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algorithmic trading, automated trading system, Bernie Madoff, Bernie Sanders, Bretton Woods, buttonwood tree, computerized trading, corporate raider, creative destruction, credit crunch, Credit Default Swap, financial innovation, fixed income, Flash crash, High speed trading, housing crisis, index arbitrage, locking in a profit, Long Term Capital Management, margin call, market bubble, market fragmentation, market fundamentalism, Myron Scholes, naked short selling, pattern recognition, Ponzi scheme, quantitative trading / quantitative ﬁnance, Renaissance Technologies, Ronald Reagan, Sergey Aleynikov, short selling, Small Order Execution System, statistical arbitrage, technology bubble, transaction costs, Vanguard fund, Y2K
Equinix, a trading firm, built a colocation facility the size of five football fields four miles west of Manhattan in Secaucus, New Jersey.2 The NYSE Euronext built a facility for its matching engines the size of seven football fields in Mahwah, New Jersey, and invited HFT firms to collocate there. Mahwah is an Indian name that translates to “where paths cross.” Exchange officials made a big show of planting six buttonwood trees outside the warehouse-like facility to reference the NYSE’s Wall Street roots, where trading supposedly began under a buttonwood tree at the tail end of the eighteenth century. The shade of the buttonwood tree was free. The NYSE Euronext expected its Mahwah operation to become a $1 billion business.3 The brokers, in turn, saw a way to profit by subletting space on their servers at these collocation facilities. They began to offer “naked sponsored access” to their HFT constituents, including hedge funds.
., 194 arbitrage, 161-162 arbitrage opportunities, 70 Archipelago, 33 Arnuk, Sal, 11-25, 44-45, 61, 217 Atkins, Paul, 145-146 ATSs (Alternative Trading Systems), 93 regulation of, 139-144 Australia (film), 78 automated liquidity provision, 161 Automatic Trading Systems (ATSs), 93, 139-144 Aykroyd, Dan, 29 B Bachus, Spencer, 187 Baker, Jim, 130 BATS (Better Alternative Trading System) Exchange, 78 Bee, Samantha, 44 Berkeley, Alfred, 173 Biden, Joe, 47-49, 52-53 “Big Picture” blog (Ritholtz), 234 Birk, Roger, 116 Black Monday (October 19, 1987), 125-133, 179 Blair, Bruce, 160 Blankfein, Lloyd, 99 Blodgett, Henry, 189-190 Bloomberg, Michael, 100 Boesky, Ivan, 126 Boggs, Caleb, 48 Bookstaber, Richard, 157 Born, Brooksley, 99 Boston Stock Exchange, 33 BP oil spill (Deepwater Horizon), 67 Brady Commission, 128 Brady, Nicholas, 83, 128 broken trades after Flash Crash, 83, 225 brokerage houses, internal trades, 31-32 Brown, Alistair, 17 Brown, Gordon, 66 Budge, Hamer, 107 Buffett, Warren, 234 Bulgaria Confidential (newspaper), 42 Bush, George H.W., 102 Bush, George W., 50 busted trades after Flash Crash, 88 buttonwood trees, 168 C Cameron, David, 66 Canaday, Ed, 41 capital crisis of 1969-70, 105-111 Casey, William, 120 CBOT (Chicago Board of Trade), 28-30 Cembalest, Michael, 207-208 CFTC (Commodities Futures Trading Commission), 27 Flash Crash report, 213-227 immediate reaction to Flash Crash, 82 investigation of Flash Crash, 183, 187 consolidated tape delays, 202-204 quick fix rules after Flash Crash, 85-87, 90 CFTC-SEC Joint Advisory Committee Accenture testifying before, 85-90 investigation of Flash Crash, 91-95 Chicago Board of Trade (CBOT), 28-30 Chicago Mercantile Exchange (CME), 28-30 Chilton, Bart, 214 Christie, William, 139 circuit breaker rule, 188 circuit breakers, 63-64, 89 Citigroup, 166 Clinton, Bill, 53, 97, 100-102, 143 Clinton, Hillary, 100 Close Encounters of the Third Kind (film), 49 CME (Chicago Mercantile Exchange), 28-30 collocated servers, 17, 22, 34 collocation, origins of, 165-169 commission structure, fixed commissions, 118-120 commodities exchanges correlation with equities exchanges, 94 history in United States, 27-30 unification with equities exchanges, 36, 70 Commodities Futures Trading Commission.
