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Wall Street Is Now Ruled By Physics PhDs, Not Traders

Stock-Markets / HFT Jul 03, 2017 - 04:49 PM GMT

By: John_Mauldin

Stock-Markets

BY JARED DILLIAN : One of the reasons I am where I am today is because I did not study hard in school.

I was barely in the top 10 percent of my high school class. I probably could have been number one, but I was too busy screwing around.

I intentionally failed physics my senior year because I didn’t like the teacher.


Clearly, I did not have a great deal of maturity. My test scores were very high, but my options were limited since my grades weren’t very good.

Yes, I went to the Coast Guard Academy, which is a good school. But it’s not a great school, despite being a selective school.

There is a difference.

The Cognitive Elite

Most of my classmates at gifted and talented camp (which counts among its alumni Mark Zuckerberg, Sergey Brin, and Lady Gaga) went on to Ivy League schools, where they became part of the cognitive elite.

They now have careers in academia, journalism, finance, technology, even politics. As forty-somethings, they are the ones running the country. One of my very good friends from gifted and talented camp is probably a billionaire.

Rewind to a few decades ago. Colleges suddenly became more meritocratic, admitting people on the basis of grades and test scores, instead of other criteria.

So the smartest people got into the smartest schools, the less smart people got into the less smart schools, and dumb people didn’t get into schools at all.

The results of that sociology experiment are fascinating: the smart people in smart schools started marrying each other and having smart children…

The smart parents earned more money and gave a leg-up to those smart children…

Those smart children got into the smart schools…

And it set off a self-reinforcing cycle that continues to this day.

The funny thing about Americans is that though we’re very careful about racism, we are actually a very classist society. Implicit in the assertion that “you don’t have any money” is the judgment that “you make poor decisions.”

People don’t talk about this. We are obsessed with racism, but people of differing socioeconomic status just do not mix.

This all came to a head in the 2016 election, where we threw out the smart people in academia and journalism and finance and technology and politics—the so-called “experts.”

The Finance Implications

I worked on Wall Street in the 2000s. That was an interesting time—on the trading floor, you had a mix of propellerheads like me and lax bros from places like Cornell. Ah, there was a lot of lacrosse back then.

But things were changing. During the associate training program, they announced the average GMAT score for the class. I was average! I was accustomed to gifted and talented camps, but didn’t expect to end up working at one.

Funny thing is, if you look across a trading floor nowadays, there are almost no lax bros.

There are almost no people.

The traders are gradually being replaced by quantitative analysts.

Most cash equity desks at the big banks are staffed by almost no one, except for a central order book—a matching engine that pairs off firm and customer order flow. A robot, built by very smart people.

Not long ago, Bloomberg posted an article about Renaissance Technologies, the most successful hedge fund in history. All quants.

Any coincidence that the top hedge fund in the world is run by the smartest people—the top math and physics PhDs—in the world?

In case you had any doubt about the correlation between intelligence and investment success.

There are two structural trends present in today’s markets:

  1. The move from active to passive.
  1. The move from discretionary to quant.

There is a limit to how far 1) can go… but 2) is going to continue forever.

So the formation of a cognitive elite is happening in finance, too. And with similar consequences.

There is a bit of a rebellion against the quants—carping that non-traders don’t have the same eye for market history, liquidity, etc.

Well, the quant funds seem to blow up less than the discretionary funds do.

But we’ll see. There are a lot of systematic strategies out there selling a lot of options.

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