Quantums: The mathematical geniuses who conquered Wall Street

In the modern stock market, the ball is not ruled by "old-school" traders like the famous Gordon Gekko. Now exchanges are ruled by mathematical geniuses who use supercomputers to make a profit. Such people are called quanta.

Journalists of The Telegraph understood whether they are good or evil for the financial market. We bring to your attention the main thoughts of this material.

At seven minutes past one in the afternoon of April 23, 2013, a tweet from the Washington-based Associated Press appeared in the news feed. Its content: “Urgent: two explosions in the White House. Barack Obama is wounded. " Agency account hackedhackers calling themselves the “Syrian electronic army”. But literally in a split second, this was noted on hundreds of traders' computers on Wall Street.

All of these machines have a program for scanning any messages by keywords. For example, “explosion”, “White House” and “Obama”. Traders went crazy. Over the next few seconds, the Dow Jones index fell 140 points, the capital of $ 200 billion simply "leaked".

A few minutes later, the hoax was exposed, and the market returned to its previous performance. But for many, the fact that a fake tweet could have such serious consequences seemed incredible. So who ultimately drives Wall Street, people or cars?

If you believe that you are still people, then you are hopelessly behind the times. The last decade has seen a real technological breakthrough. The former type of trader with his hair licked back and a leather portfolio for $ 5 thousand has sunk into oblivion. It was replaced by powerful machines capable of instantly analyzing huge amounts of data and selling and buying stocks with unprecedented speed. Look at the room where traders are sitting. There are no more men galloping and screaming into the phone. You will see rows of artistic appearance of citizens sitting quietly at screens that monitor market indicators. About 70% of transactions on Wall Street now go through special software. The mathematical geniuses who wrote all these programs are henceforth the most intelligent here.

Mathematicians made their first foray into the financial world back in the late 60s. It all started with the publication in 1967 of the book Beat the Market , Edward Thorp , a professor of mathematics at the University of California. In it, the author described a method that will help make money in the stock market, which he tested on a blackjack game in a casino. The system itself turned out to be so pretty that many game houses changed the rules. The method was quite simple and effective: sell securities at one price, and then buy them back at a reduced price. In 1974, Thorpe organized a hedge fund and continued to terrorize the market with his ideas.



Edward Thorpe (Time & Life Pictures / Getty Images)

At the same time, circumstances began to take shape not in favor of people engaged in pure science. After landing on the moon in 1969, the US government cut back state support for science in order to transfer all forces to the Vietnam War.

“A whole generation of physicists dropped out of their universities and rushed into the stock market, which at that time was in a deep depression,” says James Owen Weatherall, author of Physics of Money. The children had to live on something and many of them decided to go to the financiers. "

A similar story occurred in Britain when, after the collapse of the USSR, a flood of scientists from the Warsaw Pact countries poured into the country. They brought with them new methods of analysis and the strong belief that computers can make a real revolution in predicting market behavior. So a new branch of knowledge was born - quantitative analysis. Her pedantic mathematicians began with disheveled beards and a lack of taste for the accepted style in the gentleman's clothes.

Jim Simons, a mathematician who made a significant contribution to the development of string theory, was a living legend for these guys. No one could have thought that this scientist would ever descend from his cosmic heights to the perishable problems of Wall Street. But in 1982, he founded the highly successful hedge fund management company, Renaissance Technologies. One of these Medallion funds brought an incredible 2,478.6% in profit over 10 years. This is more than any other hedge fund on the planet, including George Soros's Quantum Fund.



Jim Simmons (AP) The

sophisticated, top-secret algorithm that brought success to the company continued to do its job in the nulls as long as the foundation existed. Profit with Medallion was about 40% per annum, which made Simons one of the richest people on the planet with a fortune of more than $ 10 billion.

Of the two hundred employees of the company working in a building similar to a Long Island fort, one third have a doctorate in mathematics, physics or statistics. Renaissance was once called the collection of the best minds in physics and mathematics in the world. They don’t hire Wall Street guys. A degree in financial sciences is also considered futile.

Not surprisingly, the old-school financiers eventually hated quanta. Not only because they shoved them from the top of the mountain, the point is the difference in cultures and worldviews. One of the hedge fund brokers described his experience with quanta in his blog: “They don't have easy conversations. I learned not to even try to start an innocent conversation about the weather while I was traveling with any of them in the elevator - they do not understand that such a topic can be discussed just like that. They are sure that you are asking some serious question about weather conditions that can affect something. That’s the same thing with jokes - the answer can only be an absent look. ”

But what do experts in the field of quantitative analysis really do?

