Welcome!

Agile Computing Authors: Carmen Gonzalez, Liz McMillan, Elizabeth White, Mano Marks, Harry Trott

Related Topics: Wearables, Java IoT, Industrial IoT, Mobile IoT, Microservices Expo, ColdFusion, IBM Cloud, PowerBuilder, Weblogic, Microsoft Cloud, Linux Containers, Adobe Flex, Symbian, Open Source Cloud, SYS-CON MEDIA, Eclipse, Cognitive Computing , Machine Learning , PHP, Agile Computing

Wearables: Article

New Column: A Geek's Bookshelf

Book Review: A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Invocation

Geeks like to read – and not only programming books. Most of us read incessantly. Whether it’s popular science, sci-fi or fantasy, a good thriller or an occasional popular history book or biography, it’s a rare geek who isn’t in love with books. And I am no exception, although I have to confess I am rather an extreme case since my love of books and eclectic tastes borders on the “gentle madness” aka “bibliomania.” 

What I am going to do in this regular column is feed my habit by highlighting some of the books I am reading, and (mostly) enjoying. (I will only rarely write negative reviews; it’s a rare book that I “do not put down gently but throw across the room with great force” after all.)

Finally, since I remain involved with Apress (www.apress.com), the publishing company for IT professionals I helped found, is there any potential for a conflict of interest? I don’t think so nor do the kind people at SYS-CON; the kind of books I will be reviewing are the books I read “non-professionally” –for fun – in my spare time. It is only these books, rather than professional books, that I will review.

Title: A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Invocation
Author: by Richard Bookstaber
Publisher: John Wiley 2007, ISBN 978-0-471-22727-4.
Price: $27.95

Talk about prescience, this amazingly relevant book, 10 years in the making, was actually published in April of 2007 – four months before the market meltdown that was caused by subprime mortgage-backed instruments going very, very south. Yet, in this extremely interesting, extraordinarily well-written book, Bookstaber essentially predicted this, and also (alas) he predicts more crises to come. The first paragraph of the book sets the stage:

“While it is not strictly true that I caused the two great financial crisis of the late 20th century – the 1987 stock market crash and the Long-Term Capital Management (hedge fund debacle)…”

Who is Bookstaber? He was one of the early “quants” on Wall Street. These are the physicists, mathematicians, statisticians, and mathematical who revolutionized trading on Wall Street by trying to search out hidden patterns and values. The foremost among them, the great mathematician James Simon, made a mere $1.7 billion last year by apparently doing exactly this.

The idea, roughly speaking, of most of these strategies is: can you find two (seemingly) equivalent securities that should trade in parallel but are currently not? Buy one and sell short the other, wait (hope) for a regression to the mean and make a bundle. Only you won’t make a bundle unless you use a lot of leverage because the anomalies are small at best. And leverage, as the old Wall Street adage has it, cuts both ways. If something really strange happens (a “black swan event,” in the words of best-selling author Nicolas Taleb whose very interesting book I’ll review soon) that makes the divergence greater than historical norms, your billions upon billions of leveraged investments often leads to catastrophic losses. And they did. What’s worse, there is a Heisenberg quality to this kind of historical/statistical arbitrage. As Bookstaber puts it: “Predicated on their conviction that the relationship had long-term stability, they would take positions based on the assumption that it would return, or converge, back to its historical value. What they did not appreciate was that they had changed history. There had never been someone trading hundreds of billions of dollars in the middle of this relationship before.”

Of course, it isn’t only about statistical arbitrage affected by the size of the investments made by people playing the game. As Bookstaber often points out, there is a certain amount of stupidity, cupidity, and outright deceit at work here. For example, the Enron-related transactions of Citigroup were described by the then head of risk management at CitiBank as: “[our] accounting is aggressive and a franchise risk to us if there is publicity,” which Bookstaber translates beautifully as: “we’re making this up and if anyone finds out, we’re in trouble.” Of course, Enron was found out and billions upon billions were lost and some of the people who went beyond merely aggressive accounting actually went to jail. (He has a wonderful suggestion about how to handle financial reporting by the way – one that will appeal to programmers: replace a lot of the hocus pocus in financial reports by requiring that the raw data be made available in basically XML form, and thus let smart data miners make sense of it without it being filtered through high-priced accounting firms with potential stakes in the matter.)

