Nerds on Wall Street: Math, Machines and Wired Markets [Hardcover]

David J. Leinweber (Author)

Book Description

Publication Date: June 9, 2009 | ISBN-10: 0471369462 | ISBN-13: 978-0471369462 | Edition: 1

An intriguing look at how technology is changing financial markets, from an innovator on the frontlines of this revolution

Nerds on Wall Street tells the tale of the ongoing technological transformation of the world's financial markets. The impact of technology on investing is profound, and author David Leinweber provides readers with an overview of where we were just a few short years ago, and where we are going. Being a successful investor today and tomorrow--individual or institutional--involves more than stock picking, asset allocation, or market timing: it involves technology. And Leinweber helps readers go beyond the numbers to see exactly how this technology has become more responsible for managing modern markets. In essence, the financial game has changed and will continue to change due entirely to technology. The new "players," human or otherwise, offer investors opportunities and dangers. With this intriguing and entertaining book, Leinweber shows where technology on Wall Street has been, what it has meant, and how it will impact the markets of tomorrow.

Editorial Reviews

Review

Praise for Nerds On Wall Street

"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.

"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 over the past two decades, with key insights for the future. It is a highly engaging, insightful, and entertaining book for all investors who want to understand the increasingly important role of technology in the financial markets."
–Blake Grossman, CEO, Barclays Global Investors

"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, Bloomberg.com and Newsweek

"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."
–Andre 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, Professor of Finance, 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, Yale School of Management, Editor, Journal of Portfolio Management

"Slicing and dicing data to predict the future can get dicey. The Super Bowl market indicator holds that stocks will do well after a team from the old National Football League wins the Super Bowl. . . The "Sell in May and go away" rule advises investors to get out of the market after April and get back in after October. . . hundreds -- of Web sites hawk "proprietary trading tools" and analytical "models" . . . There is no end to such rules. But there isn't much sense to most of them either. An entertaining new book, "Nerds on Wall Street," by the veteran quantitative money manager David Leinweber, dissects the shoddy thinking that underlies most of these techniques."
— Jason Zweig, The Wall Street Journal

"One of the best reads that I have picked up in some time. It stimulated me about things in the market that I didn't know.... A wonderful book"
—Vince Rowe Radium, Biz Radio

"Where technology will take investing and trading in the future is anyone's guess. Yet, David J. Leinweber in his newly published book, "Nerds on Wall Street: Math, Machines and Wired Markets," provides a glimpse of the direction. In his lively — alternately raucous and reverent, deriding and respectful — Mr. Leinweber recounts the history of how technology has transformed investing and trading through the people that developed ideas and pioneered applications, most famously in indexing, optimization and quantitative investing. . . The book makes one of the best reads of the summer — suitable for the beach as well as for a serious reader in suit and tie at the office."
—Pensions & Investments

“Explains complex financial instruments in relatively simple terms, and the same goes for complex trading techniques. . . The average reader will learn a lot here. I recommend the book to those that want to dig into how the equity markets became more computerized.
— Seeking Alpha

Review

Additional Praise for Nerds on Wall Street

"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

"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 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, Ten Asset Management and Kauffman Foundation

"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, Chairman, International Association of Financial Engineers; Principal, Callcott Group LLC

"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 and 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, and IA Capital Partners

See all Editorial Reviews

Product Details

• Hardcover: 353 pages
• Publisher: Wiley; 1 edition (June 9, 2009)
• Language: English
• ISBN-10: 0471369462
• ISBN-13: 978-0471369462
• Product Dimensions: 6.5 x 1.3 x 9.1 inches
• Shipping Weight: 1.4 pounds (View shipping rates and policies)
• Average Customer Review: 4.4 out of 5 stars  See all reviews (22 customer reviews)
• Amazon Best Sellers Rank: #380,051 in Books (See Top 100 in Books)

More About the Author

Dr. Leinweber is Haas Fellow in Finance and founding director of the Center for Innovative Financial Technology at the Haas School of Business, University of California, Berkeley. His professional interests focus on how modern information technologies are best applied in trading and investing, and how technology affects global financial markets.

As the founder and advisor to financial technology companies, and as a quantitative investment manager, he is an active participant in today's transformation of markets. Clients at his consulting and software business include some of the world's largest investment managers, hedge funds, brokers and exchanges. All build on a history of innovation in financial technology.

At the RAND Corporation, he directed research on real-time applications of artificial intelligence that led to the founding of Integrated Analytics Corporation. IAC was acquired by the Investment Technology Group, (NYSE:ITG) and, with the addition of electronic order execution, its product became QuantEx, an electronic execution system still in use for millions of institutional equity transactions daily. Large institutions concerned with controlling transactions costs and proprietary traders found them particularly valuable.

