Monday, May 17, 2010

"We are not in Kansas anymore"

It looks like that they have found the culprit for the 1000-point intraday swing on the Dow 30 on May 6. It turns out that rather than the hedge funds that were initially suspected, it was a Kansas-based money management firm, Waddell & Reed Financial, that traded 75000 e-mini S&P 500 contracts between 2.32 and 2.51 pm on May 6. That amounted to 9% of the trading volume on e-mini contracts during that period and all of the trading was executed by one trader at the firm. Incidentally, the CME report that uncovered this news also found that neither the trader nor the firm were acting imprudently or were at fault. This news item may still leave you a little bemused. How does one trader at a small money management firm cause a drop in market value of billions? And how can they not be at fault if they caused a market collapse? So, here is my attempt at providing an explanation.

What are e-mini contracts?
E-mini contracts are future contracts on the S&P 500. The "mini" in the name refers to the fact that each contract is $50 times the level of the index. (If the S&P 500 is at 1200, each contract is for a notional value of $60,000) E-mini contracts were introduced in the late 1990s by the Chicago Mercantile Exchange to provide a "smaller size" alternative to the long-standing S&P 500 futures contracts which were set to $500 times the level of the index; they have since been dropped to $250 times the level of the index.

How do investors use these contracts?
As with all futures contracts, there are speculators and hedgers in the e-mini market. The speculators buy or sell the e-mini to try to profit from overall market movements. Thus, a bullish (bearish) investor will buy (sell) e-mini contracts and make money if they are right on market direction. (If you buy 100 contracts and the S&P 500 moves up 80 points, you will make 100* 80 * 50 = $400,000; the 50 refers the fact that the futures contract is $50 times the index) The hedgers use the index to protect existing portfolio positions. Thus, a portfolio manager who wants to either protect profits already made or one who desires a floor on his or her losses will sell e-mini futures. (A portfolio manager who has $ 1 billion in equities can sell enough futures contracts to ensure that the value of the position does not drop below $ 900 million. Generally speaking, the more insurance you want, the more futures contracts you will have to sell. In more technical terms, you are creating a synthetic put on your portfolio, using options, and the number of futures contracts you will need to sell can be extracted using an option pricing model)

In many ways, the hedging position with futures is a lot more volatile than the speculative position, simply because the degree of selling is tailored to what the index does. As the index falls, the selling will often accelerate. partly because the point at which different portfolio managers hedge can vary. Thus, some portfolio managers may begin their hedging when the market drops 3%, others at 5% and still others at 10%.

How can futures affect the level of the index?
With financial futures, there is a third player that we have not mentioned in the section above, the arbitrageurs. Arbitrageurs have neither a market view nor do they have a portfolio to hedge. Instead, they are looking to make riskless profits, To prevent these profits, the futures price and the spot price are linked together in a rigid relationship:
Futures Price = Spot price (1 + riskfree rate - dividend yield)
To see why, assume that the S& P 500 is at 1000 right now, that the riskfree rate is 5% and that the dividend yield is 2%. Assume also that the one-year futures price on the index is 1045. Here is the arbitrage:
1. Borrow 1000 at the riskless rate and buy the index today at its spot price of 1000.
2. Sell the one-year futures contract at 1045.
3. During the next year collect dividends on the stocks in the index (2% of 1000 = 20). At the end of the year, deliver the stocks in the index in fulfillment of the futures contract and collect 1045. Pay the interest at the riskfree rate on the initial borrowing of 1000 (from step 1) and pocket the difference:
Profit = 1045 - 1000*.05 +20 = 15
To prevent this profit from occurring, the futures price has to be 1030. There are points at which you can quibble - being able to borrow at the riskfree rate and knowing the dividends for the next year - but they are minor ones, especially for the larger institutional players. The overall dividend yield on the S&P 500 index is very predictable and you can borrow at close to the riskfree rate, especially if you can back the borrowing up with marketable securities (as is the case here).

This futures-spot relationship creates the link. If one (spot or futures price) moves, the other has to follow. Thus, if there is an imbalance in the futures market, the futures price will change and the spot will follow. On May 6, here is how the script unfolded. The sell order placed by the trader at Waddell and Read was large enough to cause the e-mini futures price to drop significantly and the spot market had to follow. The fact that the trade was entirely driven by liquidity or hedging concerns (and not by information) resulted in a swift correction of both the spot and futures markets, with both reversing the losses by 3.30 pm.

