Quants: Wall Street's Alchemists

The following documentary from Dutch channel Vpro is a must watch for all who still believe there is something else to this market than pure low-volume, math-modelled momentum chasing courtesy of Wall Street's quant community (which is still happily front-running whale orders courtesy of such presumably banned inventions as Flash trading which the SEC bitched about then quickly swept under the rug). With appearances by Paul Wilmott, Mike Osinski, Emanuel Derman and Zero Hedge friend Matt Goldstein, the clip provides a much needed refresh course into the facts behind the biggest risk to the market since the 1987 crash. It is unfortunate that exposes like this, which warns about many of the core issues that Zero Hedge has been discussing for approximately a year, will rarely if ever appear on US television. And while the math and modelling that is involved in "predicting" the market is only as good as the losses suffered by the next quant driven systemic crash (1987, 2007), the greatest danger is the hubris exhibited by the very same math Ph.D. prognosticators who have an infallible belief in their own computerized concoctions... until proven catastrophically wrong: as is noted in the commentary "Making a lot of money is like taking a drug. You feel good, head to toe. When somebody hands you a million dollar check or a five million dollar check you want more. If I am making $5, I should be making $50, because I am a genius. There is no question in your mind that you are genius, and that you are so much better than everybody else." And this insight from Wilmott: "It is clear that a major rethink is desperately required if the world is to avoid a mathematician-led market meltdown. What you are supposed to do if you've got a warning, you are supposed to take your warning and write it in book form. You are supposed to write 300 pages about the dangers of etc, etc. I am a mathematician, and what mathematicians do is take something that is 300 pages and they condense it into one equation. And that to them is beauty."

Full video after the jump (skip after the Dutch intro - most of the rest of the video is in English).