Eunuchs Of The Universe
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.
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.
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.
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
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
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.
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
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
Oh, ye Eunuchs of the Universe.
AR Tom is still brilliant.