.27.07 at 12:32 am }

[gak. whenever i hear anybody use the word efficient around money, i break out in hives.]

i love math just as much as the next person [ok, maybe more than the next person] but the elegance of a solution is not necessarily a measure of its nearness to reality. on the other hand, if enough of the trading is being done according the models, then we’re going to have no other choice but to be assimilated into the mathematicians’ reality.

3 Steve Bates { 11.27.07 at 12:36 am }

Quantz? Artistic? That would be Frederick the Great’s court flutist and personal music teacher, Johann Joachim Quantz. Quantz’s accompanist, better known to us because his name was C.P.E. Bach and his father was J.S. Bach, earned only a tiny fraction of Quantz’s salary, and don’t think he didn’t notice the fact.

What? quants? autistic? Oh. Well, that’s completely different. <emily_litella_voice> Never mind! </emily_litella_voice>

4 Bryan { 11.27.07 at 1:21 am }

I understand a whole lot more about math than I’ll ever readily admit, but it doesn’t interest me because it isn’t a challenge for me and silly math instructors always want to know why something is the correct answer, rather than accepting that it is. It is the way my mind works and isn’t particularly useful in life.

I could look at what these guys write and understand what they are doing, but that doesn’t answer the real question, which is – is that what they should be doing? They are reducing the reaction times to events to the microsecond range [they are on networks, so there’s a lag], which can mean a profit, instead of a loss if the assumptions are right, but, given that their actions will control market trends, their assumptions will always look right.

If the quants have been told that a particular piece of data signals a downturn. when that data is detected their program will sell. Even if the data wouldn’t have necessarily caused a downturn, all of these programs selling will trigger one.

Now you get to the seamier side of the process. If I study their reactions and determine what these triggers are, I can then manipulate the market to my personal benefit. I can force sell offs and buying sprees, and if I don’t get greedy, I can make a hell of a lot of money without much work, or much of an investment.

When you hear market analysts hemming and hawing over why the market did something, don’t assume they are just stupid, although some of them are. They real reason may have been a garbled network packet or a typo.

5 Cookie Jill { 11.27.07 at 10:47 pm }

These guys should have just stuck with reading the Form and playing the ponies.