Red-Blooded Risk: The Secret History of Wall Street

Real Finance

Finally, there is a small group of people who actually do finance, which means they make bets. You find them on trading floors and in hedge funds and scattered other places. They are technical professionals who deal in risk. This is the part of finance that was revolutionized in the decade following 1982 by rocket scientists. Not all traders are quants today—the quals still outnumber the quants. But the basic structure of the profession is purely quantitative, whereas 30 years ago it was, with a few exceptions, purely qualitative.

I mention this partly so you can place this book within the larger literature on Wall Street. The other reason is it figures directly into the story. An independent financial quant in 1980 had two big problems: getting the data necessary to make good bets, and placing the bets on fair terms. Information hoarders had the business sewn up. You had to go to work for a big bank to get access to the data, and even then it wasn't in electronic form. And only starting from a bank trading desk could you get a trading account with the low cost and flexibility necessary for quant trading. Ed Thorp managed to do it independently, and there were a few others, but it was very difficult. You could also do it by buying a seat on a public exchange. Many took this route, but it was expensive and limited your trading activities.

Only when a critical mass of like-minded and highly computer-literate quants gathered did the situation change. We mined information ...