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Sub-prime, derivatives and quants

November 5th, 2007

m_0711I’m fairly behind on my magazine reading, but finally picked up the November/December 2007 issue of MIT Technology Review.  Their cover story examines the current volatility in financial markets, especially the obsession with derivatives and CDOs and other newer financial instruments.  In my day job, we explore the uses of new forms of data and how new sources of data can be exploited for business benefit.  The Tech Review article in a microcosm covers what we’re trying to do in non-financial markets.  I definitely feel a kinship with the quants referenced in the article, though I don’t necessarily have the physics / mathematics grounding.

It’s an interesting article and worth a read if you have time.  Here’s a telling excerpt:

One trader I spoke with at a $10 billion hedge fund based in New York said that his computer executed 1,000 to 1,500 trades daily (although he noted that they were not what he called “intra-day” trades). His inch-thick employment contract precluded my using his name, but he did talk a little bit about his approach. “Our system has a touch of genetic theory and a touch of physics,” he said. By genetic theory, he meant that his computer generates algorithms randomly, in the same way that genes randomly mutate. He then tests the algorithms against historical data to see if they work. He loves the challenge of cracking the behavior of something as complex as a market; as he put it, “It’s like I’m trying to compute the universe.” Like most quants, the trader professed disdain for the “sixth sense” of the traditional trader, as well as for old-fashioned analysts who spent time interviewing executives and evaluating a company’s “story.”

Link:  The Blow-Up, The quants behind Wall Street’s summer of scary numbers via MIT Technology Review (registration required)

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