What should be done about this?
I think that the May 6 collapse was an aberration. In what sense? The trade by the W&R trader occurred at a point in the day when the market was already skittish - it was down 250 points as worries about Greek default were rampant. When traders get antsy, they look for clues in trading by others. In other words, they assume that large trades, especially anonymous ones, must be coming from more informed traders (such as the Greek central banker) and they follow the trade.

While there is always the potential for this type of panic with or without futures markets, the existence of futures contracts has made it easier to create this type of panic. To the regulatory-minded, the solution seems simple. Ban futures trading or add more restrictions to the trading.  I disagree with the sentiment and think more harm than good will come out of it. As an investor who uses futures contracts very rarely and only to hedge, I still benefit from the liquidity created by these markets and bear little or no cost, simply because I choose not to trade frequently. In fact, as an intrinsic-value driven, long term investor, selling panics such as these can actually be opportunities to take positions in companies that I have always wanted to buy. For short term traders, though, futures markets may increase intraday volatility and thus their perception of risk in equities. I cannot speak for them but they are short term traders by choice!!


  1. Professor

    That was a great insight into the dynamics of futures trades and pricing. No wonder, more often than not, arbitrage opportunities keep emerging in the markets, only to disrupt rational trends, momentarily though.


  2. thank you very much
    I have one question though, how large was the trade the broker initiated (in dollar terms) ?

  3. I think you have some of the facts wrong. From the NYT: "Waddell said its selling of the e-minis that day was just 1 percent of overall trading volume, or 75,000 contracts out of 5.7 million traded that day." (my math says a bit above 1%)

    Also, ' “The e-mini rallied during our trade, suggesting it was not causing the price movement,” the firm said.'

    There should be plenty of liquidity to fix something like this and it is very surprising but yes, it is possible that over a VERY short interval that a stupid and large trader can disrupt the market. In this case it appears that Waddell may have had some impact but certainly could not have done much without a whole bunch of others joining the party.

    You cannot have markets and then try to regulate away greed or fear or stupidity. News flash: prices do not always appropriately reflect values and people act rashly and emotionally.

    Here we go thing the government will try to pass a law that states stock prices can only go up... It is amazing the lack of understanding of the markets that this Congress and administration possesses.

  4. I think the reason for the different numbers flying around is simple. The trade accounted for 9%$ of the trading volume over about a ten-minute interval. Over a longer time interval, the percentage drops off.

  5. Interesting theory, I know that when futures move, rest of the market has to follow. Could You please recommend me a good book, that would explain how futures, ETF-s, stocks are related to each other? Dollar vs. USO, GLD vs. USO etc...
    Thank You in advance.


  6. We are not in Kansas anymore….

    Seems like the market action and the Market Auction isn’t completely understood here.

    One thing is to be “simple” another is being “simplistic”.

    If the first is for the sake of the readers with the final aim of being “widely understood” the second is …detrimental bringing-eventually- to significatives mistakes.

    Do the reader appreciate your attempt to give an explanation to “the drop” and the 75.000cts traded on the offer side by Waddell ( which is NOT a small firm but a rather chunky one , for detail sake…) ? I guess so .

    You are showing a savvy approach and a deep intellectual honesty which is a rare merchandise nowadays.

    However I feel compelled to try to straight the things up, adding few cents….most of them in common sense non deterministic humbleness.

    1. Is there a need for an explanation?
    Markets goes Up and down according to a number of reasons . They may be even… choppy although there is no choppiness in physics : it depends on how you want to look markets: what you see on weekly is rather different of what you see on other Time Frames . matter of factly the lower you ‘ll go down in Time frames the wider the swings or price impulses, extensions , retracements’ you’ll be able to appreciate.
    Any (serious) investor and even more an active professional traders MUST define ex ante what KIND OF “GLASSES” WANTS TO USE TO LOOK AT THE MARKETS DYNAMICS. Positively. It means that any defined time frame regroups participants’ at the auction with the same expectations since they look at markets from the same perspective. This practice is utterly important since will let you UNDERSTAND WHO IS IN COMMAND in that precise moment: Commercials without short term expectations, Big Speculators, Small Speculators and finally dumb money..

  7. Once I know who is driving the auction than I’ll be able at least to try to understand what is going on in that precise moment. Nothing more nothing less counts. WHAT IS GOING ON IN THIS MOMENT. All the rest is non influent and belongs to the realm of “Hope”. HOPE in financial markets is the best synonym of LOSSES.