Why Wall Street Matters by William D. Cohan
Apple II, asset-backed security, bank run, Bernie Sanders, bonus culture, break the buck, buttonwood tree, corporate governance, corporate raider, creative destruction, Credit Default Swap, Donald Trump, Exxon Valdez, financial innovation, financial repression, Fractional reserve banking, Gordon Gekko, greed is good, income inequality, Joseph Schumpeter, London Interbank Offered Rate, margin call, money market fund, moral hazard, Potemkin village, quantitative easing, secular stagnation, Snapchat, South Sea Bubble, Steve Jobs, Steve Wozniak, too big to fail, WikiLeaks
The United States became one of the few countries in the world to have its seat of political power in a different place from its center of financial power. The city’s first “stock exchange” was opened at 22 Wall Street on March 1, 1792, by a group of “auctioneers” who had been designated by the Treasury to sell the bonds that were issued in order to pay off the young nation’s debt in accordance with Hamilton’s plan. Farther east on Wall Street, at around 70 Wall Street, stood one of the lone trees—a buttonwood tree, which we now call a sycamore—that had survived the Revolutionary War intact and thus had metaphorical importance to the young nation. Under that tree, a small group of brokers had already been in the business of buying and selling the new nation’s Treasury debt. They had also been meeting and trading at the Tontine Coffee House, farther east on Wall Street, which was named after a seventeenth-century method of raising capital devised by Lorenzo de Tonti, an Italian, and which was particularly popular in France.
They have been around since before there was a Wall Street. So when we imagine that Wall Street is the sole cause of all financial calamities, that is not even remotely correct. It’s a crucial point to remember. Of course, that doesn’t mean Wall Street hasn’t been involved in, or exacerbated, its share of financial turmoil. In March 1817, the brokers who had been trading for years on Wall Street at the Tontine Coffee House and under the buttonwood tree decided to organize themselves more formally in what they called the New York Stock and Exchange Board. They rented a room at 40 Wall Street and started meeting regularly. The purpose of the organization, the precursor of what became the New York Stock Exchange, or the NYSE, was for the president of the board to announce on a daily basis the prices for which the stocks of the companies listed on the exchange were bought and sold.
Albert Einstein, Andy Kessler, automated trading system, bank run, Big bang: deregulation of the City of London, Bob Noyce, Bretton Woods, British Empire, buttonwood tree, Claude Shannon: information theory, Corn Laws, Douglas Engelbart, Edward Lloyd's coffeehouse, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, Grace Hopper, invention of the steam engine, invention of the telephone, invisible hand, Isaac Newton, Jacquard loom, Jacquard loom, James Hargreaves, James Watt: steam engine, John von Neumann, joint-stock company, joint-stock limited liability company, Joseph-Marie Jacquard, Leonard Kleinrock, Marc Andreessen, Maui Hawaii, Menlo Park, Metcalfe's law, Metcalfe’s law, packet switching, price mechanism, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, railway mania, RAND corporation, Robert Metcalfe, Silicon Valley, Small Order Execution System, South Sea Bubble, spice trade, spinning jenny, Steve Jobs, supply-chain management, supply-chain management software, trade route, transatlantic slave trade, transatlantic slave trade, tulip mania, Turing machine, Turing test, William Shockley: the traitorous eight
No one wanted to own a high risk, illiquid IOU from a brand new government of the United States. Investors were more willing to take the risk if they knew they could sell the scrip at some point. Of course some idiot top ticked it at $310, just like some idiot in 2000 would top tick the NASDAQ at 5000. With risk and liquidity comes volatility. Trading scrip on the muddy streets of a New York was no way to go through life. So on May 17, 1792, 24 brokers and merchants met under a buttonwood tree, which has since been replaced by a building at 68 Wall Street. Voila! They formed the first organized stock exchange in New York. They were hungry for action and someone had to move those bonds and scrip around. A stock exchange could not be much larger than someone’s voice could carry, so they eventually moved indoors to a rented room on Wall Street. This group became the New York Stock & Exchange Board, and all sorts of bonds and other bank stocks began to change hands there.
