Nerds on Wall Street

The Impact of Technology on Wall Street and Investing

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• Overview of "Nerds on Wall Street"
  • Contents of "Nerds on Wall Street"
  • Introduction to Nerds on Wall Street
  • Praise for "Nerds On Wall Street"
  • More Praise for "Nerds on Wall Street"
  • Forward by Ted Aronson

• Part 1 – Wired Markets
  • Chapter 01 – An Illustrated History of Wired Markets
  • Chapter 02 – Greatest Hits of Computation in Finance
  • Chapter 03 – Algorithm Wars

• Part 2 – Alpha as Life
  • Chapter 04 – Where Does Alpha Come From?
  • Chapter 05 – A Gentle Introduction to Computerized Investing
  • Chapter 06 – Stupid Data Miner Tricks

• Part 3 – Artificial Intelligence and Intelligence Amplification
  • Chapter 07 – A Little Artificial Intelligence Goes a Long Way on Wall Street
  • Chapter 08 – Perils and Promise of Evolutionary Computation on Wall Street
  • Chapter 09 – The Text Frontier – AI, IA, and the New Research
  • Chapter 10 – Collective Intelligence, Social Media, and Web Market Monitors
  • Chapter 11 – Three Hundred Years of Stock Market Manipulations

• Part 4 – Nerds Gone Wild – Wired Markets in Distress
  • Chapter 12 – Shooting the Moon – Stupid Financial Technology Tricks
  • Chapter 13 – Structural Ideas for the Economic Rescue – Fractional Homes and New Banks
  • Chapter 14 – Nerds Gone Green – Nerds on Wall Street, off Wall Street

“Leinweber isn’t half as crazy as people said! He foresaw the profound change that wired technology would bring to markets (robots trading millions of shares in six milliseconds). Now he nails the Stupid Financial Engineering Tricks that dumped the markets, and offers his patented, sound insights on how the nerds will help bring us back.”

Jane Bryant Quinn,
Financial columnist for Bloomberg.com and Newsweek
Author, “Smart and Simple Financial Strategies for Busy People“

“David Leinweber has been a pioneer in developing and applying advanced technologies in the capital markets. This book is a virtual tour de force survey of many of the key innovations that ‘nerds’ and computational techniques have driven over the past two decades, with key insights on future opportunities in this area. It is a highly engaging, insightful, and entertaining book that will benefit all investors who want to understand the increasingly important role that technology plays in the financial markets.”

Blake Grossman
CEO, Barclay’s Global Investors

“Leinweber leads his readers through a largely unexplored forest, turning over ordinary-looking rocks to reveal hidden colonies of peculiar creatures that feed on moldering mounds of numbers teeming with trailing zeroes. His book is absorbing, instructive, and very, very funny.”

David Shaw
Founder D.E.Shaw & Co.

“Through the lenses of finance “nerds”, Dave Leinweber recounts the quantitative and technological revolution in equity trading. The book is humorously written but it is serious and insightful. It makes an important contribution to our understanding of financial innovation and the evolution of the capital markets.”

André F. Perold
George Gund Professor of Finance and Banking
Harvard Business School

“Finally, a book that rightly honors the pocket-protected, RPN-loving, object-oriented, C-compatible, self-similar Wall Street quant! This is a delightfully entertaining romp across the trading floors and through the research departments of major financial institutions, told by one of the early architects of automated trading and a self-made nerd.”

Andrew W. Lo
Harris & Harris Group Professor
Director, MIT Laboratory for Financial Engineering
MIT Sloan School of Management

“David Leinweber is one of the great financial innovators of our time. David possesses a unique combination of expertise in the fields of money management, artificial intelligence, and computer science.”

Blair Hull
Founder, Hull Trading & Matlock Trading

“An important, accessible, and humorous guide to today’s electronic markets. Like Capital Ideas mixed with Being Digital, as told by Steve Martin.”

Frank Fabozzi
Professor in the Practice of Finance, Yale School of Management
Editor, “Journal of Portfolio Management“

“Most new technologies are exploited first by “alpha geeks,” the folks with the skills to push the envelope. This is as true on Wall Street as it was on the web. David 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’Reilly
Founder & CEO O’Reilly Media

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

Paul Kedrosky
Infectious Greed
Senior Fellow, Kauffman Foundation
Consulting Strategist, Ten Asset Management

“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 Rosenblatt
CEO, 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. Lindsey
Principal, Callcott Group LLC
Chairman, International Association of Financial Engineers

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

Richard Peterson MD
Managing 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 Aronin
Co-founder Quantitative Analytics, Inc.
Sr. Manager, Thomson Reuters

“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. Whitcomb
Founder and Chairman Emeritus, Automated Trading Desk
Professor of Finance Emeritus, Rutgers University

“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 Sisk
Infoshock, Yahoo

“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
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 Ehrenberg
Information Arbitrage
IA Capital Partners

>>>>>> READ MORE HERE < <<<<<<

“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’Reilly
Founder & CEO, O’Reilly Media

“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. Lindsey
Chairman, International Association of Financial Engineers
Principal, Callcott Group LLC

“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 deadpan humor make this a book that even those with an advanced case of fear of mathematical formulae can understand and enjoy.”

Suzanne McGee
Wall Street Journal & Barrons

“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 Kedrosky
Senior Fellow at the Kauffman Foundation
Editor of “Infectious Greed“

“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. Whitcomb
Founder and Chairman Emeritus, Automated Trading Desk
Professor of Finance Emeritus, Rutgers University

“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.

“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 Rosenblatt
CEO, Rosenblatt Securities

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

Richard Peterson, MD
Managing 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 Aronin
Co-founder, Quantitative Analytics, Inc
Senior Manager, Thomson Reuters

“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 Ehrenberg
Managing Partner, Information Arbitrage and IA Capital Partners

“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 Sisk
Quantextual Nerd Extraordinaire, Infoshock, Yahoo!