    But let’s go back to the question #1: is there a need of an explanation? No.

    If market’s move affects the operator negatively means that that position was for that extent WRONG. There are no excuses. What matters is HOW much affects it negatively: if too much means that the position was not properly secured .
    And there is a wide array of tools to secure a position.

    2. The Drop. Hold a sec….

    a. You haven’t properly described what a Future is. Commodities Futures - in this case Emini ( or any other Index Future)- we buy the right to buy an amount of the a foresaid underliyng which will be delivered (for physical indeed at expiration) in a defined future. Generally speaking the longer the delivery the larger the PREMIUM incorporated in the future where for premium ( or discount)we intend the difference amid the Cash price of the commodity (Spot Price) and the future value defined during the auction. For futures with intangibles underlying as the case of “ Indexes”, there wont be –indeed- a delivery for physical as would happen with Canola, Wheat, Cable ( Sterling) Soy, Gold. The premium formula you quote Futures Price = Spot price (1 + riskfree rate - dividend yield) is correct but purely ….scholastic just like a Cox Rubistein or B&Scholes Models and is simply theoretical; you will not find it cogent during an auction. The Index “EPREM” shows you every 30 sec if the derivative is at discount or at premium so that you can evaluate his position against the cash (spot).

    b. During these years , Markets have shown PRECISELY and EMPIRICALLY that reality is different : triyng to linearize a non linear environment and define it via models relying on “human” assumptions whereas the drivers are fundamentals or technical has been as much inconsistent and unprofitable as devastating ( cfr. VAR.) However…. I’m not expressing an OPINION but just empirically reporting what we on markets have all experienced operating daily; simple handy outcome in spending zillions of hrs in front of screens and charts and tapes….

    c. This premise is almost indispensable to understand how market works. Since a Derivative ( a future, an option) REFLECTS directly the smart money expectations towards the CASH so it is its fair value . Insofar if the future’s fair value goes down at discount … generally will be an anticipation of the cash drop.

    d. A future at DISCOUNT has –therefore- a high relevance: meaning that I can “wipe off” the time component of a financial instrument (value) actually buying a proxy (the derivative) at a lower price for a” future deferred delivery” than the value of the real commodity traded NOW for cash (spot price). Which simply means that something in the overall valuation of the commodity is pointing strongly toward south… Put it simply and practically: the participants at the auction (buyers) are willing to pay less and less amounts of money for that specific commodity obliging the offer side (sellers) to constantly lower the price in order to be filled and have the auction going . (Liquid auctions- indeed- where the spreads between bid and offer are not larger than 2-3 ticks at maximum in specific fast market, as happened in certain moments May 6th) . In fast markets you just see a simple “join the bid ‘n take the offer …. “

  8. e. So isn’t the CME or CBOT affecting directly the cash market -unless some inefficiency in the markets arises. And markets ARE inefficient, thanks to the Almighty….
    Without being deterministic, Cash Markets will NOT drop with a directionality ( aka for several days in the same direction up or down) ) because of derivatives : is an epiphenomena… In the other side markets it will just react simply with SPIKES, which will be likely to be reabsorbed during the auction likewise during news release.. Not properly a mean reverting action but a rebalancing, a regrouping of the actors in the arena, the sellers and the buyers towards a real bias …if ever.

    f. Waddel sold a large quantity of emini during almost 2 hrs. So no mistake , no rogue trade,no panic. AMOF It does not have any influence if was a rogue trade or just a massive long covering or a concerted action or a black box triggered by a fair value hitting threshold or by a down tick. Waddel did it . Period. All the rest has no relevance. The only thing is that markets they go up and go down and anyone should be responsible for his long /short position and responsible for the losses he she wants to bear and for how long (here vis the ….hope…).

    g. Any serious speculative trader cuts his losses: if mr. market shows a positive bias (or the operator believes in it…) than he will buy back BELOW at discount what he had sold above . Unless In the meanwhile he will be properly hedged in calls or secured with spread or other strategies . Just an amateur has a plain naked equity portfolio. Playing Black jack by the book is less risky manner to lose money.