. *** From its debut as a hot IPO, the Bank of the United States was capitalized with $8 million. The year before, in 1790, the new government of the United States of America sold $80 million in bonds to pay for the Revolutionary War and General Washington’s bar tab. Trading scrip on the muddy streets was no way to go through life, so the first organized stock exchange in New York was formed May 17, 1792 when 24 brokers and merchants met under a buttonwood tree that has since been replaced by a building at 68 Wall Street. Two centuries ago, standing on a soapbox was considered high tech. A stock exchange could not be much larger that someone’s voice could carry. These guys were hungry for action and someone had to move those bonds and scrip around. This group became the New York Stock & Exchange Board, and all sorts of bonds and other bank stocks began to change hands there.
In the first half of the 19th century, transportation was the rage: Turnpikes were funded in the early 1800s and canals were funded between 1820 and 1850. But then in 1844, investors saw the introduction of the Morse telegraph and an era of faster and cheaper communications began. Wall Street immediately saw the benefits. The telegraph gave investors outside of New York access to more up-to-date pricing information. While the area under the Buttonwood Tree didn’t get bigger, the telegraph funneled more cash into the exchange. Technology constantly increased the speed of information and speed meant more profitable trades. Telegrams were invented to relay messages. The most amazing stat I found suggests that trades in stocks and bonds accounted for over half of the telegraph usage in those days. Ezra Cornell wired up the east coast with telegraph lines and consolidated them into Western Union in 1855.
algorithmic trading, automated trading system, banking crisis, bash_history, Bernie Madoff, butterfly effect, buttonwood tree, Chuck Templeton: OpenTable, cloud computing, collapse of Lehman Brothers, computerized trading, creative destruction, Donald Trump, fixed income, Flash crash, Francisco Pizarro, Gordon Gekko, Hibernia Atlantic: Project Express, High speed trading, Joseph Schumpeter, latency arbitrage, Long Term Capital Management, Mark Zuckerberg, market design, market microstructure, pattern recognition, pets.com, Ponzi scheme, popular electronics, prediction markets, quantitative hedge fund, Ray Kurzweil, Renaissance Technologies, Sergey Aleynikov, Small Order Execution System, South China Sea, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stochastic process, transaction costs, Watson beat the top human players on Jeopardy!, zero-sum game
Heading west toward Trinity Church on the western terminus of the famed street, yellow cabs darting by along the deep and narrow canyon of skyscrapers, worried-looking men storming out of subway stations, Levine glanced up at the sculpted Georgia marble façade and Corinthian columns of the New York Stock Exchange, imperious as a Roman temple. Central exchanges such as the NYSE had first cropped up around the coffeehouses of Amsterdam, London, and Paris in the seventeenth century. Founded in 1792 by twenty-four men under a buttonwood tree, the NYSE had maintained a virtual monopoly on stock trading in the United States for nearly two hundred years. As such, it represented everything Levine hated about Wall Street. The inside information, the special deals, the secrecy of the connected. The money. The power. The Big Board. Trading at the NYSE took place on the floor of the exchange, beyond the ken of everyday investors, amid the haggling of a select group of insiders.
The length of several football fields, the 400,000-square-foot building would allow computer-driven trading firms to put their computer servers right next to the NYSE’s matching engine—the computers that brought buyers and sellers together in the frictionless ether of cyberspace. Twenty-inch-wide pipes pumped in water to cool the computers. Twenty surge protectors, each the size of a tank, protected the site against power outages. In August 2010, just months after the Flash Crash, Project Alpha was ready for action. Evenly spaced around the large, nondescript building—nearly invisible to the traffic flowing around it on nearby roads and highways—were six buttonwood trees, planted in apparently un-ironic homage to the origin of the venerable stock exchange on Broad Street. That exchange was all but dead. Mahwah was the new floor, a powerful confluence of capitalism and state-of-the-art computer technology. While tourists snapped photos of the exchange’s marble façade on the corner of Wall and Broad, the real trading was taking place thirty miles away in Mahwah’s vast air-conditioned floors of computer servers.
Getco’s general counsel was John McCarthy, who’d formerly served as an associate director of the SEC’s Office of Compliance Inspections and Examinations. In June 2010, Getco hired Elizabeth King, a seventeen-year SEC veteran and an expert in options markets. And now, with its move onto the NYSE’s hallowed floor, Getco was taking its place as the new king of the hill in the stock market, the direct descendant of the traders who’d founded the exchange under a buttonwood tree in 1792. The revolution started by Levine on January 16, 1996, with the launch of Island had come full circle. WEEKS after the NYSE’s Mahwah data center opened for trading, in early September, two old adversaries met again. The Financial Industry Regulatory Authority, formerly known as the National Association of Securities Dealers, or NASD, fined a New York trading firm $2.3 million and suspended several of its traders.
