The Quants – How Swashbuckling Mathematicians and Computer Scientists Nearly Destroyed Wall Street

Wall Street Journal writer, Scott Patterson has written The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. Quants are a small group of mathematics wizards and computer geniuses who almost brought Wall Street down. They conjured up ultra-complicated systems to trade securities like mortgage derivatives, credit default swaps and their ilk, all of which are still at the center of financial ground zero. Meltdown mayhem lays at the Quants’ feet.

PDT (Process Driven Trading) at Morgan Stanley was the brainchild of these financial whiz kids. These guys were traders (or is that, “traitors?”) who engineered and utilized brain-bending mathematics coupled with super computers to massage billions of market dollars according to their otherworldly models. They essentially bet on which stocks would rise or fall, often with no regard to the individual companies themselves. These types of investors came to dominate Wall Street. Many even won Nobel Prizes for their vastly complicated theoretical financial concoctions.

You already know how the story ends, but it’s a continuing saga of intrigue dominated by mathematical greed. Now, don’t faint, but most of this PDT action was highly secretive lending to insider advantages of the highest order. But, PDT imploded and ended up operating in reverse, vaporizing money instead of creating it.

As the Stock Market meltdown began in 2007, Wall Street’s top brass scrambled to understand what was going on. There was absolutely no transparency evident anywhere. The Market was hemorrhaging like a stuck pig, and nobody had a clue how to stop it, resulting in complete financial free-fall. The mind-boggling rat’s nest of PDT left Wall Street reeling and rudderless.

As unwitting investors’ dire need to unload stocks immediately rose, there were no buyers. Everybody was selling: “The result was a black hole of no liquidity whatsoever.” This caused prices to collapse. PDT ended up losing almost $300 million in just one day. It was self-destructing into financial oblivion. Big hedge funds and their relatives were going down in flames, suffering record-breaking losses. Indeed, it was a meltdown of epic proportions.

All the best mathematicians and tech savants in the world couldn’t save themselves or the market. This catastrophic unraveling defied logic and description. Or, did it? The Quants just couldn’t figure it out. An understanding began to emerge with the theory that as the American housing market began to collapse, it led to gigantic losses in the mortgage portfolios of banks and hedge funds. The Quants’ Process Driven Trading funds could not stem the tide of the increasing domino effect in the market. Desperate selling ruled the day, with no buyers in sight.

This full-tilt selling frenzy scrambled the models that the Quants used to buy and sell stocks. They, too, had to unload their own positions in the market. The result? Billions in losses. And, this tidal wave of selling proved capable of drastically affecting and triggering loses in seemingly unrelated portfolios that had nothing to do with the bursting housing bubble. Complete and utter fear caused by this chaotic financial earthquake was never even supposed to happen. But happen, it did. And, we have all been feeling the hourly aftershocks ever since.


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