As this book is just filled with interesting information and great anecdotes, I could go on for a long time describing its virtues. For example, there’s a wonderful discussion of what portfolio insurance is and how it (inevitably with hindsight) led to the crash of 1987, for example. In the end, however, the whole point of this book can be summed up by the following passage:

“The danger to the system is the system…despite all the risks we can control, the greatest ones remain beyond our control. Those are the risks we do not see, things beyond the veil…”

Combine this inescapable fact with the amazing leverage that modern hedge funds can use, throw in the usual amounts of human stupidty and cupidity, the speed with which things happen in our modern era, the interconnections of everything with everything and Bookstaber has convinced me at least that more and more disasters await the financial system.

Before I leave this review though I do want to point out some parts of the book that will be especially interesting to programmers. Here is an amusingly scary one that occurred in the past and perhaps is not so relevant anymore; however, it remains of vital importance to everything we do. He describes how one early crisis (1995) was caused by the use of a now exotic programming language called APL (“A Programming Language”) created by Turing award-winner Ken Iverson. APL was an amazingly fun language for math types. You could invert a matrix with a single key stroke and write the most amazing one-liners. But let’s forget about the maintenance problems of a language that makes PERL seem like COBOL in it lucidity; the real problem was that APL was interpreted in an era when JITs were still a decade away and computers were hundreds of times slower. But many financial calculations require zillions of iterative calculations to compute prospective values, and APL, since it was not compiled in those days, simply couldn’t do them. So oddball situations weren’t well modeled in the financial models built with APL, and, once upon a time, this failure to use a compiled language led to a loss of between 100 and 250 million dollars to UBS – and this was back when a quarter of a billion dollars was real money.  

But more important is his stressing that the worst nightmare of financial machinations is our worse nightmare as well: the effects of tight coupling on systems. OOP was designed to solve this problem but it hasn’t proven the panacea its early proponents had hoped for. And, as anyone who was on the Vista team can testify (for example), tight coupling remains the biggest problem we face for large software projects.

In sum, get this book. Read it and learn. It’s beautifully written and full of insights that apply not only to financial management but to “life, the universe, and everything.”

More Stories By Gary Cornell

Gary Cornell has a PHD in mathematics from Brown University. At various times and among other things he has been a professor, a program director at the National Science Foundation, and a visiting scientist at IBM's Watson Labs. He has written or co-written numerous best-selling and award-winning computer books. Most recently he co-founded Apress (www.apress.com), which under his leadership became one of the largest publishers of books for IT professionals in the world. And he did all this while simultaneously having a truly serious case of the 'gentle madness,' AKA bibliomania.

Comments (4) View Comments

Share your thoughts on this story.

Add your comment
You must be signed in to add a comment. Sign-in | Register

In accordance with our Comment Policy, we encourage comments that are on topic, relevant and to-the-point. We will remove comments that include profanity, personal attacks, racial slurs, threats of violence, or other inappropriate material that violates our Terms and Conditions, and will block users who make repeated violations. We ask all readers to expect diversity of opinion and to treat one another with dignity and respect.


Most Recent Comments
Debbie Moynihan 10/15/07 01:52:26 PM EDT

Interesting review, I love the idea of a geek book review column. The suggestion to make raw financial data available in XML would be interesting. It would be cool to be able to grab data from various companies and do interesting things with it, but that might be a bit scary to some people...

Jane 10/11/07 04:39:13 PM EDT

Nice start to your new column, Gary. Great review of an interesting sounding book.

Paul E. Hanson 10/11/07 04:48:04 AM EDT

I did get a laugh (on a morbid level) that the blame for LTCM debacle does not lay where popularly thought. I will not give away the source for future readers.

