Technology has transformed global markets, but this is nothing new. Markets have been shaped by machinery for hundreds of years, and this continues at a rapid pace today.
Author David Leinweber—a computer scientist who accidentally stumbled upon Wall Street and became an innovator in the application of modern information technology in trading and investing—is a well-qualified guide to the nerds of greater Wall Street. And now, in this engaging and entertaining new book, he tells the tale of the ongoing technological transformation of the world’s financial markets.
The impact of technology on investing is profound, and Leinweber provides an intriguing look at where technology on Wall Street has been, what it has meant, and how it will impact the markets of tomorrow. In essence, the financial game has changed and will continue to change due entirely to technology. Throughout these pages, Leinweber takes a detailed look at the new “players,” human or otherwise, that offer both unprecedented opportunities and debilitating dangers in this ever-evolving environment.
Divided into four parts, this lively exploration of markets and machines:
• Illustrates the history of technology upheavals in markets and deals with electronic markets and algorithmic trading in Part 1 – Wired Markets
• Explores the use of wired markets, and anything else you can find, to outperform market averages in Part 2 – Alpha as Life
• Examines how humans and machines can work together to extract useful information for investment and trading from textual sources in Part 3 – Artificial Intelligence and Intelligence Amplification
• Considers the roles of technology in contributing to the crisis of 2008, as well as its use to avoid future mishaps in Part 4 – Nerds Gone Wild – Wired Markets in Distress
Being a successful investor—whether individual or institutional—involves more than stock picking, asset allocation, or market timing: it involves technology. And through this story, Leinweber helps you go beyond the numbers to see exactly how advanced technology has become a bigger part of modern markets.
It’s getting harder every day to see the difference between financial markets and computer networks. Hopefully, after reading this book, you’ll have a better sense of how technology shapes today’s markets, and how to best participate in the future of electronic finance.
David Leinweber is a Haas Fellow in Finance at the Haas School of Business at UC Berkeley, and founding Director of the Center for Innovative Financial Technology at Berkeley. He is the founder of two pioneering financial technology firms and successfully managed multibillion-dollar institutional portfolios for many years.
Dr. Leinweber has consulted, published, and lectured widely on the use of advanced technology, artificial intelligence, and intelligence amplification in finance—always in an easy and accessible way—and has earned the reputation as “class clown of the quantitative investing industry.”
He received BS degrees in physics and electrical engineering from the Massachusetts Institute of Technology and a PhD in applied mathematics from Harvard University.
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Wall Street Analytics
- Chapter 10 – Collective Intelligence, Social Media, and Web Market Monitors (Web Market Monitors and the Impact of Social Media on Financial Markets
"The words of the prophets are written on the subway walls." — Simon & Garfunkel, The Sound of Silence
Opinions vary widely on the value of collective wisdom, with ample supporting evidence both for and against. The Internet has many positive examples: The collective ratings [...])
- Chapter 14 – Nerds Gone Green – Nerds on Wall Street, off Wall Street (Clean Energy and Nerds off Wall Street
This book closes with another chapter that, like the previous two, I didn’t expect to be writing. Recent headlines (Wall Street layoffs could reach 200,000, Citigroup is cutting 50,000 jobs) imply that many nerds on Wall Street (NOWS), mostly innocent bystanders in the meltdown, may soon find themselves on [...])
- Chapter 04 – Where Does Alpha Come From? (Where Does Stock Alpha and Alpha Return Come From?
"Life Is Alpha. The Rest Is Details." — Popular T-shirt at hedge fund manager events
There was a time not too long ago when, if you posed the question “Where does alpha come from?” to a roomful of academic financial economists, most of them would complain: “It’s a [...])
- Chapter 05 – A Gentle Introduction to Computerized Investing (Computerized Investing, Index Funds, Quantitative Investing, and Active Management
“Life would be so much easier if we only had the source code.” — Hacker proverb
The beginning of index investing in the 1970s was the result of a convergence of events, one of those ripe apple moments. Institutional investors began to use firms like A.G. Becker to actually [...])
- About (David Leinweber is a Haas Fellow in Finance at the Haas School of Business at UC Berkeley, and founding Director of the Center for Innovative Financial Technology at Berkeley. He is the founder of two pioneering financial technology firms and successfully managed multibillion-dollar institutional portfolios for many years.
Dr. Leinweber has consulted, published, and lectured widely [...])
- Chapter 09 – The Text Frontier – AI, IA, and the New Research (Hunting Investment Alpha and Trading Alpha from Online News, Social Media, and Rumors
Alpha hunters are always looking for new territory. When a strategy becomes known and used by too many players, the collective market impact of getting in and getting out will squeeze out all the profit juice, and only the lowest-cost transactors (large sell-side [...])
- Chapter 13 – Structural Ideas for the Economic Rescue – Fractional Homes and New Banks (Structural Ideas for the Economic Rescue - Fractional Homes and New Banks
Mom used to say, “If you don’t have something nice to say, don’t say anything at all.” I clearly ignored that advice in the previous chapter, with the “mad as hell” opening and analogies to an exploding meth lab run by the neighbors. This [...])
