Anyone who dabbles on the stock market longs for a way to beat the system. A group of physicists actually managed to pull it off with a stack of computers and some financial backing from Union Bank of Switzerland.
The Predictors, by Thomas Bass, tells the tale of how chaos theory and computer models were used to defeat not only the unpredictability of The Street but also the vagaries of TBonds, forex trading and derivatives.
The team who pulled it off, trading as the Prediction Company based in a desert hideout in Santa Fe, New Mexico, brought considerable experience to the project. They were the same group who several years before tried to beat the roulette wheels of Las Vegas using computers, toe-controlled switches hidden in their shoes and radio transmitters. (I am not kidding. This effort was chronicled in an earlier book by Bass called The Neutonian Casino).
Bass begins the story in 1991 even before the company was named by its founders, Doyne Farmer, Norman Packard and James McGill. McGill was the corporate guru behind the project while Farmer and Packard were the computer geeks, experts in chaos theory and mathematical modelling who believed they could develop computer systems to pluck order out of the frenzy in the trading pits of the world's markets.
Farmer had just left the nearby Los Alamos National Laboratory where the US government carries out top-secret research. Packard, a cousin of David Packard who co-founded the Hewlett-Packard computer company, was moving between research posts in the US and Italy but eventually landed up in Santa Fe.
Together the three hired a collection of brilliant anoraks and began programming. McGill hit the road, occasionally with Farmer and Packard in tow, to chase up investment money.
Even if he didn't start with it, Bass ended up with an apparent enthusiasm for the heady world of high finance. He writes with enthusiasm for the Chicago Mercantile Exchange trading pits, and the thrill and horror of derivative trading.
The book also delivers something of a who's who of famous traders, both those who stayed out of jail and those who didn't. Soros, Milken and others stride through the pages as the Prediction Company takes shape and tries its first halting steps on the market using fistfuls of money from the then Swiss Bank Corporation, later the Union Bank of Switzerland (UBS).
It is an entertaining read and Bass manages to demystify the world of traded finance. And for the record, the Prediction Company made money, lots of it, and continues to trade successfully. UBS ended up buying one-quarter of the company in March 2000 and still funds its trading activities.
dahlstrom@irish-times.ie