Rajat Bhatia 10/11/07 04:28:17 AM EDT

Derivatives, trading and hedge funds are here to stay. They perform a valuable service to the financial markets, though Warren Buffet will disagree with me.

Nevertheless, it is the mis-use of derivatives and the excessive use of leverage that leads to financial disasters. This book provides an excellent insight into why we witness financial turmoil in some of the most liquid markets.

@ThingsExpo Stories
WebRTC is bringing significant change to the communications landscape that will bridge the worlds of web and telephony, making the Internet the new standard for communications. Cloud9 took the road less traveled and used WebRTC to create a downloadable enterprise-grade communications platform that is changing the communication dynamic in the financial sector. In his session at @ThingsExpo, Leo Papadopoulos, CTO of Cloud9, discussed the importance of WebRTC and how it enables companies to focus o...
The Internet of Things can drive efficiency for airlines and airports. In their session at @ThingsExpo, Shyam Varan Nath, Principal Architect with GE, and Sudip Majumder, senior director of development at Oracle, discussed the technical details of the connected airline baggage and related social media solutions. These IoT applications will enhance travelers' journey experience and drive efficiency for the airlines and the airports.
With major technology companies and startups seriously embracing IoT strategies, now is the perfect time to attend @ThingsExpo 2016 in New York. Learn what is going on, contribute to the discussions, and ensure that your enterprise is as "IoT-Ready" as it can be! Internet of @ThingsExpo, taking place June 6-8, 2017, at the Javits Center in New York City, New York, is co-located with 20th Cloud Expo and will feature technical sessions from a rock star conference faculty and the leading industry p...
"LinearHub provides smart video conferencing, which is the Roundee service, and we archive all the video conferences and we also provide the transcript," stated Sunghyuk Kim, CEO of LinearHub, in this SYS-CON.tv interview at @ThingsExpo, held November 1-3, 2016, at the Santa Clara Convention Center in Santa Clara, CA.
Things are changing so quickly in IoT that it would take a wizard to predict which ecosystem will gain the most traction. In order for IoT to reach its potential, smart devices must be able to work together. Today, there are a slew of interoperability standards being promoted by big names to make this happen: HomeKit, Brillo and Alljoyn. In his session at @ThingsExpo, Adam Justice, vice president and general manager of Grid Connect, will review what happens when smart devices don’t work togethe...
The 20th International Cloud Expo has announced that its Call for Papers is open. Cloud Expo, to be held June 6-8, 2017, at the Javits Center in New York City, brings together Cloud Computing, Big Data, Internet of Things, DevOps, Containers, Microservices and WebRTC to one location. With cloud computing driving a higher percentage of enterprise IT budgets every year, it becomes increasingly important to plant your flag in this fast-expanding business opportunity. Submit your speaking proposal ...
"There's a growing demand from users for things to be faster. When you think about all the transactions or interactions users will have with your product and everything that is between those transactions and interactions - what drives us at Catchpoint Systems is the idea to measure that and to analyze it," explained Leo Vasiliou, Director of Web Performance Engineering at Catchpoint Systems, in this SYS-CON.tv interview at 18th Cloud Expo, held June 7-9, 2016, at the Javits Center in New York Ci...
20th Cloud Expo, taking place June 6-8, 2017, at the Javits Center in New York City, NY, will feature technical sessions from a rock star conference faculty and the leading industry players in the world. Cloud computing is now being embraced by a majority of enterprises of all sizes. Yesterday's debate about public vs. private has transformed into the reality of hybrid cloud: a recent survey shows that 74% of enterprises have a hybrid cloud strategy.
WebRTC is the future of browser-to-browser communications, and continues to make inroads into the traditional, difficult, plug-in web communications world. The 6th WebRTC Summit continues our tradition of delivering the latest and greatest presentations within the world of WebRTC. Topics include voice calling, video chat, P2P file sharing, and use cases that have already leveraged the power and convenience of WebRTC.