As Managing Director at First Quadrant, he was responsible for institutional quantitative global equity portfolios totaling $6 billion. More than twenty long and market neutral strategies utilized a wide range of computerized techniques for stock selection and efficient trading. He won five rounds against the Wall Street Journal's investment dartboard.

Quantitative investing is driven by electronic information, and the Internet dramatically transformed the financial information landscape. This led to the founding of Codexa Corporation, a Net based information collection, aggregation and filtering service for institutional investors and traders. The company's clients included many of the world's largest brokerage and investment firms.

As the founding director of the Center for Innovative Financial Technology at U.C. Berkeley, and previously as a visiting faculty member at Caltech, Leinweber worked on practical applications of ideas at the juncture of technology and finance. He has advanced the state of the art in the application of information technology in both the sell-side world of trading and the buy-side world of quantitative investment. He's published and spoken widely in both fields.

In his misspent youth, he graduated from MIT, in physics and computer science, where he was one of the first 5000 people on the Internet. That was when it was called the ARPAnet and wasn't cool. He also has a Ph.D. in Applied Mathematics from Harvard. But on a good day, it's hard to tell.

Most Helpful Customer Reviews

159 of 185 people found the following review helpful

1.0 out of 5 stars Out of date and badly edited July 7, 2009

By Aaron C. Brown TOP 500 REVIEWERVINE™ VOICE

Format:Hardcover

With all due respect to the previous Amazon reviewers, it's hard to believe they both (a) read this book and (b) have any familiarity with Wall Street technology. The book is a collection of articles written for technology magazines from the mid-80s to the mid-90s. Even within an article entire paragraphs are repeated, and the same idea in more or less the same words can often be found a dozen times or more in the book. This is interspersed with apparently random cut-and-pastes from the Internet and lots of tiny black-and-white pictures which the author tells you are only meaningful with color and animation. You get the feeling the author cleaned out his desk, and decided to make some money from the stuff he didn't want anymore.

There is some useful information in here, and the author does know a lot about automated equity trading before the advances of the late 90s. The trouble is it's not presented in coherent sequence and the technical level is too uneven. For example, it is asserted five separate times that garbage collection is a problem for LISP, without any background material. Anyone who knows what garbage collection means in this context, or has worked with LISP, already knows this and will get annoyed at even the second repetition. Anyone without that background will find the repeated explanations meaningless. There is nowhere near enough technical information for nerds who want to understand Wall Street (or the Wall Street of 20 years ago) or Wall Streeters who want to understand nerds, but there is far too much unexplained jargon for non-technical readers.

Another complaint is the author makes significant errors when he steps beyond his expertise, which is often. For example, he claims if you have 1,000 statistical results significant at the 5% level, 50 of them will be false. The correct statement is if you test 1,000 rules with no predictive value, you expect 50 of them to show significance at the 5% level. The number of your significant results that are false depends whether you start with rules that are mostly useful, or mostly random. This is the key insight to the concept of data mining, the author's misunderstanding makes his chapter on the subject misleading.

Another error is the claim that futures markets were developed to allow farmers to lock in prices. This is false historically (no farmers were involved in the creation of futures markets, farmers have never been big participants and have often tried to have them shut down, when farmers do transact it is much more often to double up their bets by buying the crop they grow than it is to hedge) and anyone who believes it misunderstands the economic function of futures. That's dangerous if you also have a computer that can send trades to financial exchanges. Professionally, the author stuck to equities so it didn't matter to him, but it could matter to his readers if they rely on his account.

There is one up-to-date section at the end, which the author admits was tacked on to make the book more relevant, even though he knows nothing about the topic. His angry rant about the current financial crisis appears to be constructed from reading the first paragraphs of other people's rants. He relies almost exclusively on quotes from politicians, senior regulators and bank CEOs, who all agree it was the nerds' fault. He condemns "complex and opaque" techniques in strong language and great lengths. This from a guy who built black-box trading systems. While it's true there can be a long path between a mortgage dollar a borrower sends in (or, more to the point, doesn't send in) and the end investor, and there can be matches from phantom securities along the way, all of this is done by clear rules which are disclosed. You don't really know what a black box program will do until you turn it on, and its workings are never made public. I'm not defending synthetic CDO-squareds, I'm just pointing out opinions on complexity should come from people who know the field. A non-programmer might look at 1,000 lines of computer code and say it is hopelessly complex and opaque, when a programmer finds it a clear and elegant solution. When disaster strikes, everyone will agree it was the computer's fault.