>>>>>> READ MORE HERE < <<<<<<

Financial Nerds Gone Wild – Global Markets in Distress

The original plan for this book stopped after the three parts that you’ve just read. These parts are about how markets became machines, and about using more machines to pick stocks and trade them electronically, bringing in an assortment of nifty ideas from finance and computer science along the way.

By the fall of 2008, it was clear that stopping there would have made for a book that seemed quaint. How could any financial author ignore what has happened since then? The problem was that I had spent my entire financial career in the stock markets, and the stock market was a victim, not a cause, of the Great Mess of ’08.* The causes came not from the stock side of Wall Street, but from a mix of abuses, greed, and sheer stupidity from the people who created, repackaged, and sold overly complex derivatives that started with mortgage loans that should never have been made, and were assembled into an over-leveraged financial house of cards that is still collapsing today.

These final chapters are about that collapse. Chapter 12 – Shooting the Moon: Stupid Financial Technology Tricks, is about how wildly complex derivatives traded in opaque markets, and the misuse of mathematical models to value them, contributed to the mess.

This is informative on how responsible use of market technology might have avoided the crisis and can help avoid an even more dreadful sequel in the future. Technology errors of omission and commission have contributed to our present woes. Stock markets are almost perfectly transparent, with full information available to all, and the best electronic clearing and settlement in history. These technologies were omitted in building the skyscraper of cards (“house of cards” seems too mild) out of collateralized debt obligations (CDOs), credit default swaps (CDSs), synthetic collateralized debt obligations (SCDOs), and the rest.

The Hall of Shame for those guilty of incompetent engineering features collapsing bridges, flaming dirigibles, exploding spacecraft, and melting reactors. We can add a new wing for overly complex derivatives, modeled in exquisite detail by myopic nerds with Ph.D.’s who got lost in the ever more complex simulations but ignored the basic principles, and their lavishly paid bosses who ignored the warnings from the best of them so they could be even more lavishly paid.

Chapter 13 – Structural Ideas for the Economic Rescue, expresses the view that as structural flaws in the current recovery plan become increasingly apparent, it seems clear that there is a need for a coherent systems approach to these problems. At first, I felt a great deal of trepidation about delving into this. As a longtime stock guy, I felt I didn’t know what I was talking about in this area. It has become increasingly clear that the people who are in charge don’t know what they are talking about, either. They try to solve problems charging up one hill with $700 billion of our money, drop a couple of hundred billion, then charge back down leaving the same problems in place.

Many aspects of the plans put forth are overly complex, and seem to ignore central aspects of the problem to protect and further enrich the people and institutions that created the mess. This chapter describes two original ideas suggested by my colleagues that address key issues in the economic recovery in a simple, straightforward way. Both have a near circuit designer’s approach, removing “gain” in a system that makes it unstable, and bypassing systemic flaws that impede the desired goals. These ideas are:

• Fractional home ownership. My Berkeley office-mate John O’Brien is one of the founders of the field of financial engineering. His idea, which expands on a suggestion from Fed Chairman Ben Bernanke, has the potential to address the crisis where it started, in the housing market.
• New American bank initiative. This is an idea for getting ourselves out of the hole we are in. With my coauthor for this chapter, Sal Khan, I describe a structural solution, free of the inherent flaws and conflicts that have resulted in a tragic waste of time and money in recent months.

Chapter 14 – Nerds Gone Green, discusses how many nerds are finding themselves cast out of Wall Street. Some will find their way back, but many will not. What’s a former Wall Street nerd to do? The answer may lie in market technology that is valuable outside of financial markets. Just as the Internet started out as a way for the Department of Defense to link military computers, there are future uses for market technology that may rival or surpass those involving traditional financial instruments.

Efficient, environmentally sound use of energy is one of the most important. We hear from voices as diverse as Thomas Friedman, T. Boone Pickens, and Ted Turner that energy technology is the next big thing. It is not just about making energy; it is about matching the consumers and the producers of this resource. For oil, the markets are there. For electricity, they are not, at least not in a useful way (unless you were Enron in 1999). Matching consumers, at the individual and business level, and producers, including small alternative suppliers of solar panels, is an allocation and communication problem.

Wired markets have developed to a remarkable level in finance, giving individual buyers and sellers the capabilities to interact with each other and with market makers using direct electronic access that was once found only in large institutions. There is a parallel path in energy markets. Simple real-time spot pricing is not a full solution.

Consumers need to know that cutting back today to help producers produce less pollution or greenhouse gases will not cost them more tomorrow. They effectively need software to manage trade futures, and it needs to be simple and reliable—a considerable technology challenge. Nerds with pink slips may find they go well with green.

>>>>>> READ MORE HERE < <<<<<<

* Jon Stewart has a much better non–politically correct name for what has transpired lately. It begins with “Cluster.” But everyone tells me I can’t put it in the book or use it at conferences. I think you need to watch the Daily Show to pick up on its continuing economic coverage. Stephen Colbert, whose show follows Stewart’s, says the financial markets are like a roller-coaster ride where you vomit money. This brand of fake news has its share of dumb gags, to be sure, but there is more “truthiness” to be found there than in much of what passes for serious broadcast journalism.

Recent guests include Barack Obama, Bill Clinton, John McCain, and Tony Blair. There are frequent appearances by Al Gore, that pesky rascal responsible for all the weird weather lately, who is a huge Daily Show fan. In The Assault on Reason (Penguin Press, 2007) Gore praises Stewart to the sky, and quotes Dan Rather in pointing out that a great deal of mainstream television news is “dumbed down and tarted up … to glue eyeballs to the screen … and sell advertising.” (p. 17)