Eunuchs Of The Universe

By Tom Wolfe
Newsweek, January 2013

Edited by Andy Ross

Sheraton Hotel, New York, May 2012: We are ablaze with excitement. Our man is 27, attired in a gray T-shirt and a dark-gray hoodie. Investors are here for the initial public offering of an estimated $104 billion worth of stock. He is Mark Zuckerberg, and his company is called Facebook.

The market was a shambles. Hired help managed to keep the IPO price propped up until the end of the first day. Over the next 10 days it sank almost 25%. By September it had sunk to less than half the offering price. After Facebook Day, all that Wall Street stood for, the sense that this is where things are happening, was gone.

Up until 2006, a spirit of manly daring had pervaded Wall Street investment bankers. The warriors told of how fighting in combat at computer screens brought euphoria. These boys were knocking back a million dollars or more a year in bonuses, Victory on those screens made them feel like Masters of the Universe.

In 2004 a trader called John Coates quit Wall Street and headed off to Cambridge University, England, to study neuroscience. Coates was intrigued by how a bunch of heedless young men got excited by trading billions of dollars every day. He was turning to neuroscience in hopes of finding out what made them tick.

In short, the trader becomes the endocrinological double of a Delta Commando, a Navy SEAL, an Air Force fighter jock, gearing up for mortal combat. Coates discovered that traders starting the day with high levels of testosterone could be counted on to turn a profit that day. PNAS 2007

The Master of the Universe doesn't worry about manliness. He is manly. He's got masculinity to burn. His problem is his sexual appetite. The girls said that every date consisted of the Master of the Universe holding forth on just two subjects: My Career, and sex. His discourses on My Career they characterized as endless endless endless boring boring boring. As for sex, pump pump pump, ooh, ah, roll off, snore like a bear.

The Masters of the Universe had always thought of their customers as people who should never have been let out of the house with money in their pockets. But here they were and somebody was going to take advantage of them. Not every investment bank would lead its customers to the slaughter. On the other hand what was wrong with shearing the fleece every so often?

Our manly Masters just didn't get it in 2009 even when a bunch of weaklings, a bunch of nerds known as quants, shut the golden door flat in their faces. The typical nerd is a male with intelligence but no sense of giving it a manly face. He doesn't play sports, doesn't automatically crack up over jokes about slutty girls, doesn't realize how bad it looks when he gets the teacher to call on him first to answer the question, doesn't retaliate against insults from his fellow males in the schoolyard.

Quant was what a nerd could move up in rank to, if he turned out to be a mathematical genius. Quantitative analysts set up computers and freed the Master of the Universe from a lot of tedious clerk work. The traders looked down upon the quants as nerds who didn't have the balls it took to go out on the floor and take the big risks required if you wanted to make real money.

Stocks and bonds evaporated property. What the quants had in mind was a quantum leap (so to speak) forward to the next stage: evaporating the stocks and bonds themselves and making some real real money.

Back in 1962 a young mathematics professor at MIT, Edward O. Thorp, had published a mathematically foolproof way of winning at blackjack by counting the numbers of the cards already played. Beat the Dealer became a bestseller. His second book, Beat the Market, described a foolproof way of winning big on the stock and bond markets. Thorp launched a hedge fund. In 1983 he simultaneously sold short $332.5 million worth of the blended shares that included the exciting Baby Bells and bought $330 million worth of AT&T stocks, for a profit of $2.5 million. It was then the biggest transaction in the history of Wall Street. He bet a third of a billion to make a profit of $2.5 million.

Thorp laughed. That was no bet. It was a mathematical certainty! To sell shares at the high figure short and simultaneously buy an equal number of shares at the low figure — it was a perfect hedge. You pocketed the comparatively tiny difference. Tiny comparatively, yes, but an entire transaction might take all of 10 seconds. That was quantitative trading. It was a purely mathematical way to game the markets.

Thorp's real ambition was not to make money, although he has put away a personal fortune of $800 million over the intervening 30 years. He was far more interested in showcasing the mathematical genius of Edward O. Thorp. He was a gamester eager to astound the world with real-life demonstrations of the higher mathrobatics.

James Simons was another math swami who had gone from academia into the markets. He began to go into partnerships with other quants and founded an assortment of funds under the umbrella name Renaissance Technologies. He set up a hedge fund for employees only, and it poured lots of money straight into their buckets all year long every year. By 2007 he was by far the biggest player the markets had. From then on, quants were the stars.

All along, Thorp's hedge fund had been using so many computers and servers, they filled up an entire room as big as his office itself. By the year 2000 Simons needed so much computing power, the machinery filled up the equivalent of a small warehouse. And that was just the beginning.

At thousands of banking operations, investment funds, and exchanges, quants kept adding computers and servers and servers and computers row above row on racks that stretched on infinitely, wrapped in miles of white fiber-optic cables that interconnected the machines. These stacks were engulfed by an overwhelming droning sound that made you think this enormous robo-monster was breathing. No human brain could possibly think or act as fast, as accurately, as cunningly as a robo-brain.

Thorp's 10-second transactions would have been an eternity in the robo-world. It was no longer split seconds but millionths of a second. This became known as High Frequency Trading.

By 2006 the robo-monster was huge. The NYSE was now a private corporation and did proprietary trading, too. The machines, if piled up, would have created a structure the size of two Empire State Buildings. All that was quite in addition to new systems spanning vast distances. One corporation was laying fiber-optic cables across the Atlantic to shave six milliseconds off the time it took a signal to travel from New York to London. Another was building a system to transmit data from New York to Chicago on a straight sight line, a millisecond faster. Such speed was a quant's dream come true.

The robo-monster accounted for 10% of all trades in 2000 and 73% in 2009. Even the Wall Street traders were as innocent as the suckers, the guppies, the muppets. Their first inkling came when the trading floors began to calm down. Before long they were sitting at desks behind banks of computer screens and communicating with each other by text message.

What the Masters didn't realize was that their muppets, marks, guppies, and chumps provided only the liquidity for the quants' robo-diddlers with numbers to play with, discrepancies the robot battle machinery could game and exploit.

Silicon Valley is now where things are happening. And what is happening there is part of an older, more typical America. A Mark Zuckerberg and his Facebook are perfectly traditional in the lustrous economic annals of the United States.

For a hot quant prospect, employers would pay up to five times as much as for a Master of the Universe.

Look at us now, all but strapped into our chairs, mute, trying to monitor six screens at once. There's not a sound in here! It’s like an insurance office. We're not fighting anyone about anything.

The crash of 2008 was a godsend for the poor Masters of the Universe. Nearly half a million people in the financial industry lost their jobs in the grim slide that began in 2008. Amid so much debris, it didn't look so bad when they lost theirs. The rubbish covered over the charade, the farce, the diddling, they had become part of.

Oh, ye Eunuchs of the Universe.

AR Tom is still brilliant.