Market Talk

Markets across asset classes and national borders have been wildly erratic today, and the longer that condition persists, the weaker the “fat finger” or computer glitch explanation for yesterday’s meltdown gets.

Whatever the trigger was, a bad trade, an outlier kind of spike somewhere, there were God knows how many sell orders programmed into the market’s computers. Yesterday afternoon may have been a one-off, but it was also one of those flashes of illumination, where for a bright instant you see all those vicious creatures hiding in the dark, waiting to devour you.

What markets need right now, more than good data, more than liquidity, more than an end to Greek riots, is leadership. Somebody, somewhere, in a position of responsiblity, needs to stand up and stop this thing before it goes any further. Heading into this week, it was all about the risk trade. Heading out of it, it’s all about the fear trade.

There isn’t much the U.S. can do, directly. Our problems aren’t driving this. It started in Greece, but since at the heart of this whole thing we’re still talking about a credit problem, it’s quickly washed over Greek borders. Let’s be clear here. The global recovery, and especially the recovery in the developed world, is still a fragile thing. Nobody can afford to flirt with another seizure in the credit markets. But there’s a lot of chatter about that happening among European banks. And if European banks seize, well, in an automated, interconnected world, you saw yesterday just how fast things move.

Toward the end of his book “The Quants,” Scott Patterson quotes one exec at a company that supplies services to high-frequency trading firms: “My concern is that the next LTCM problem will happen in less than five minutes.”

Continue reading…

Back in the summer of 2007, while the housing market was imploding  but apparently nobody knew it (certainly not the chairman of the Federal Reserve Board, the Treasury Secretary or Jim Cramer,) a number of shadowy hedge funds suddenly started melting down. It happened very quickly. Billions were lost amid the first tremors of what would become the housing implosion and credit crisis, and people started to hear a new phrase to describe these shadowy firms: the Quants.

Scott Patterson, a veteran Wall Street Journal reporter, explains these firms, the power they amassed and the damage they did, in his new book, “The Quants.” It comes out Feb. 2, although Amazon is taking orders now.

In the interest of full disclosure, I should mention I’ve know Scott since I first arrived at Dow Jones in 1997, so he’s an old friend. He’s also one of the sharpest guys in the newsroom, and a first-rate writer as well. The guy’s smart enough to get to the heart of the story and honest enough to tell the plain truth.

Here’s an excerpt, from the Journal:

At Morgan Stanley’s investing powerhouse Process Driven Trading on Monday, Aug. 6, founder Peter Muller was AWOL, visiting a friend near Boston. Mike Reed and Amy Wong manned the helm, PDT veterans from the days when the group was nothing more than a thought experiment, its traders a small band of young math whizzes tinkering with computers like brainy teenagers in a cluttered garage.

On Wall Street, they were all known as “quants,” traders and financial engineers who used brain-twisting math and superpowered computers to pluck billions in fleeting dollars out of the market.

Continue reading…