How to Kick Ass on Wall Street by Andy Kessler
Andy Kessler, Bernie Madoff, buttonwood tree, call centre, collateralized debt obligation, family office, fixed income, hiring and firing, invention of the wheel, invisible hand, London Whale, margin call, NetJets, Nick Leeson, pets.com, risk tolerance, Silicon Valley, sovereign wealth fund, time value of money, too big to fail, value at risk
When I think of Wall Street, I think of alpha dogs generating revenue at all cost, getting deals done, fighting for market share against all the other firms, and then at the end of the year, the political knives come out trying to carve up the ever growing bonus pool, though often each other. * * * So let’s go back. It’s been said that a stock exchange can only be as large as a voice can carry. On May 17, 1792 after years of shouting out on the street, a group of 24 prominent brokers met under a Buttonwood tree at what is now 68 Wall Street, and decided to move indoors, so to speak. They created the New York Stock and Exchange Board, copying European exchanges and “pledge ourselves to each other that we will not buy or sell from this day for any person whatsoever, any kind of Public Stock, at least than one quarter of one percent Commission on the Specie value and that we will give preference to each other in our Negotiations.”
Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber
AI winter, algorithmic trading, asset allocation, banking crisis, barriers to entry, Big bang: deregulation of the City of London, butterfly effect, buttonwood tree, buy low sell high, capital asset pricing model, citizen journalism, collateralized debt obligation, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, Emanuel Derman, en.wikipedia.org, experimental economics, financial innovation, fixed income, Gordon Gekko, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, John Nash: game theory, Kenneth Arrow, Khan Academy, load shedding, Long Term Capital Management, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, quantitative hedge fund, quantitative trading / quantitative ﬁnance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Renaissance Technologies, Richard Stallman, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, semantic web, Sharpe ratio, short selling, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, too big to fail, transaction costs, Turing machine, Upton Sinclair, value at risk, Vernor Vinge, yield curve, Yogi Berra, your tax dollars at work
Notice the same distinguished-looking CME official, Everett Harris, then president of the Merc, banging on the gong with a salami. This guy had a great job. These are the little details that make market history come alive for me. 9 10 Nerds on Wall Str eet There’s so much technology in modern markets that it’s easy to forget that some of our favorite markets, like the New York Stock Exchange (NYSE), started out as very low-tech places. In 1792, the New York Stock Exchange was a bunch of guys standing around a buttonwood tree at 68 Wall Street shouting at each other on days when it didn’t rain or snow: We like our markets to be liquid, efficient, resilient, and robust. But this is hard to do when all the participants have to crowd around a tree and hope for good weather. So in 1794, we see the first big technological solution: the roof. Everybody moves inside, to the Tontine Coffee House at the corner of Water and Wall streets.
When you can do enough simple computation, remarkable things can happen. MIT recently merged its Artificial Intelligence Laboratory and Computer Science Laboratory, reflecting this merger of ideas. Along the path from hand signals to Deep Blue and the World Wide Web, we’ve seen some remarkable market applications of technology. This isn’t going to stop. We’ve come a long way since the traders moved from under the buttonwood tree into the Tontine Coffee House, but we’ve really just moved indoors in our use of information technologies. There is so much written about information overload that we have an information overload information overload. But as we have seen, technological patterns repeat. An Illustrated History of Wir ed Markets 29 Living through a technology revolution isn’t easy. We aren’t exactly trapped in the cogs like Charlie Chaplin in Modern Times, or racing steam-powered Victorian dune buggies, but it often feels that way.
I’m confident in saying that there will in fact be room in the future for new people in the wired markets of the world, whether they are trading securities, emissions, or electrons. Ner ds Gone Gr een 341 Ogden Nash was mildly nostalgic but mostly joking when he said, “Progress might have been all right once, but it has gone on too long.” None of us will be going back to shouting under the Buttonwood tree. Notes 1. CUSIPs are issued by the U.S. Committee on Uniform Security Identification Procedures; they are nine-character alphanumeric security identifiers. See www.cusip .com for more than you need to know. 2. Brent Barker and Lucy Sanna, “Turning on Energy Efficiency,” EPRI Journal (Summer 2006): 4–13, http://mydocs.epri.com/docs/public/000000000001013720.pdf. 3. Ahmad Faruqui, Ryan Hledik, Samuel A.
Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein
Albert Einstein, Alvin Roth, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, Bayesian statistics, Big bang: deregulation of the City of London, Bretton Woods, buttonwood tree, capital asset pricing model, cognitive dissonance, computerized trading, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Lloyd's coffeehouse, endowment effect, experimental economics, fear of failure, Fellow of the Royal Society, Fermat's Last Theorem, financial deregulation, financial innovation, full employment, index fund, invention of movable type, Isaac Newton, John Nash: game theory, John von Neumann, Kenneth Arrow, linear programming, loss aversion, Louis Bachelier, mental accounting, moral hazard, Myron Scholes, Nash equilibrium, Paul Samuelson, Philip Mirowski, probability theory / Blaise Pascal / Pierre de Fermat, random walk, Richard Thaler, Robert Shiller, Robert Shiller, spectrum auction, statistical model, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas Bayes, trade route, transaction costs, tulip mania, Vanguard fund, zero-sum game
Simply that a coffee house was the birthplace of Lloyd's of London, which for more than two centuries was the most famous of all insurance companies.18 Insurance is a business that is totally dependent on the process of sampling, averages, independence of observations, and the notion of normal that motivated Graunt's research into London's population and Halley's into Breslaw's. The rapid development of the insurance business at about the time Graunt and Halley published their research is no coincidence. It was a sign of the times, when innovations in business and finance were flourishing. The English word for stockbroker-stock jobber-first appeared around 1688, a hundred years before people started trading stocks around the Buttonwood tree on Wall Street, New York. Corporations of all kinds suddenly appeared on the scene, many with curious names like the Lute-String Company, the Tapestry Company, and the Diving Company. There was even a Royal Academies Company that promised to hire the greatest scholars of the age to teach the 2,000 winners of a huge lottery a subject of their own choosing. The second half of the seventeenth century was also an era of burgeoning trade.
Actually, it seems, options gave more people an opportunity to participate in a market that had previously been closed to them. The opprobrium attached to options during the so-called tulip bubble was in fact cultivated by vested interests who resented the intrusion of interlopers onto their turf 2 In the United States, options appeared early on. Brokers were trading put and call options on stocks as early as the 1790s, not long after the famous Buttonwood Tree Agreement established what was to become the New York Stock Exchange. An ingenious risk-management contract was issued on June 1, 1863, when the Confederate States of America, hard up for credit and desperate for money, issued the "7 Per Cent Cotton Loan." The loan had some unusual provisions that gave it the look of a derivative instrument.3 The principal amount was not repayable in Confederate dollars nor was it repayable at the Confederate capitol in Richmond, Virginia.
Higher: A Historic Race to the Sky and the Making of a City by Neal Bascomb
By 1929, half a million commuters a day stepped into the Wall Street district alone to work at one of the eighty banks, nineteen trust companies, one hundred railroad corporations, four hundred insurance companies, twelve safe deposit companies, fourteen cable and telegraph companies, and the hundreds of coal, iron, steel, copper, and steamship companies—among many others. Exchanges traded everything from stocks and bonds to sugar, coffee, rubber, and leather. The rattle of ticker tapes and elevated trains had long since replaced the blackbird’s song. Shoeshine boys lined the corners and chauffeurs and taxicab drivers crowded the streets waiting for their customers. It was a long way from the whipping posts that once populated the area and the old Buttonwood Tree underneath which merchants traded the first stocks. Severance and the Starrett Brothers entered this melee, charged with the job of demolishing buildings of heavy masonry, setting foundations seventy feet deep into bedrock, delivering seventeen thousand tons of steel, and managing the legions to do the work. It was May 1929. They had less than a year and the shoeshine boys, taxi drivers, and bank clerks couldn’t exactly be told to take a holiday until the building reached hundreds of feet in the air.