  9. h. Arbitrage: I beg your pardon but your example is out of scheme since your assumption(s) is ONLY NORTH ( prices going up) An arbitrageur working the fashion you describe would end up bankrupt in 3 days… not in 1 year, since you ASSUME WRONG ( where in the hell comes this assumption that an index future you bought at 1000 will rise to 1045? ) not because of you but because you make an ASSUMPTION. This is the problem. The Assumption….We Look what is going on and leave the assumptions in the realm of the… naïve (fools)

    You point your finger at the moon quibbling on risible topics - like being able to borrow at such and such I.R. % ….- but the serious problem is another: you assume that an arbitrageur will act in the way you describe . What you describe is not only incorrect , is again naïve…

    3. An aberration May 6? Why? Has simply happened what had to happen. There are no aberrations in the free flowing of the prices and of the reality…these are simply facts .I sell you buy you buy I sell. Period. Nothing more nothing less. I can be smart enough to spot market’s inefficiency’s and ARB. on these, and take profit of those chances often intermarkets.

    But a falling Market is not an aberration: is just a a
    f-a-l-l-i-n-g market. And the delta in exchange's capitalization is not destroyed value : being simply a form of moving assets from one pocket (yours) to another (mine).

    AMOF there is always someone buying falling markets….(I remember just one exceptional different case where there was no counterpart in buying and an enormous spread between bid & ask : Real Estate CDS in August 2007….which was prodromica to the meltdown far away any expectation…..)

    4. Why does it fall? Who gives a damn. Markets gives constantly opportunities on either sides every seconds 24 hrs a day 345 days a year every given year on this earth. And with a Vix rising to 46/50 there will be even more opportunities than with a VIX at 21. What an amateur sees as a threaten – a volatile market- is exactly what a pro is expecting.

    5. I respect you approach :“…In fact, as an intrinsic-value driven, long term investor…”. So just because of that and your shown intellectual honesty, casting judgments on different non deterministic approaches or bringing in some “dubious” examples ( you have the total right in doing so , though) won’t bring any good to your nice and wise blog.

    Financial markets are the only “environment” where numberless realities could coexists.

    Nevertheless the only one that counts is the year end P&L statement bottom line figure …

    Best to you.


  10. Waltz,
    I think you need to start your own blog. I cannot make sense of half of what you say and the other half is in serious need of a rewrite.

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  12. Oh la la... le gamin a-t-il répondue? Non , évidement pas, car incapable du metriser un métier. Bien, je vous laisse liberté de choix sur le métier:prof ou ingénieur financier?

    Did you reply, ?

    Obviously not, (kiddo).You ain't got the tools to manage the "idea" of markets. And you take yourself too seriously.

    More: enter into dialectics; bring in fundamental as well as practical issues on how deal on markets or "how spot value in some undervalued equity for a long term investment"

    Not far from the same walls in the vilage I loved 31 years ago, traders will call you -nicely-moron...

    Rather than being so improbably chic, exibit -once in a while- a statement from a clearing house, showing real positions (not paper trading )

    Beating the market making money counts: all the rest has just
    no relevance.

    I sound harsh kiddo, but there's no reply since you have no idea of what I'm talking about. Simply you do not grasp the ain't got the idea of what I'm talking about.
    But a Brealey Myers last edition is enough for you.
    Ouais, what else you may need?

    Best to you.

    Ps: No wonder your publications are of little or no academical relevance.

  13. Waltz Lannes - Maybe You could recommend me some literature about Your theories. I am looking to get smarter and I know that most of the financial readings are misleading. I would be very grateful, if I could learn some more.

  14. Dear Matis

    Mine are not theories, I am not that arrogant to play that role.
    Very simply is how market works.

    Stay in touch.
    Best to you

  15. Dear Waltz,

    I am willing to study hard. I have watched US Equity markets all day more than a year, but I still feel that I lack the intelligence to beat the markets.

  16. Hi Waltz, thanks for the excellent words but just couldn't understand what you were trying to point out....... and i don't take my self too seriously.:)...

    How ever let me clarify a few points that made sense.....although non sense...

    "Just an amateur has a plain naked equity portfolio. Playing Black jack by the book is less risky manner to lose money." ----- WARREN BUFFET .... does it strike somewhere?

    "Why does it fall? Who gives a damn. Markets gives constantly opportunities on either sides every seconds 24 hrs a day 345 days a year every given year on this earth. And with a Vix rising to 46/50 there will be even more opportunities than with a VIX at 21. What an amateur sees as a threaten – a volatile market- is exactly what a pro is expecting. ---- nothing new, a trader requires volatility"....WHO doesn't know that... unless you are trying show off ur newly learnt knowledge...

