Ontheonehand,technologyadvancesreducecostovertime,ceterisparibus.Ontheother
hand,financialinstitutionscontinuetoinvestheavilyintechnologytobothgainmarket
shareanddefendtheircurrentpositions.Tobeactiveincertainareasinfinancetoday
oftenbringswithittheneedforlarge-scaleinvestmentsinbothtechnologyandskilled
staff.Asanexample,considerthederivativesanalyticsspace(seealsothecasestudyin
PartIIIofthebook):
Aggregatedoverthetotalsoftwarelifecycle,firmsadoptingin-housestrategiesforOTC[derivatives]pricingwill
require investments between $25 million and $36 million alone to build, maintain, and enhance a complete
derivativeslibrary.
—Ding2010
Notonlyisitcostlyandtime-consumingtobuildafull-fledgedderivativesanalytics
library,butyoualsoneedtohaveenoughexpertstodoso.Andtheseexpertshavetohave
therighttoolsandtechnologiesavailabletoaccomplishtheirtasks.
AnotherquoteabouttheearlydaysofLong-TermCapitalManagement(LTCM),formerly
oneofthemostrespectedquantitativehedgefunds—which,however,wentbustinthe
late1990s—furthersupportsthisinsightabouttechnologyandtalent:
Meriwetherspent$20milliononastate-of-the-artcomputersystemandhiredacrackteamoffinancialengineers
toruntheshowatLTCM,whichsetupshopinGreenwich,Connecticut.Itwasriskmanagementonanindustrial
level.
—Patterson2010
ThesamecomputingpowerthatMeriwetherhadtobuyformillionsofdollarsistoday
probablyavailableforthousands.Ontheotherhand,trading,pricing,andrisk
managementhavebecomesocomplexforlargerfinancialinstitutionsthattodaytheyneed
todeployITinfrastructureswithtensofthousandsofcomputingcores.
Ever-IncreasingSpeeds,Frequencies,DataVolumes
Thereisonedimensionofthefinanceindustrythathasbeeninfluencedmostby
technologicaladvances:thespeedandfrequencywithwhichfinancialtransactionsare
decidedandexecuted.TherecentbookbyLewis(2014)describesso-calledflashtrading
—i.e.,tradingatthehighestspeedspossible—invividdetail.
Ontheonehand,increasingdataavailabilityonever-smallerscalesmakesitnecessaryto
reactinrealtime.Ontheotherhand,theincreasingspeedandfrequencyoftradingletthe
datavolumesfurtherincrease.Thisleadstoprocessesthatreinforceeachotherandpush
theaveragetimescaleforfinancialtransactionssystematicallydown:
Renaissance’s Medallion fund gained an astonishing 80 percent in 2008, capitalizing on the market’s extreme
volatility with its lightning-fast computers. Jim Simons was the hedge fund world’s top earner for the year,
pocketingacool$2.5billion.
—Patterson2010
Thirtyyears’worthofdailystockpricedataforasinglestockrepresentsroughly7,500
quotes.Thiskindofdataiswhatmostoftoday’sfinancetheoryisbasedon.Forexample,
theorieslikethemodernportfoliotheory(MPT),thecapitalassetpricingmodel(CAPM),
andvalue-at-risk(VaR)allhavetheirfoundationsindailystockpricedata.
Incomparison,onatypicaltradingdaythestockpriceofAppleInc.(AAPL)isquoted
around15,000times—twotimesasmanyquotesasseenforend-of-dayquotingovera