- Part 1 – Wired Markets ( Financial Markets - Electronic Markets
Not too long ago, going to a stock market meant you would meet lots of new people who were energetically shouting, running around, and making a mess with great quantities of paper. No more. Visiting a financial market now is more like visiting a telephone exchange. Computers and network gear [...])
- Part 3 – Artificial Intelligence and Intelligence Amplification (Artificial Intelligence and Intelligence Amplification in Financial Markets
Securities Markets are Machinery Now.
This raises the question of how to best participate in the world’s new wired markets. People who use information technology most effectively will be rewarded.
Artificial intelligence (AI) as an academic discipline began at the famous 1955 Dartmouth conference organized by John McCarthy from Stanford [...])
- Chapter 02 – Greatest Hits of Computation in Finance (Computational Finance, Stock Market Analysis, and Investment Trading
"A computer does not substitute for judgment any more than a pencil substitutes for literacy. But writing without a pencil is no particular advantage." - Robert McNamara
The Journal of Portfolio Management (JPM*) is one of the more upscale investment management publications around. For $500 a year, you get [...])
- Alpha as Life
(Passive Investing - Active Investing - Alpha Returns
Index funds are passive investments; their goal is to deliver a return
that matches a benchmark index. The Old Testament of indexing is Burton
Malkiel’s classic A Random Walk Down Wall Street, first published in
1973 by W.W. Norton and now in its ninth edition. For typical
individual [...])
- Wired Markets (
Financial Markets - Electronic Markets
Not too long ago, going to a stock market meant you would meet lots of
new people who were energetically shouting, running around, and making
a mess with great quantities of paper. No more. Visiting a financial
market now is more like visiting a telephone exchange. It can be a wild
ride versus parking your cash in a few money market funds. Computers
and
network gear [...])
- Nerds
Gone Wild – Wired Markets in Distress (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 [...])
- A
Little Artificial Intelligence Goes a Long Way on Wall Street
(A Little AI Goes a Long Way on Wall Street: Artificial Intelligence
and Securities Trading
“If you give someone a program, you will frustrate them for a day; if
you teach them how to program, you will frustrate them for a lifetime.”
This is a history and technical overview of one of the earliest
artificial intelligence re (AI), and is a far cry from simple financial
planning software [...])
- Collective
Intelligence, Social Media, and Web Market Monitors (Web
Market Monitors and the Impact of Social Media on Financial Markets
"The words of the prophets are written on the subway walls." — Simon
& Garfunkel, The Sound of Silence
Opinions vary widely on the value of collective wisdom, with ample
supporting evidence both for and against. The Internet has many
positive examples: The collective ratings [...])
- Artificial
Intelligence and Intelligence Amplification (Artificial
Intelligence and Intelligence Amplification in Financial Markets
Securities Markets are Machinery Now.
This raises the question of how to best participate in the world’s new
wired markets, and this is anything but simple.
People who use information technology most effectively
will be rewarded.
Artificial intelligence (AI) as an academic discipline began at the
famous 1955 Dartmouth conference organized by John McCarthy from
Stanford [...])
- AI,
IA, and the New Research (Hunting Investment Alpha and
Trading Alpha from Online News, Social Media, and Rumors
Alpha hunters are always looking for new territory. When a strategy
becomes known and used by too many players, the collective market
impact of getting in and getting out will squeeze out all the profit
juice, and only the lowest-cost transactors (large sell-side [...])
- Stupid Data
Miner Tricks (To Err Is Human. To Really Screw Up, You Need a
Computer.
— Popular Campus T-shirt, circa 1980
Stupid Data Miner Tricks in Quantitative Finance
This chapter started out over 10 years ago as a set of joke slides
showing silly, spurious correlations. Originally, my quantitative
equity research group planned on deliberately abusing the genetic
algorithm (see Chapter [...])
- Greatest
Hits of Computation in Finance (Computational Finance, Stock
Market Analysis, and Investment Trading
"A computer does not substitute for judgment any more than a pencil
substitutes for literacy. But writing without a pencil is no particular
advantage." - Robert McNamara
The Journal of Portfolio Management (JPM*) is one of the more upscale
investment management and financial
article publications around. For
$500 a year, you get [...])
- An
Illustrated History of Wired Markets (An Illustrated History
of Wired Capital Markets
"Progress might have been all right once, but it has gone on too long."
-- Ogden Nash
This chapter is based on a number of ever-evolving dinner and lunch
talks I have given over many years, all called “Nerds on Wall Street"
irrespective of their actual subject. Many financial conference [...])
- A
Gentle Introduction to Computerized Investing (Computerized
Investing, Index Funds, Quantitative Investing, and Active Management
“Life would be so much easier if we only had the source code.” — Hacker
proverb
The beginning of index investing in the 1970s was the result of a
convergence of events, one of those ripe apple moments. Institutional
investors began to use firms like A.G. Becker to actually [...])
- Three
Hundred Years of Stock Market Manipulations (300 Years of
Stock Market Manipulations - From the Coffeehouse to the World Wide
Web's Stock Manipulations
In previous chapters, we saw that many of the changes in securities
markets brought about by information technology in general and the
Internet in particular are positive, democratizing access to markets
and information. We also saw that technology is [...])
