Yahoo Finance Will ChatGPT Disrupt Wall Street Algos?
If you are an investor or an active day trader, you likely know of Renaissance Technologies.
This is the giant hedge fund "accidentally" started by mathematician Jim Simons in 1978, initially with the name Monemetrics.
In the Wikipedia entry for Simons, we find this...
Due to the long-term aggregate investment returns of Renaissance and its Medallion Fund, Simons is described as the "greatest investor on Wall Street," and more specifically "the most successful hedge fund manager of all time."
How did he achieve this? It's all about the math.
In the video that accompanies this article, I explain my first encounters with algo trading in the early 2000s and what I learned from the revolution created by Simons. I also give a recent update from another “rocket scientist who does markets” about whether and how ChatGPT changes the algo game.
Right now, let’s continue with the Renaissance, or RenTech, story that gave us trading algos…
The Secret Life of a Topologist
At MIT in the early 1960s, Simons specialized in differential geometry and the topology of manifolds, the study of curved spaces. When the young graduate student needed some extra money, he took a job in 1964 with the National Security Agency and Department of Defense to break Russian codes.
As a “code breaker” between 1964 and 1968, Simons was also allowed to work half of his time on mathematical problems of his own interest. And he taught mathematics at MIT and Harvard.
After being forced to leave the Institute for Defense Analysis due to his public opposition to the Vietnam War, he joined the faculty at Stony Brook University in 1968 and became chairman of the mathematics department, at only age 30. Advisors had encouraged him to go to Berkeley and work under Shing-Shen Chern, a professor who also had great interest in differential geometry.
Eventually, the two would collaborate on a groundbreaking theory now called the Chern-Simons form. Without knowing much about physics, his and Chern’s work became a mathematical tool now used extensively in theoretical physics. From a 2000 article by Hal Lux in Institutional Investor magazine…
"Chern-Simons pervades a whole class of theories that underlie our fundamental view of the observable world," says Brandeis University physicist Stanley Deser, an expert on supergravity, a discipline of quantum theory that studies elementary particles and their interaction.
Simons would subsequently contribute to the development of string theory by providing a theoretical framework to combine geometry and topology with quantum field theory.
Code-Breaker and Space Fan Goes to Wall Street
Simons left Stony Brook in 1978 and started Monemetrics to begin trading currencies. He’d always been interested in business, but found commodities more fascinating than stocks. At first, he didn’t even apply the mathematical modeling that was his expertise to currency data.
But once he realized the power of mathematics in markets, he never looked back. By 1982, the Monemetrics name was changed to Renaissance Technologies and he started hiring other mathematicians to help him create models.
RenTech went on to specialize in systematic trading using quantitative models derived from mathematical and statistical analysis. They created the mold for algorithms to make investment gains from market inefficiencies and pattern recognition.
And one of its major sources of innovation was the fact that Simons would only hire quantitative specialists with non-financial backgrounds, including computer scientists, mathematicians, physicists, signal processing experts and statisticians. He never wanted the scent of Wall Street to foul up his data modeling.
Simons Was Semi-AI Before NVIDIA
One of the wonderful elements of stories about great mathematicians like Simons who have applied their knowledge to complex but practical problems is how many of them did it without sophisticated software.
Picture Simons cranking out complicated theorems with pencil on paper, or chalk on blackboards. And then when he learned to harness market data to do pattern recognition and create models, he still just had “ancient” computing power that only spit out signals to execute trades. The automated algo part was barely in its infancy in the 1980s.
Now the “machine” of markets has taken over. And it’s only going to accelerate. In the video, I explain where and when you can still compete with the algos in trading.
I also highlight three stocks and companies that have made a difference for investors who’ve followed me…
Synopsys SNPS is the $65 billion maker of electronic design automation (EDA) software for the semiconductor and electronics industries. Synopsys offers a full suite of products used in the logic synthesis and functional verification phases of chip design, including a broad array of reusable design building blocks.
I recommended Synopsys shares in March under $375 as part of my first report on ChatGPT where I explained the AI revolution wrought by NVIDIA NVDA and AMD GPU chips. You can get a copy of that report by emailing Ultimate@Zacks.com and tell ‘em Cooker sent you.
In the video, I also mention Cadence Design Systems CDNS as another provider of systems design enablement (SDE) for chip makers. Cadence calls their proprietary brand of solutions Intelligent System Design (ISD) and Jensen Huang’s NVIDIA is a key customer because he values their capabilities to simulate before manufacture.
Synopsys and Cadence are basically a "duopoly" in the software realm that semiconductor companies need to bring their ideas to life with simulation first before engineered solutions go to the foundry. This is critically important as NVIDIA and all its competitors are diving into the microscopic sub-5 nanometer world of integrated circuits.
Be sure to watch the video to hear astrophysicist Michael Hobson from eyeQ talk about the impact of ChatGPT on his statistical models and algorithms for trading.
Disclosure: I own shares of NVDA and CDNS for the Zacks TAZR Trader portfolio.
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