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

2.3. The Crackpot as Billionaire

Not everyone who decides to burn CPU cycles on Wall Street ends up writing about lessons learned. There are more than a few examples of computer scientists and economists with a gleam in their eye who publish that last technical paper and then surface some years later at the top of the hedge fund rankings running a firm and employing more programmers and Ph.D.'s than a medium-sized university.

This illustrious and distinguished group includes David Shaw, once a professor in the Columbia University computer science department. After a stint at Morgan Stanley's Automated Trading Group, he started D.E. Shaw & Company in 1988 with $28 million (it now has current assets exceeding $30 billion).^[] What is likely Shaw's last publication on trading dealt with the mechanics of interfacing Unix systems with the current generation of electronic trading systems. He apparently realized that, despite his instincts as a former academic, some things are more valuable unpublished. Subsequent in-house developments made D.E. Shaw a leader (reportedly) in electronic market making, statistical arbitrage, and other fast electronic trading strategies.

David Whitcomb, a market microstructure economist at Rutgers University and coauthor of a 1988 book on electronic trading strategies,^[] faced the same sort of skepticism selling his ideas to Wall Street. Finding no institutional backing, he joined forces with a computer scientist colleague to found Automated Trading Desk ...