The Predictors
by Thomas Bass

Sep 2005

The new market makers?

From a writer's perspective, I thought Bass did an excellent job. From a trader's perspective—and as someone who has long been pursuing the intersection of market behavior, psychology and the physical sciences—the story was solid. The Predictors reads like an expanded New York Times feature or multi-part Wired article... educational and modestly challenging, yet focused on entertainment and accessibility more than hard fact or theory.

The way Bass lays it out, Prediction Company could be any technology startup. But the story is extremely well told, and interesting in its own right (in my opinion). Rather than driving the narrative, the financial and scientific elements are woven around and through the major events and milestones of the company. The triumphs and trials of the characters are the central thrust of the book.

There are no major revelations, but dozens of interesting and entertaining observations. You get a whirling gestalt of chaos theory and the financial world, not deep detail. The quotes leading off each chapter were excellent, and the balance of description to storytelling, while clearly weighted towards storytelling, was good.

The scientific and financial explanations were meant to spark curiosity, not sate it. I can see why some were disappointed, but I get the impression they were wanting a different book... more of an instruction manual or a doctoral thesis. (If you came to this story expecting clues to the holy grail, you were seriously reaching for your fifteen bucks.)

Reading the book in 2005, I enjoyed the suspense of not knowing whether Prediction Company actually pulled it off. Did they make it for the long haul? It appears so, as they are still in business and still working with UBS. In fact trading algorithms are now hailed as a new frontier on Wall Street. A recent article in the Economist highlighted the intense competition to build intelligent software programs (robo-traders one might call them) designed to minimize the visible footprints of large orders and execute complex arbitrage strategies in multiple markets simultaneously.

So do old school flesh and blood traders have reason to fret? It depends on the timeframe. Will outfits like Prediction Company and Renaissance Technologies eventually suck all the profit out of markets? Probably not.

These guys occupy a very specific niche in the market ecosystem. Before the onslaught of computers, human floor traders provided vital liquidity to the markets (and got paid plenty well to do so). As physical exchanges lumber towards extinction, `smart' algorithms are filling the shoes of floor traders, extracting profits tick by tick with high volume, high frequency strategies. These automated players are thus becoming the new liquidity providers and market makers of the 21st century. Daytraders and scalpers may find themselves swept up in a technological arms race, but longer term traders and investors have little to fear… it's a different game.