Patrick Boyle and Jesse McDougall manage their hedge fund from the town house on Islington. Their office is located next to an ethnic cafe, whose visitors probably hate capitalism as much as they love healthy, organic food. They spend their working time in a small room with three monitors. Their day starts at 7 and ends closer to 23.00. “We have monitors everywhere, even in the kitchen and living room,” says Boyle. “We can view indicators at lunch, log in remotely if we are not at home in the evening.” He showed the journalist Telegraph a chart that reflects the activities of the fund. Their curve does not sink as deep as the market as a whole falls, and grows faster than the FTSE index.

How do they do it?

“It's math,” Boyle says. “We buy stock market data and analyze it. It is like a weather forecast. For example, we can with a confidence of 65% that the market will grow until closing. So with a probability of more than 50%, our short-term actions in the market will be successful. "

When asked who wrote the program that they use, Boyle says “I”. The next question: “How did you do it. “Gradually,” he replies.

The program itself may have been written for a long time, but the transaction speed that it provides is impressive. Many quanta use the high-frequency trading approach. It involves conducting a large number of transactions in a short period of time. “In a split second, the cost can change by a cent. Repeat the operation a thousand times on each of the hundreds of transactions, and you will get good money, ”says MacDougall.

In order to delve deeper into the topic, reporters met with Simon Jones, who until recently headed the quantitative analysis department at a large bank. At 36 years old.

“I worked with the best specialists in my field. We collected them all over the world: from China, Russia, India. We have a very competitive environment, ”he said. “Suppose I noticed that with the Dow rising, our UK FTSE is also going up. You can make money on this. To do this, you need to get information from New York and send back the transaction decision, but buy your FTSE earlier than anyone else. ”

In this case, speed is paramount. So, the race of providers begins. In 2010, Spread Networks ran a cable from New York to Chicago through the Allegany Mountains, which won something about 1/1000 of a second of time in transferring information between the stock exchanges.

In order to get such a means of communication between London and New York, the bank in which Jones worked had to lay out about $ 50 million. “This would give us an advantage over other players at 6/1000 fractions of a second,” he says.
This game over time may not be very reliable. “Warren Buffett holds, for example, Coca-Cola shares, when they go down, he says that he does not dump them, because he is sure that they will rise again,” - says Jones. “But the guys working with HFT are only interested in the next millisecond. But when too many people start to panic about the next millisecond, then all the hopes collapse. ”

Something similar happened on May 6, 2010. There were so many transactions on the New York Stock Exchange that trading lines could not cope with the load, and the trading decided to freeze temporarily. Between 14.30 and 15.00, the Dow Jones Index lost and brought back about $ 1 trillion. On this day, for example, the shares of the management company Accenture fell to almost zero, and Apple shares rose to $ 100 thousand (We wrote about this failure here ).



“No one knew what to expect and what to do in such a situation. And it was terrible, ”recalls the analyst who worked that day with the HFT system on the Dave Lauer exchange.

A bell rang for him that day. “I saw how competition, who is faster, makes things very fragile,” he said. In subsequent years, he had to make a difficult choice, the family was expected replenishment. “I then thought how I would explain to the child how I earn a living?”, Dave said. He left his previous job and testified to the Senate Committee, in which he stated that the crisis was triggered by high-frequency traders.

Part of the troubles that happened on May 6 can be explained by the strategy followed by HFT traders when they make fictitious buy or sell offers in order to stimulate their competitors. On that day, deals were announced to sell 19.4 billion shares, but only hundreds of millions were actually sold. Most were active for a hundredth of a second. So traders checked the soil.

Is such a system reasonable, bringing the market into a state of instability? Were all investments in the race against time and new technologies justified? Buffett's business partner Charles Munger described the HFT as "essentially a devilish invention." “This will legalize the practice of leading deals,” he said. For ordinary investors, the system really does not bring any benefits.

Однако большая часть квантов отказывается видеть в своей работе опасность для рынка, хотя некоторые из них и высказывают определенные опасения.

«Некоторые ребята, которые приходят торговать на рынок, имея за плечами опыт чистой науки, привыкли решать конкретные задачи. Многие из них полагают, что способны найти формулу, которая идеально опишет работу рынка. Это поиски философского камня, в жизни такое невозможно», — поясняет Патрик Бойл. Проблема, по его словам, в том, что за цифрами и графиками, перестают видеть людей.

After 16 years in the City of London, Simon Jones plans to start traveling. “At work, you can get up a good quantum. But sometimes I think about the contribution that I could make to the development of society, ”he said. Jones says that he and his colleagues — the brightest minds of our time — worked days and nights, but only to become richer.

“As a result, it causes damage to those industries from which all these scientists have come - physics, chemistry, and healthcare. If the search for a cure for cancer paid as much as in the City of London, this medicine would have long been found. "

Other related articles:

• How to become a quantum in an HFT company
• How the mysterious trader and his algorithm caused the largest stock market crash
• Three very expensive milliseconds
• Social networks, finance and robots: How a trader earned $ 2.4 million in 28 minutes with one tweet
• Investigation: How high-frequency traders collapsed and manipulated the US Treasury market on October 15, 2014