The Minds Behind the Meltdown
How a swashbuckling breed of mathematicians and computer scientists nearly destroyed Wall Street
By SCOTT PATTERSON
WSJ
On Thursday, President Barack Obama proposed new rules to curb a number of Wall Street's risky—and highly profitable—trading activities. One target: The secretive trading operations within banks that use large doses of leverage, or borrowed money, to make huge bets on the market. Wall Street says the regulations are unnecessary, and since the financial crisis struck, most banks have cut back on these trading outfits. But when the downturn first hit in the summer of 2007, several of them were among the first to suffer, and collectively they lost billions over a matter of days.
A small group of brainy math whizzes are emerging as the unlikely group who nearly brought down the finance industry. As WSJ's Scott Patterson reports, a group called "The Quants" developed complex systems to trade securities such as mortgage derivatives, which were at the heart of the crisis.
In his new book, "The Quants," Wall Street Journal reporter Scott Patterson suggests how this new breed of mathematicians and computer scientists took over much of the financial system—and the damage they inflicted in the 2007 meltdown.
At Morgan Stanley's investing powerhouse Process Driven Trading on Monday, Aug. 6, founder Peter Muller was AWOL, visiting a friend near Boston. Mike Reed and Amy Wong manned the helm, PDT veterans from the days when the group was nothing more than a thought experiment, its traders a small band of young math whizzes tinkering with computers like brainy teenagers in a cluttered garage.
On Wall Street, they were all known as "quants," traders and financial engineers who used brain-twisting math and superpowered computers to pluck billions in fleeting dollars out of the market. Instead of looking at individual companies and their performance, management and competitors, they use math formulas to make bets on which stocks were going up or down. By the early 2000s, such tech-savvy investors had come to dominate Wall Street, helped by theoretical breakthroughs in the application of mathematics to financial markets, advances that had earned their discoverers several shelves of Nobel Prizes.
(More here.)
By SCOTT PATTERSON
WSJ
On Thursday, President Barack Obama proposed new rules to curb a number of Wall Street's risky—and highly profitable—trading activities. One target: The secretive trading operations within banks that use large doses of leverage, or borrowed money, to make huge bets on the market. Wall Street says the regulations are unnecessary, and since the financial crisis struck, most banks have cut back on these trading outfits. But when the downturn first hit in the summer of 2007, several of them were among the first to suffer, and collectively they lost billions over a matter of days.
A small group of brainy math whizzes are emerging as the unlikely group who nearly brought down the finance industry. As WSJ's Scott Patterson reports, a group called "The Quants" developed complex systems to trade securities such as mortgage derivatives, which were at the heart of the crisis.
In his new book, "The Quants," Wall Street Journal reporter Scott Patterson suggests how this new breed of mathematicians and computer scientists took over much of the financial system—and the damage they inflicted in the 2007 meltdown.
At Morgan Stanley's investing powerhouse Process Driven Trading on Monday, Aug. 6, founder Peter Muller was AWOL, visiting a friend near Boston. Mike Reed and Amy Wong manned the helm, PDT veterans from the days when the group was nothing more than a thought experiment, its traders a small band of young math whizzes tinkering with computers like brainy teenagers in a cluttered garage.
On Wall Street, they were all known as "quants," traders and financial engineers who used brain-twisting math and superpowered computers to pluck billions in fleeting dollars out of the market. Instead of looking at individual companies and their performance, management and competitors, they use math formulas to make bets on which stocks were going up or down. By the early 2000s, such tech-savvy investors had come to dominate Wall Street, helped by theoretical breakthroughs in the application of mathematics to financial markets, advances that had earned their discoverers several shelves of Nobel Prizes.
(More here.)
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