    "Period. All the rest has no relevance. " ....If this was the case there would not have been a discussion to solve the issue....Just because you think this makes no sense won't give it the FED approval... i hope not atleast :)

  17. Gaurav

    Thanks for your notes.
    in bullet points:

    * You quote "Just an amateur has a plain naked equity portfolio. Playing Black jack by the book is less risky manner to lose money." ----- WARREN BUFFET .... does it strike somewhere?

    --> Thank you: nice handle.
    a) Warren Buffet does not work with a not secured portfolio. Believe me and if you do not want to believe ask people in B.H.
    b) quoting:
    By Jesse Westbrook in Washington November 8, 2005:
    Warren Buffett's Berkshire Hathaway reduced a bet against the US dollar after losing more than $US900 million ($1.23 billion) from foreign currency investments this year." Every time WB gets into speculation on derivatives get a bad hit. We were trading on a tangled problem btw: on Katrina news marktes kept on going up. Strange. But those are markets. this example is a sort of "strangeloop" to empirically explain my previous words...

    * YOU QUOTE: "Why does it fall? Who gives a damn. Markets gives constantly opportunities on either sides every seconds 24 hrs a day 345 days a year every given year on this earth. And with a Vix rising to 46/50 there will be even more opportunities than with a VIX at 21. What an amateur sees as a threaten – a volatile market- is exactly what a pro is expecting. ---- nothing new, a trader requires volatility"....WHO doesn't know that... unless you are trying show off ur newly learnt knowledge...

    ---> amof . CFR my previous reply . Markets work that way. I just report how markets day by day work. No theories.
    Just hard empirical and technical work.
    The worts thing is try to reinvent the wheel. Markets go upo and down. not only up.
    Single direction is a META-REALITY

    More empiricism and less questions , and move on markets. Which are made by men engaged in an auction..

    Best to you


  18. No theories.
    Just hard empirical and technical work.
    The worts thing is try to reinvent the wheel. Markets go upo and down. not only up.

    How to make that work? Can You teach me?

  19. Matis

    I spend , we spend zillions of hours in front of screens
    I'm nobody... -:)

    Markets are at the same time very complex but simple per se. Not rocket science but not everyone is fitted for.

    I cannot teach nothing to nobody when it gets to "money".
    We can discuss about topics, certainly, with pleasure.

    Or you make an internship at my company....;))))

    Best to you and stay in touch.

  20. Waltz,

    Where is Your company located at? If I could cover my living expenses, then I would be interested.

  21. Waltz,

    I'd just say to each its own, Warren Buffet does get into derivatives as well for example the 2019 and 2038 bets that markets would at certain levels. The point is, these bets are very small compared to his whole portfolio....he could have done without this and made enough money but since he found these bets to be alluring with his equity portfolio he speculated with these.

    I did never say that trading is bad and you can't make profits out of it, all i just said was that have a pure long term good equity portfolio can make u a lot of money as well. That is all that the professor has been is a lot based on news, where does the news come from??? Companies (M&A, Results, Losses, profits) or Macroeconomic - (Countries data, recession, growth, Euro zone ect) - both of which is what fundamental analysis is about.

    Alternatively it would be wrong to assume just long term people make the market infact that would be incorrect for its the traders and market makers who trade make the market by trading and providing liquidity for long term guys to benifit from those prices.

    In a market one can't exist without the other and both can make a profit using just one technique....

    Hope this

  22. Gaurav

    fIRST: I don't understand what follows: "as well for example the 2019 and 2038 bets that markets would at certain levels."


    Your intention is to show that there's more than one way to skin a cat?

    For there is nothing definitive and sure in our reality in our world; except few physics laws. ( BTW in the latter domain with 3 law you may attempt to succesfully and scientifically explain the 80% of scientifics phenomena.
    Alas, with 80% of Econo-laws-so-beloved-by.economists you are -barely- able to "expalin" 3% of the events....if ever...)

    Here hence a GREAT DOSE OF HUMBLENESS and a mandatory attitude NOT to FORECAST OR DIVINE THE FUTURE. Yes, just for pleasure or fun, could be done just as an academical essay or (with) the Gods.

