04 March 2009

SportsCenter for Quants

SportsCenter is familiar, has a friendly user interface, and is indeed omni-present -- We ate dinner last night at a sport bar, feasting on pub grub with my mother, my daughter, and her one year old son (and thus, my grandson), the baby. That young man is just getting walking fast down pat, preparatory to learning to run.

But he was also craning his head from side to side, sitting in the booster chair, to see past the adult's heads, for a good view of a panel television, following the fast paced clips

but ... What's a 'quant'?

A quant is a specialized kind of a geek, focused on studying, modeling, and seeking to understand Financial markets. They do this with an aim of being able to know just a little bit more, just a little bit sooner than other quants and other forms of market counterparty traders against whom they compete, to be able to arbitrage a profit from fleeting asset mis-pricings in a market by buying one that is 'too cheap' and selling the one 'too dear'. Profit !!

Part of my morning routine, is to check the overnight results of the markets in summary, and to get a preview of what is coming up as 'scheduled' events' for the upcoming trading day; of course, today's unscheduled exogenous external events are not previewed. I still need that time machine.

This morning, Jim Chanos of Kynikos Associates was on CNBC's Squawk Box [6 to 9 am, US ET], coming into the 8:15 release of the ADP Jobs data. For those of you who may not follow the Financial Layer, Chanos was the fellow who early on, clearly pointed out that the Enron empire and its emperor's had no clothes, in a quarterly conference call. He was called a rude name, but Enron could not thereafter hide from the truth of its frauds, and toppled in short order.

Chanos had the courage of his conviction (that Enron was overvalued) to sell 'short' Enron stock, and then later 'cover' and close the position for cents from the dollars he had received in the initial sale.

Today, anchor Joe Kernen and wingman Carl Quintanilla had a good ten minutes of give and take with Chanos. Good questions, and a very thoughtful and reasoned set of replies from Chanos.

Chanos asks the very sensible question of WHY a arbitrary minimal capitalization requirement is 'set in stone' at 2.5 percent, rather than say: 0.5 [under a convention called Basel II]. Economics 101 covers fractional reserve banking, and the multiplier effect; governmental (social) 'guarantees' and the moral hazard of 'too big to fail' in the US [compare contra, the last year in New Zealand] have removed market discipline by re-incentivizing leveraging in the last few years.

I say: Re-incentivized. Note that we went through all this in a smaller scale in the so-called S and L crisis only twenty years ago -- did no-one in government remember?

I was raised in a family that invests, reads and thinks about application of what we see in the WSJ and related financial press [I currently favor IBD], mailing lists, and newsletters, and historical literature about markets. Add training and practice as an Economist, and a lawyer, and developing quant tools, as well as having high power computing readily available all my life [currently, on a CentOS platform]. And so I am comfortable with Finance issues, and can work through what the 'correct' answers should be, by and large.

There is a large body of well written and often entertaining economic history -- I'll cover a bit in future posts -- which a geek will enjoy reading

Some geek friends who hang out in the side #centos IRC channels seem to feel helpless before market events. Treating CNBC as SportsCenter, and following the stars (and learning to recognize the rogues) is one way to gain confidence and financial literacy