"Trading as a Business" quant interview, highly recommended

Quote from pedro01:

It would appear that you haven't read the posts but want to join in the debate for the hell of it. :confused:

In 87, complex mathematics turned what would have been a little crash into a bloodbath. Portfolio Insurance theory is a great concept BUT not if everyone does it at the same time.

If you read up on Portfolio Insurance (hell - it's in the above posts) and the avalanche of selling it caused, you would understand the role of quantitive analysis in the 23% one day drop.
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I am not saying quantitative methods dont have any downside, but what about the crashes that happened before it? And what if ban any form of quant trading and go back to trading from the pits (since any access to computerized trading is suspect to quant activity), will it help abolish crashes and panics?
 
Quote from hermit:

Like everything else in the world, quantitative methods have their good and bad side and there are good quants and bad quants.

If there were no quantitative methods and we go back to trading through the pits, will the crashes and panics suddenly stop? What about all the scams/ripoffs that used to happen when everything was pit-traded? If you are seeking a utopia, markets are not the place for you.
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Of course crashes will still occur without quants - but the problems we have now are so very much worse because of quantitative analysis.

As for seeking something ? What makes you think I am seeking anything ? What makes you think this has any thing to do with pit trading vs electronic markets.

Traders did just fine pricing options before Black Scholes and now that Black Scholes is no longer being used, they are also doing just fine.

The quants answer to the problems created by Gaussian Copula and VaR is that 'we need better models'. I would say that this is incorrect. We don't need models at all.

The markets are not a problem with a mathematical solution and whilst the world of financial education continue to churn out grads with no business skills but a numch of numeracy skills, we will continue to suffer from their machinations.

Supply and demand - either in an electronic marketplace or otherwise does a much better job of setting prices than ANY quantitative analyst who's never placed a trade in his life. Hence the failure of Black Scholes.
 
Quote from hermit:

I am not saying quantitative methods dont have any downside, but what about the crashes that happened before it? And what if ban any form of quant trading and go back to trading from the pits (since any access to computerized trading is suspect to quant activity), will it help abolish crashes and panics?
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Pits ? Quant Trading ?

This has nothing to do with the issue.

Quants don't trade (which I suspect is part of the problem) - but they do put together risk profiles that financial institutions rely on.

That's what is causing the mayhem.

If they kept Quants busy trading, we wouldn't be in such a mess.

I think though, that there is a basic misunderstanding of what a Quant does - the interweb pseudo-quant is somewhat to blame for that.

Anyway - what else are you going to do with a physics Phd that would pay so well ?
 
first of all you or your fellow "professor" seems to confuse the term portfolio insurance. Portfolio insurance has NOTHING to do with being short options. Its about being long puts in order to "insure" against adverse moves in long-only portfolios. (the counter party would of course be short premium and would have to frequenty readjust the hedge in fast moving markets. But the point is that this would have the same effect than dumping long cash positions, short-selling, selling index futures, buying gold..., thus citing portfolio insurance as the major reason for this excessive move is utter nonsense).

Secondly, you seem to not fully grasp how risk taking in large financial institutions works! The ONLY job of quants is to develop and maintain models for day-to-day pricing of hard-to-value derivatives. However, in the end all risk at EVERY desk is overseen by a (hopefully) experienced and senior trader. The job of risk managers in everybody's eyes (except the risk manager himself) is to satisfy regulatory requirements, nothing else. So, what does all this risk taking in the past couple years and what I just told you lead you to? Excessive risk taking was a VOLUNTARY decision by individuals not some computer systems. Greed drove excessive risk taking and nothing else. Please do not tell me some computer code developed by some nerd bankrupted large financial institutions. That is simply crap and untrue.

Also, your points on BS are an old hat. Nobody EVER claimed that the assumptions BS requires hold up. Everybody knows that.



Quote from pedro01:

That last statement is not true.

The Value at Risk at Bear Stearns was just over $60M the day before the value of Bear Stears was wiped out to the tune of $8bn.

How is it my choice that people in huge financial institutions rely on flawed mathematical concepts to take huge risk ?
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As a matter of fact, Fisher Black was pretty successful in business, he worked for Goldman for several years.

He also said that "markets are far more efficient when viewed from the banks of the Charles than from the banks of the Hudson," when he made a shift from the academia in Boston to an investment banking career in NY.

He was probably alluding to the fact that it is possible to make money in the markets, if you have enough determination and a good grasp of technical analysis, if you applied the most effective TA concepts selectively, which is what successful traders do.
 
Once again, we are back to 'computer code'. I have not at any point blamed computers. This is a people problem.

The initial concept of portfolio insurance was to REPLICATE the performance of a put option in what was referred to as a “dynamically programmed system,” where a client was automatically shifted out of a position when it began to fall, increasing the client’s cash as long as the stock fell and “insuring” that a predetermined amount was all that the client could lose.

This is the reason that everyone sold at the same time. If they had been using options instead of attempting to replication options by selling, we'd have been OK. It is blindingly obvious to us now that any model that calls for seling en masse when prices drop is a recipe for disaster.