    Want it more tangled?
    There are multiple realities as per our subjective perception and archetypes and mental representation though (in part outrlined in behaviouralism, mimetism, or ...cfr. Festinger) . So the way you see the markets - if interpreted not with a sane skepticism , empirism is different from someone else . Expecially if YOU want to DIVINE (forecast) the future...(starting from some assumptions and working on pure inference thereon)

    However (and so said):
    Profits: the only good way is the one that brings more profits than losses over a protected/secured environment
    Losing money: if you "pretend " to trade the markets losing money is an absolutely acceptable part of the job. As much as is for Valentino Rossi or Casey stoner fall down from their bike in rehearsals or racing.
    would you lose money driven by the attitude of ..." the (naked) "expectations" AKA no Risk Management?
    would you make assumptions ( in derivatives but in plain equity too) and than - afterwards - complain because market does not comply with the direction you were (epistemically) fallen in love? ( aka not cut losses....)
    would not to work by inference aka ...castle cards.
    I'm not getting into WB topic again. The fact is that every time he gets into specualtion he shows lost money. His risk mangement allows him to keep losses within the acceptable.
    But trading IS NOT BETTING... is READ what market is telling you JUST RIGHT NOW.

  23. There is NO stochastic evidence , but some statistic yes, that a long term portfolio will yield roughly a 10 % over a 30 years time frame.

    the vast majority of the fly-by-night analists , they do not know wjhat they are talking about since most of them are inetersectorials. Means they have the arrogance of talking and evaluateing of different equities belonging toi differents sectors or clusters.

    So a kid ( or a seasoned pompous senior analist) will dictate:
    the "value" -advising buy-hold-sell-underperform-overperform blah blah- of CATERPILLAR without having the palest Idea of how the sector is PROFOUNDLY STRUCTURED since he never worked in the sector but his experoience is limiuted to sector ratios and to news ( the worts thing: we do not need news. News are resolving themselves onto spikes most of the times) and balance sheets. Whch , by definition, are made of can sterch them as much as you like and window dress them at your will....
    So this KID, unable in stock picking for he has NO EXPERIENCE , unable to take a long position on a stock without cover himself with an ETF either on the same equity or on the INDEX, should tell ME and to the world how the market will perform? C'mon.

    So is for our He believes he knows. But actually he is funding his "knowledge" on assumptions and on a less than superficial sectors/groups/subgroups/share analisys ...
    We work on this
    We work on rotations.
    we rotate , we spin markets into gyrations to buy cheaper what we sold fkng expensive....
    on and on and on....untill a rotation can became a rally ( behaviour) or in a strong sell off ....directional.

    Transfer that to markets , transfer that to the "assumptions"....

    Take care.

    PS: Now let's have philosophy, humanism a lovely predominance on economics, over our entire
    Gaurav, tell me : how do you know what you vehemently sustain to know? where your knowledge came from?
    it's a simple epistemological affaire....

    A Conversation with Emanuel Derman

    Watching that interrogation of the bankers at the Senate hearings, I had the feeling that this is the way karma works in the universe. Everybody is going to do something not quite right as they act out their destiny mechanically, doing what they unthinkingly believe they have to do. The Wall Street people are going to reflexively overshoot and be too greedy. The Senate people are going to reflexively grandstand and be too uninformed and try to reign them in. There isn't going to be an elegant solution to any of this.


    When The Reality Club (the forerunner of Edge) was launched in 1980, one of it's founding members was the late Heinz Pagels, a particle physicist at Rockefeller University and president of The New York Academy of Sciences.

    It was around that time that Pagels began to talk about themes that revolved around "the importance of biological organizing principles, the computational view of mathematics and physical processes, the emphasis on parallel networks, the importance of nonlinear dynamics and selective systems, the new understanding of chaos, experimental mathematics, the connectionist's ideas, neural networks, and parallel distributive processing. ..."

    He understood that the computer provided "a new window on that view of nature." This led to interesting insights into how the new sciences of complexity would impact global financial markets. He had the intuition that we were on the brink of a new epistemology that would transform the scientific enterprise and the way we think about knowledge.

    Pagels was having similar conversations at Rockefeller during this period with Emanuel Derman, one of his fellow particle physicists who soon after left academia for a position at Bell Labs, and from there went on to spend 17 years at Goldman Sachs where he became managing director and head of the Quantitative Strategies Group. It was Derman who brought the ideas floating around physics in the 70's and 80's to Wall Street, and in the process came to embody the word "quant."