algorithmic trading, automated trading system, Bernie Madoff, buttonwood tree, commoditize, computerized trading, corporate governance, cuban missile crisis, financial innovation, Flash crash, Gordon Gekko, High speed trading, latency arbitrage, locking in a profit, Mark Zuckerberg, market fragmentation, Ponzi scheme, price discovery process, price mechanism, price stability, Sergey Aleynikov, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, transaction costs, two-sided market, zero-sum game
Matthew Vincent, “Speed Fails to Impress Long-Term Investors” (Jan. 1, 2011), Financial Times, Sept. 22, 2011, Financial Times website, http://www.ft.com/intl/cms/s/0/df141604-e070-11e0-bd01-00144feabdc0.html#axzz1n3cofl4o. 5. New York Stock Exchange, Service Description, New York Stock Exchange website, http://www.nyse.com/pdfs/Colocation-NYSE-Euronext-US-Liquidity-Center.pdf. 6. New York Stock Exchange, Price List 2012, U.S. Equities website, https://usequities.nyx.com/sites/usequities.nyx.com/files/nyse_price_list_01.01.12_0.pdf. 7. Peter Chapman, “A Buttonwood Tree Grows in Mahwah” (May, 2010), Traders Magazine.com, http://www.tradersmagazine.com/issues/23_308/buttonwood-nyse-mahwah-nyfix-colocation-data-center-105760-1.html. 8. Bob Ivry, Whitney Kisling, and Max Abelson, “How America Ceded Capitalism’s Bastion to German Boerse Seizing Big Board” (July 5, 2011), Ethnic Cliques, Bloomberg website, http://www.bloomberg.com/news/2011-07-06/how-america-ceded-capitalism-s-bastion-to-germans.html. 9.
The Quants by Scott Patterson
Albert Einstein, asset allocation, automated trading system, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, buttonwood tree, buy low sell high, capital asset pricing model, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, fixed income, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, job automation, John Meriwether, John Nash: game theory, law of one price, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, merger arbitrage, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, quantitative hedge fund, quantitative trading / quantitative ﬁnance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Sergey Aleynikov, short selling, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise
True arbitrage is virtually a sure thing. It involves buying an asset in one market and almost simultaneously selling that asset, or its near equivalent, in another. Say gold is trading for $1,000 in New York and $1,050 in London. A fleet-footed arbitrageur will buy that New York gold and sell it in London (instantaneously), pocketing the $50 difference. While this was difficult when traders were swapping stocks beneath a buttonwood tree on Wall Street in the eighteenth century, the invention of the telegraph—and the telephone, the high-speed modem, and a grid of orbiting satellites—has made it much easier to accomplish in modern times. Such obvious discrepancies in practice are rare and are often hidden in the depths of the financial markets like gold nuggets in a block of ore. That’s where the quants, the math whizzes, step in.
Investment: A History by Norton Reamer, Jesse Downing
activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, break the buck, Brownian motion, buttonwood tree, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve
With the French Revolution beginning in 1789 and the Napoleonic Wars lasting until 1815, disruption and destruction in France and the Low Countries cleared the way for a rising England.67 88 Investment: A History The American Experience In the United States, the federal government ﬂoated $77.1 million in debt in 1790 to pay back costs incurred by the American Revolution, giving birth to the ﬁrst US public debt markets.68 On May 17, 1792, the Buttonwood Agreement (so named because it was signed under a buttonwood tree by twenty-four stockbrokers) was executed. Soon, in 1793, the Tontine Coffee House in New York City became a forum for trading government debt and equities, while many of the stockbrokers’ colleagues traded securities in the street nearby.69 The Buttonwood Agreement created what is today the New York Stock Exchange. It is of interest that the agreement speciﬁed that the brokers were to deal directly with one another and that commissions for trades would be twenty-ﬁve basis points (or one-fourth of 1 percent).
The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini
affirmative action, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bernie Madoff, Black-Scholes formula, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, labour mobility, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low skilled workers, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Northern Rock, Occupy movement, oil shock, price stability, quantitative easing, quantitative hedge fund, quantitative trading / quantitative ﬁnance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond
How could a well-functioning market spawn such chaos? What caused the Flash Crash? What happened to those poor souls who bought stocks at $100,000 per share or sold them for as little as a penny? Could crowd behavior be partly responsible for the distortions in the market movements of May 6? FIGURE 17.1 Apple, Accenture, and Sotheby’s Stock Prices Source: Nanex. Background In the 1700s, stock traders met under a buttonwood tree on Wall Street. In 1792, they created the New York Stock Exchange (NYSE). For more than 200 years, individuals traded stocks face to face. Computer technology has since made trading blindingly fast and largely anonymous. In 2006, the NYSE became an electronic exchange, saying goodbye to the traditional floor brokers and specialists who ran around on those old wooden floors, screaming prices as they went.2 Stock purchases and sales can be completed through a variety of networks: a national exchange such as the NYSE, an electronic communication network (ECN), a large broker-dealer, or a dark pool.
Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan
asset-backed security, Bernie Madoff, buttonwood tree, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, fear of failure, financial innovation, fixed income, Ford paid five dollars a day, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, mega-rich, merger arbitrage, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, risk tolerance, Ronald Reagan, Saturday Night Live, South Sea Bubble, time value of money, too big to fail, traveling salesman, value at risk, yield curve, Yogi Berra, zero-sum game
CHAPTER 6 / The Biggest Man on the Block CHAPTER 7 / Caveat Emptor CHAPTER 8 / The Goldman Way CHAPTER 9 / A Formula That Works CHAPTER 10 / Goldman Sake CHAPTER 11 / Busted CHAPTER 12 / Money CHAPTER 13 / Power CHAPTER 14 / The College of Cardinals CHAPTER 15 / $10 Billion or Bust CHAPTER 16 / The Glorious Revolution CHAPTER 17 / It’s Too Much Fun Being CEO of Goldman Sachs CHAPTER 18 / Alchemy CHAPTER 19 / Getting Closer to Home CHAPTER 20 / The Fabulous Fab CHAPTER 21 / Selling to Widows and Orphans CHAPTER 22 / Meltdown CHAPTER 23 / Goldman Gets Paid CHAPTER 24 / God’s Work ACKNOWLEDGMENTS NOTES INDEX Other Books by This Author PROLOGUE THE PYRRHIC VICTORY Wall Street has always been a dangerous place. Firms have been going in and out of business ever since speculators first gathered under a buttonwood tree near the southern tip of Manhattan in the late eighteenth century. Despite the ongoing risks, during great swaths of its mostly charmed 142 years, Goldman Sachs has been both envied and feared for having the best talent, the best clients, and the best political connections, and for its ability to alchemize them into extreme profitability and market prowess. Indeed, of the many ongoing mysteries about Goldman Sachs, one of the most overarching is just how it makes so much money, year in and year out, in good times and in bad, all the while revealing as little as possible to the outside world about how it does it.
Debt of Honor by Tom Clancy
airport security, banking crisis, Berlin Wall, buttonwood tree, complexity theory, cuban missile crisis, defense in depth, job satisfaction, margin call, New Journalism, oil shock, Silicon Valley, tulip mania
Once peopled with products of the Harvard or Wharton business schools, the new crop of "rocket scientists" were just that—largely holders of science degrees, especially mathematics and physics. MIT was the current school of choice, along with a handful of others. The reason was that the trading houses all used computers, and the computers used highly complex mathematical models both to analyze and predict what the market was doing. The models were based on painstaking historical research that covered the NYSE all the way back to when it was a place under the shade of a buttonwood tree. Teams of historians and mathematicians had plotted every move in the market. These records had been analyzed, compared with all identifiable outside factors, and given their own mathematically drawn measure of reality, and the result was a series of very precise and inhumanly intricate models for how the market had worked, did work, and would work. All of this data, however, was dedicated to the idea that dice did have a memory, a concept beloved of casino owners, but false.
Caribbean Islands by Lonely Planet
Bartolomé de las Casas, big-box store, British Empire, buttonwood tree, call centre, car-free, carbon footprint, clean water, colonial rule, cuban missile crisis, discovery of the americas, Donald Trump, glass ceiling, haute cuisine, income inequality, intermodal, jitney, microcredit, offshore financial centre, place-making, Ronald Reagan, Rubik’s Cube, Search for Extraterrestrial Intelligence, sustainable-tourism, urban planning, urban sprawl, white picket fence
At the eastern ‘bottom’ of Treasure Beach you’ll find Great Bay, a pretty, rural patchwork of fields and beach; this is the least-developed portion of Treasure Beach, where the main business remains a Fishermen’s Co-op building. Jack Spratt Beach , at the western edge of Jake’s Place, is next along as you head north and west; here brightly painted wooden fishing boats are pulled up on the sand and there is invariably a fisherman or two on hand tending the nets. This is the safest beach for swimming. The next beach to the west is Frenchman’s Beach , watched over by a landmark ‘buttonwood’ tree that has long attracted the attention of poets, painters and woodcarvers who ply their wares. Local boat captains congregate here, as does everyone else in the area once the sun starts to set. It’s is a great place to arrange trips to the Pelican Bar or Black River. In the opposite direction from Jake’s there’s Calabash Bay Beach , with a few cook and rum shops and a sandy beach, and Old Wharf Beach , the most private of the bunch, although still accessible by anyone who makes the effort to totter down to the sand.