Then he's "mad as hell" at the irresponsibility of Wall Streeters. Again, without arguing the point, this is a guy who loves the Cold War doctrine of mutually assured destruction, and worked on military projects involving weapons of mass destruction for, in his own words, "the guys in the five-sided nuthouse." The worst financial idea in history does not compare in irresponsibility to supporting the capability to destroy all life on earth, at the direction of people you believe to be insane. In my opinion, the system the author supported and still supports had something like a 10% chance of killing me and everyone else (and still might do it), with absolutely no moral or other human justification. And it was done by people, like the author, who were avenging no personal tragedy, were not hungry or trapped or desperate, who had no great spiritual rationale; just irresponsible nerds with toys.

Finally, the coverage is entirely based on projects the author happened to work on and write about at the time, so a few areas are overcovered and many other areas are ignored. With a good editor to remove the redundancies and sections the author is not qualified to discuss, to order the material and to insist on background explanations, links and transitions, this might be a pretty good account. Until that happens, I suggest you avoid this book.

7 of 7 people found the following review helpful

3.0 out of 5 stars Funny, but not deep! June 10, 2010

By Lars Tackmann

Format:Kindle Edition|Amazon Verified Purchase

This book is a fun read, but ultimately somewhat disappointing. I had hoped for a book discussing the various computer related treading strategies used on wall street, but instead I found a widely scattered and outdated treatment of everything from internet market manipulation to green technology. Parts of the book are very good, including its treatment of data mining strategies and the problems with LISP garbage collection, but elsewhere it completely looses the focus. What annoys me the most (and almost compelled me to give it one star) is the extremely bad flow of the text. Readers should be aware that this book is just a collection of prior articles and often these are not elaborated and expanded upon (or even put in context) thus mostly raising more questions than they answer.

However when all is said and done, the book is quite funny and the author does point to many other interesting books and articles, so I will give 3 stars and hope that he will write a better nerd quant book next time.

25 of 33 people found the following review helpful

5.0 out of 5 stars Smart and independent thinking about the arcane world of the quant May 30, 2009

By S. McGee TOP 500 REVIEWERVINE™ VOICE

Format:Hardcover

Wall Street, if you believe Ben Bernanke's testimony to Congress last year, is an "abstraction" to most of us. And if there's one part of Wall Street that is abstract even to large parts of Wall Street itself, it's the world of the quant -- quantitative finance, the guys who develop electronic-based investment, trading and analytical models and systems.

Dave Leinweber has been part of that world for decades, and for years he's been showing up at conferences talking about the world of Wall Street's nerds. Finally, he's put his knowledge and smarts to work to explain it to even the most math-phobic person who wants to understand just what the collision between financial markets and technology means for investors, from the most sophisticated hedge fund trader right down to those of us trying to figure out what to do next with our 401(k). Markets move faster than ever before -- you can now execute a trade in less time than it takes you to start reaching for the telephone (six milliseconds or thereabouts). They also move in ways that the architects of these systems -- increasingly significant players -- don't readily understand themselves.

Most of the people on Wall Street who know and understand these changes and what they mean either don't have the communication skills to make the rest of us understand; others are too busy making money or choosing to keep a low profile to share their wisdom. Those who do end up writing about quants all too often end up in one of two camps: over-simplifying what they do and telling the world how brilliant they are, or over-simplifying what it is that they're up and deciding that they are Dr. Strangelove-style villains. Leinweber's analysis is simple, straightforward and lucid. Above all, it's subversively witty, encouraging the reader to roll his or her eyes at some of Wall Street's absurdities. He takes his subject seriously, but not himself.

I recommend this highly to anyone who has a basic understanding of Wall Street but is fed up hearing about quants, electronic trading, etc. etc. and is desperate to lay hands on a straightforward work that will spell out everything they needed to know and were afraid to ask -- including some questions that they didn't know they needed to ask. I wish that more of the writing on complex financial issues being done these days was as accessible and helpful. Far too much of it feels more like taking your medicine -- or dong the assigned reading for a course you're not enjoying that much.

Full disclosure: I know Dave, read his work in galleys and am overlooking my usual policy of not reviewing books by people I know on this occasion, because I think that more than ever before it's important to draw attention to the tiny handful of books that actually do help readers get to the point where they understand the basics of even complex finance. The more general readers that seek out this book, the better. Best of all, this book may be one part of Wall Street where you can truthfully claim to receive your money's worth in both education and entertainment, and where you won't feel that somehow you've been ripped off along the way...