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The Wrong Answer Faster: The Inside Story of Making the Machine that Trades Trillions
Before the advent of computers and quants, Wall Street was a very different place. A comparatively small industry, volume was light, risk was high and retail players predominated the action. Seeing the opportunity to outsmart the system, one young man with a great idea decided not to play the game but rather to revolutionize it for generations to come by creating the most ground breaking tool since the ticker tape.
The incredible true story behind the introduction of computerized trading on Wall Street from the man who began it all, The Wrong Answer Faster: The Inside Story of Making the Machine that Trades Trillions (Wiley; Hardcover and eBook; February 2012; $34.95; 978-1-118-13340-8) by Michael Goodkin, offers the previously untold, firsthand account of one of the greatest revolutions in financial history.
In 1967, provincial Midwesterner Michael Goodkin moves from Chicago to New York to make his mark in the world. While a student at Columbia University, he notices by chance there are no computers on Wall Street. Drawing on his experience as a failed teenage investor and successful gambler, he has an epiphany. Since no one on Wall Street knows the right price for anything, perhaps the way to beat the market is not by trying to come up with the right answer but rather by using a computer to anticipate the wrong answer faster.
Similar to when he was a poor teenager and backed by a Chicago bookmaker to play in the bigger stakes games with the older players, a New York financier bankrolls the almost broke scholarship student to outsmart the Wall Street professionals. Recruiting a team of eminent economists – including future Nobel Prize winners Paul Samuelson, Harry Markowitz and Robert Merton – to combine their academic expertise in econometrics with his gambler's instinct and a computer's speed, he founds Arbitrage Management Company. Two years later he introduces the first computerized trading machine on Wall Street and sells the company. As New York rushes to install computers and recruit academics to satisfy the soaring demand by institutional investors for a seat at the new game in town, Goodkin, now a man of independent means, moves on to see the world as a professional backgammon player.
Over time, the investment techniques introduced by his company come to be known as algorithmic trading, quantitative arbitrage and statistical arbitrage. The bedrock of modern Wall Street, these techniques currently represent the basis for most of the volume on the major global stock exchanges and the derivatives market.
Eventually returning to Chicago, in 1996 Goodkin founds Numerix, a computational physics software firm. Using a spare bedroom as his office for a virtual, Internet based company; his goal is to make the burgeoning derivatives market a safer bet by substituting the precision of computational physics for econometrics. The software company becomes the global standard in derivatives risk management. Its clients bring him full circle, placing their less risky than otherwise multi-billion dollar bets in the multi-trillion dollar derivatives market on the trading techniques originally introduced by his first company in 1970.
In this Horatio Alger story of our times, The Wrong Answer Faster takes readers inside a world with colorful characters that seems scripted by Hollywood. It details Goodkin’s lively encounters with Chicago bookmakers, Nobel Prize winning economists and masters of the universe including Carl Ichan as well as backgammon games with Hugh Hefner and his bunnies in Las Vegas and Bernie Cornfeld at his French chateau. From enticing Paul Samuelson and Harry Markowitz to join his team to being shown the door by Sir Sigmund Warburg, who thought the idea of using a computer to trade the market was utterly preposterous, the book details the quixotic and ultimately inspiring journey of a man who literally revolutionized the way the money game is played.