I don't see the point in debating this because it is a simple fact that options were not being used at that point and the selling as a 'replication' of puts caused the '87 drop.

I do agree that greed pays a very large part but the overlords of the industry - the SEC - have also been convinced that these mathematical constructs have meaning in real life. You could also argue that not everyone that brought the AAA derivative products were guilty of greed but someone, somewhere obviously knew the risks being calculated were out of line.

Some people will look at these problems and say that we need smarter quants and better math. I think the opposite. We need less math.
 
no, Black never alluded to any sort of TA, show me a post or reference to your claim to believe that. If anything he disdplayed an utter disregard and almost ignorant arrogance towards TA.

Quote from HiddenAgenda:

As a matter of fact, Fisher Black was pretty successful in business, he worked for Goldman for several years.

He also said that "markets are far more efficient when viewed from the banks of the Charles than from the banks of the Hudson," when he made a shift from the academia in Boston to an investment banking career in NY.

He was probably alluding to the fact that it is possible to make money in the markets, if you have enough determination and a good grasp of technical analysis, if you applied the most effective TA concepts selectively, which is what successful traders do.
More...
 
Quote from pedro01:

Of course crashes will still occur without quants - but the problems we have now are so very much worse because of quantitative analysis.

As for seeking something ? What makes you think I am seeking anything ? What makes you think this has any thing to do with pit trading vs electronic markets.

Traders did just fine pricing options before Black Scholes and now that Black Scholes is no longer being used, they are also doing just fine.

The quants answer to the problems created by Gaussian Copula and VaR is that 'we need better models'. I would say that this is incorrect. We don't need models at all.

The markets are not a problem with a mathematical solution and whilst the world of financial education continue to churn out grads with no business skills but a numch of numeracy skills, we will continue to suffer from their machinations.

Supply and demand - either in an electronic marketplace or otherwise does a much better job of setting prices than ANY quantitative analyst who's never placed a trade in his life. Hence the failure of Black Scholes.
More...

So you dont like quants and they fail at the things they are supposed to do well, now isn't that a good thing for you since you could those very things much better and capitalize on their mistakes.

Moreover, my point was about you generalizing everything. There are quite a few quantitative hedge funds that have done very well over the years, what about DE Shaw, Asness or Simmons, why just count the failed ones. Like there are good and bad traders, there are good and bad quants.
 
Quote from hermit:

So you dont like quants and they fail at the things they are supposed to do well, now isn't that a good thing for you since you could those very things much better and capitalize on their mistakes.

Moreover, my point was about you generalizing everything. There are quite a few quantitative hedge funds that have done very well over the years, what about DE Shaw, Asness or Simmons, why just count the failed ones. Like there are good and bad traders, there are good and bad quants.
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Indeed - it's the one's that win the Nobel Prize that cause the most havoc.

I didn't say I don't like quants. I just think they should be shot for the benefit of mankind.
 
buddy, again you are wrong, portfolio insurance has NOTHING WHATSOEVER to do with option replication. Its the insurance of a long portfolio against adverse moves by using short index futures or long put options.

Even if your points were accurate the conclusions you draw from them are illogical and dont hint at you having undergone a deep thought process. Why would everybody sell at the same time just because portfolio insurance is what you (incorrectly) described as such?

People sold en masse because panic set in. Aside any of the program trading massive amounts of papers were dumped onto the market in 87 by HUMAN HANDS, HUMAN MINDS, that had nothing whatsoever to do with quants, mathematical models, options, BS,.....
It all can be summed up by one term : Psychology!!! This is what drives mania, bubbles and the subsequent destruction of those for thousands of years. No mathematicians needed. I am not sure what your points actually are!!!

P.S.: Options were traded well before 1987, what the heck are you talking about. You sound more and more clueless. Options were in fact traded already on tulip bulbs hundreds of years ago....


QUOTE]Quote from pedro01:

Once again, we are back to 'computer code'. I have not at any point blamed computers. This is a people problem.

The initial concept of portfolio insurance was to REPLICATE the performance of a put option in what was referred to as a “dynamically programmed system,” where a client was automatically shifted out of a position when it began to fall, increasing the client’s cash as long as the stock fell and “insuring” that a predetermined amount was all that the client could lose.

This is the reason that everyone sold at the same time. If they had been using options instead of attempting to replication options by selling, we'd have been OK. It is blindingly obvious to us now that any model that calls for seling en masse when prices drop is a recipe for disaster.

I don't see the point in debating this because it is a simple fact that options were not being used at that point and the selling as a 'replication' of puts caused the '87 drop.

I do agree that greed pays a very large part but the overlords of the industry - the SEC - have also been convinced that these mathematical constructs have meaning in real life. You could also argue that not everyone that brought the AAA derivative products were guilty of greed but someone, somewhere obviously knew the risks being calculated were out of line.

Some people will look at these problems and say that we need smarter quants and better math. I think the opposite. We need less math. [/QUOTE]
 
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