    Writing in the New York Times ("They Tried To Outsmart Wall Street" March 9, 2009) , Denis Overbye observed:

    Dr. Derman, who spent 17 years at Goldman Sachs, and became managing director, was a forerunner of the many physicists and other scientists who have flooded Wall Street in recent years, moving from a world in which a discrepancy of a few percentage points in a measurement can mean a Nobel Prize or unending mockery to a world in which a few percent one way can land you in jail and a few percent the other way can win you your own private Caribbean island.

  25. They are known as "quants" because they do quantitative finance. Seduced by a vision of mathematical elegance underlying some of the messiest of human activities, they apply skills they once hoped to use to untangle string theory or the nervous system to making money.

    Derman, Overbye noted, "fell in love with a corner of finance that dealt with stock options."

    "Options theory is kind of deep in some way. It was very elegant; it had the quality of physics," Derman told him.

    I recently sat down with Derman to ask about his thoughts on the financial crisis, the role played by Goldman and the other big banks, and what new questions we need to ask to get our heads around the big problems which, to some, seem intractable and unsolvable.

    Concerning the last point, Pagels was on to something, when, in his 1988 book Dreams of Reason: The Rise of the Sciences of Complexity, he wrote:

    Mathematicians and others are endeavoring to apply insights gleaned from the sciences of complexity to the seemingly intractable problem of understanding the world economy. I have a guess, however, that if this problem can be solved (and that is unlikely in the near future), then it will not be possible to use this knowledge to make money on financial markets. One can make money only if there is real risk based on actual uncertainty, and without uncertainty there is no risk.

    — John Brockman

  26. Waltz... despite you may think otherwise, the circumstance that you're not writing in your first language doesn't justify anything.

    What were you trying to demonstrate by writing here in french? That people from a country wich official language is french, can *actually* speak -and write, too!- french?
    Well, no wonder... :P

    Personally, I think your walls of text are both difficult to read (I doubt that's because of their content) and distasteful.

    Distasteful because you've abudantly crossed the line of criticism: you didn't sound harsh, only terribly arrogant, presumptuos and kinda hateful.
    "nondeterministic HUMBLENESS"?
    Maybe we have really different ideas of humbleness :PP

    In the future, if you want readers (at least one of them, which happens to be me) to pay more attention to you and what you have to say, you may consider following these few guidelines:

    - have your graphomania cured
    - avoid personal attacks
    - fix your english

    I am not telling this to provoke you, sincerely.

    PS: english is neither my native language, so I apologize in advance for any mistake.

  27. Thanks Alessio, for writting this up, else i'd have to do exactly what you just did... :)

  28. Waltz

    As much I would admire your dialectic, philosophical and to a great extent analytic skills, I guess this is not an ideal forum for it. Nor it is really relevant to post picks from "Edge" onto this blog. Wolfram would be prouder with your posts.

    Though not relevant, I would certainly like to read the translated version of your views on "36 arguements...."



  29. Alessio

    You are right.Running on the keyboard too fast does not excuse mistakes.
    Definitively correct.

    Let's get to the points.

    The fact I wrote -even- few lines in French has no relevance. Does it? Readers problem? Maybe.

    Whatever, no relevance.I'm used to speak in different Idioms , so I write.

    Hurting with criticism. Interesting subject. In a dialectic exchange it is a risk. There is no exchange here, so...

    All the rest belongs to subjective...sensitivity.
    I do not write to be popular. Period.

    You don't like my style ? again your problem. Not mine.

    Do not read me.

    But if you do,please, would you kindly get into "contents" and/or technicalities and not if I do sound arrogant or whatever?

    You don't? your problem again. I basically made my point. And that's it from my side. I'm not looking for a "polite" or "unpolite" audience". I write what I think within the border of politness.

    Take care!


    PS: Guru, for the 36: that is an excellent Idea! Thanks!

  30. The tenor of your - superficial?- communication lents itself to a reminder.
    Alessio read my lips so you will understand what I say ;):

    -Official Language in Monaco is MONEGASQUE.
    - French is Administrative.
    - 6720 Monegasque Nationals in Monegu are speaking their language.
    - Proudly.

    Porte toi bien, jeune homme.

  31. Waltz,

    So Your office is in Monaco and mainly make money trading US stocks?

  32. This comment has been removed by the author.

  33. vidaguevra: the mother of imbecils is always pregnant nad you are 6the FACTUAL EXAMPLE OF THIS.


Given the amount of spam that I seem to be attracting, I have turned on comment moderation. I have to okay your comment for it to appear. I apologize for this intermediate oversight, but the legitimate comments are being drowned out by the sales pitches and spam.