Nerds on Wall Street: Math, Machines, and Wired Markets

Chapter 5. A Gentle Introduction to Computerized Investing

"Life would be so much easier if we only had the source code."

—Hacker Proverb

The beginning of index investing in the 1970s was the result of a convergence of events, one of those ripe apple moments. Institutional investors began to use firms like A.G. Becker to actually compare the total performance of their hired managers with index benchmarks, and found that many of them fell short, especially after the substantial fees the investors were paying.

Yale professor Burton Malkiel popularized the academic efficient market arguments in A Random Walk Down Wall Street, writing in 1973, "[We need] a new investment instrument: a no-load, minimum-management-fee mutual fund that simply buys the hundreds of stocks making up the market averages and does no trading [of securities].... Fund spokesmen are quick to point out, 'you can't buy the averages.' It's about time the public could."

Computers had gotten to the point where one could be put in an office setting without having to tear out walls and bring in industrial-strength air-conditioning, raised floors for the cables, and special power systems. It was slightly easier to install a computer in an office building than a particle accelerator, but not by much. I recall visiting an insurance company in Hartford one winter where they were using their IBM System 360 to heat several floors of a large building. Minicomputers, like the Digital Equipment Corporation (DEC) systems described ...