Discover top technologies and tools all under one roof at April 24–28, 2017, at the Westin San Diego in San Diego, CA. Explore the Mobile Dev + Test and IoT Dev + Test Expo and enjoy all of these unique opportunities: The latest solutions, technologies, and tools in mobile or IoT software development and testing. Meet one-on-one with representatives from some of today's most innovative organizations
SYS-CON Events announced today that Super Micro Computer, Inc., a global leader in Embedded and IoT solutions, will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 7-9, 2017, at the Javits Center in New York City, NY. Supermicro (NASDAQ: SMCI), the leading innovator in high-performance, high-efficiency server technology, is a premier provider of advanced server Building Block Solutions® for Data Center, Cloud Computing, Enterprise IT, Hadoop/Big Data, HPC and E...
Internet of @ThingsExpo, taking place June 6-8, 2017 at the Javits Center in New York City, New York, is co-located with the 20th International Cloud Expo and will feature technical sessions from a rock star conference faculty and the leading industry players in the world. @ThingsExpo New York Call for Papers is now open.
WebRTC sits at the intersection between VoIP and the Web. As such, it poses some interesting challenges for those developing services on top of it, but also for those who need to test and monitor these services. In his session at WebRTC Summit, Tsahi Levent-Levi, co-founder of testRTC, reviewed the various challenges posed by WebRTC when it comes to testing and monitoring and on ways to overcome them.
DevOps is being widely accepted (if not fully adopted) as essential in enterprise IT. But as Enterprise DevOps gains maturity, expands scope, and increases velocity, the need for data-driven decisions across teams becomes more acute. DevOps teams in any modern business must wrangle the ‘digital exhaust’ from the delivery toolchain, "pervasive" and "cognitive" computing, APIs and services, mobile devices and applications, the Internet of Things, and now even blockchain. In this power panel at @...
WebRTC services have already permeated corporate communications in the form of videoconferencing solutions. However, WebRTC has the potential of going beyond and catalyzing a new class of services providing more than calls with capabilities such as mass-scale real-time media broadcasting, enriched and augmented video, person-to-machine and machine-to-machine communications. In his session at @ThingsExpo, Luis Lopez, CEO of Kurento, introduced the technologies required for implementing these idea...
Buzzword alert: Microservices and IoT at a DevOps conference? What could possibly go wrong? In this Power Panel at DevOps Summit, moderated by Jason Bloomberg, the leading expert on architecting agility for the enterprise and president of Intellyx, panelists peeled away the buzz and discuss the important architectural principles behind implementing IoT solutions for the enterprise. As remote IoT devices and sensors become increasingly intelligent, they become part of our distributed cloud enviro...
"A lot of times people will come to us and have a very diverse set of requirements or very customized need and we'll help them to implement it in a fashion that you can't just buy off of the shelf," explained Nick Rose, CTO of Enzu, in this SYS-CON.tv interview at 18th Cloud Expo, held June 7-9, 2016, at the Javits Center in New York City, NY.
The WebRTC Summit New York, to be held June 6-8, 2017, at the Javits Center in New York City, NY, announces that its Call for Papers is now open. Topics include all aspects of improving IT delivery by eliminating waste through automated business models leveraging cloud technologies. WebRTC Summit is co-located with 20th International Cloud Expo and @ThingsExpo. WebRTC is the future of browser-to-browser communications, and continues to make inroads into the traditional, difficult, plug-in web co...
In his keynote at @ThingsExpo, Chris Matthieu, Director of IoT Engineering at Citrix and co-founder and CTO of Octoblu, focused on building an IoT platform and company. He provided a behind-the-scenes look at Octoblu’s platform, business, and pivots along the way (including the Citrix acquisition of Octoblu).
For basic one-to-one voice or video calling solutions, WebRTC has proven to be a very powerful technology. Although WebRTC’s core functionality is to provide secure, real-time p2p media streaming, leveraging native platform features and server-side components brings up new communication capabilities for web and native mobile applications, allowing for advanced multi-user use cases such as video broadcasting, conferencing, and media recording.