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.