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A Real-Life Trader Talks About “The Big Short”

What surprised you the most in the movie’s portrayal of the impending financial collapse? 

It was surprising to me that some people, portrayed by Ryan Gosling and Christian Bale and others, actually got to the bottom of some of those mortgage products—figuring out that they were being fundamentally mispriced—when so many others didn’t. We had lots of quants—quantitative experts—and very smart people at the banks who presumably didn’t see it, or somehow it didn’t reach the right people. Alan Greenspan didn’t see it, Ben Bernanke didn’t see it, and neither did the head of the Treasury—super smart people who did have their fingers on the pulse of a million different things. Working at my bank, I talked to some of those high level people towards the end of 2007, when the first real cracks were happening in subprime loans, but it hadn’t spread to everything else yet and the big crisis came a year later. They really thought, Oh it’s just a subprime thing; it’ll be contained. So a big part of the debate about the recession—and this is simplifying a bit—is whether the banks were stupid or criminal in this. I’ll go on the side of stupid, not criminal. The fact that an organization can act stupidly even though it has a bunch of smart people in it, that’s interesting.

More here – Nautilus

The Mockingbird Next Door: Life With Harper Lee

To Kill a Mockingbird remains one of my favourite books and films. I will regularly ensconce myself on the coach when it comes on.

There are many reasons to be grateful for “The Mockingbird Next Door,”Marja Mills’s wonderful memoir of Harper Lee and her sister, and being enticed to re-read “To Kill a Mockingbird” is just one of them. Improbable as it seemed even to Mills when she first was granted access to the two fiercely private women in 2001, she has written an authorized, intimate portrait of the reclusive author and her older sister, Alice Finch Lee, who still practiced law (“sweetly, quietly, and lethally,” in her famous sister’s estimation) through her 90s in their home town of Monroeville, Ala.

Authorized, sympathetic and respectful it may be, but “The Mockingbird Next Door” is no sycophantic puff piece. It is a zesty account of two women living on their own terms yet always guided by the strong moral compass instilled in them by their father, attorney A.C. Lee, who was the model for Atticus Finch in his youngest daughter’s first and only novel.

It is also an atmospheric tale of changing small-town America; of an unlikely, intergenerational friendship between the young author and her elderly subjects; of journalistic integrity; and of grace and fortitude — including Mills’s battle with lupus. While her autoimmune disease slows her to a “glacial pace,” it serves her well in writing about “the old in a nation geared to the young.”

More here – The Washington Post

If you have a teenage son who is having trouble working out what a man should be sit them down in front of the tv and watch To Kill a Mockingbird and get them to pay attention to  Gregory Pecks tremendous portrayal of Atticus Finch

 
 

The Physics Of Wall Street

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I have just finished wading through The Physics of Wall Street by James Owen Weatherall which tracks the impact of quantitative traders on both finance at large and Wall street in particular. As the title suggests it concentrates most on physicists who have made the leap into finance and with them have brought their impressive computational and modelling toolboxes.

From my perspective the book is a book of two halves and some glaring omissions. The book starts with a description of various sorts of distributions and this is to some degree important since later on the book delves into the origins of the Black and Scholes equation for pricing options. It is this chapter along with the exploration of the work of Edward Thorp and Benoit Mandelbrot which is the strongest part of the book. I have to admit some bias here since I find Thorps evolution from mathematician to card counting shark to extremely successful hedge fund manager fascinating. My guess is that very few applied mathematicians risked having their legs broken to prove a mathematical point. Mandlebrots work in fractal geometry which later coined the phrase fractals is something I first came across at university and it is something that I have found endlessly fascinating. His book The Mis(Behaviour) of Markets should be on every traders reading list.

It is once we get past these two men that the book starts to flounder a little bit – the material on Black and Scholes and the failure of LTCM is interesting but not really new and it certainly offers nothing really insightful about these events. The latter personalities introduced in the book such as J Doyne Farmer, Norman Packard and James McGill who founded the Prediction Company and Didier Sornette the academic who claims to be able to predict markets are fairly weak. It may again be my bias towards the early history of markets but the second half of the book seems to lose tempo.

The glaring omission from the book is Jim Simons of Renaissance Technology, mathematician, cryptographer for the US Defense Department and billionaire hedge fund manager. Simons is widely regarded as the king of quants, his Renaissance technologies hedge fund is staggeringly successful delivery twice the rate of return of Warren Buffett for over three decades. Whilst, Simons is undoubtedly guarded about his proprietary technology his story is fascinating. He is a quant who has proven what can be done with the application of mathematical models – it is hard to argue with a net worth of $12.5 billion.

My other point of contention is that the book overlooks high frequency trading and its evolution and impact. HFT is impossible without mathematical modelling and it has had a strong impact upon financial markets. The simple maxim is no quants no HFT – so to leave it out from a book on the history of quants is an odd decision.

My verdict is that this is not a bad history of quantitative trading but it falls sort in a few areas so expect to lose steam half way through. I would put Michael Buchanan’s Forecast and Fortunes Formula by William Poundstone ahead of this book on your reading list.

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