City nerds have taken over the trading universe

Charles Orton-Jones traces the rise of a new breed of City computer geeks who prefer algorithms to champagne and Lamborghinis

The Masters of the Universe have been demoted. Back in the 1980s the strutting lords of the City were traders. The author Tom Wolfe wrote in The Bonfire of the Vanities of the supremacy of this exotic species of testosterone-fuelled warriors of capitalism. Traders were narcissistic, exuberant, hyperactive uber-males and, above all, rich. Wolfe’s caricature of these Masters stuck – how could it not when New York and London teemed with men (always men) who worked so tirelessly to confirm it?

But the Big Bang reforms of 1986 were stripping the City of stockjobbers. The open-cry trading, which did so much to foster the confrontational image of the City, was abolished. Trades could be executed at the push of a button. Then the buttons began to push themselves. Computers took over as the agents of trading, handing supreme power to the men behind the machinery: the quants.

Wolfe recently went back to the trading floors of Wall Street to check the status of his race of Masters. His verdict: “The most unlikely thing in the world happened: a bunch of weaklings, a bunch of nerds known as quants, shut the golden door flat in their faces.”

It’s the role of these quantitative analysts to programme the trading machines which now dominate the City

Quants are physics PhDs, mathematicians and computer science graduates. It’s the role of these quantitative analysts to programme the trading machines which now dominate the City. They write algorithms which know when to buy and when to sell. They use massive computing power to analyse the market. As computer trading has risen, so has the status of quants.

And what of London? Are the quants running the show here as in Wall Street? Old City hand Hugh Cumberland has no doubts: “Quants are the kings of the pile. Their style is very different. In the old days you’d have known who the star traders were – they had glorious nicknames like the Pimlico Plumber. The quants are unknown. No ego.”

The culture of the City is changing. Mr Cumberland recalls: “My father was chief financial officer of a banking group. He once did the largest foreign exchange deal ever in the Hoop and Grapes. He wasn’t even an FX trader, but the alcohol was flowing and the deal happened.”

The notion appals modern City folk now used to the supremacy of quants and computers. Dary McGovern, managing director of timetotrade, which allows retail investors to create their own algorithms, says the personal side is vanishing. “A lunch might be used for an introduction. After that, why would you? I was talking to an institutional guy recently and he said they don’t even like to take phone calls any more. They don’t want that interaction. Computers are doing it all,” he says.

The creeping influence of silicon and maths is intruding into even the most “human” of areas. Take social networks. Traders use Twitter and blogs to get an edge on their rivals. It is one of the few edges humans have over machines. Or was. Firms such as Knowsis use algorithms to trawl social networks and pass on market-insights in a form which can be used either by a trader or fed directly into a trading algorithm.

Knowsis founder Oli Freeling-Wilkinson says: “Our investor is a quant fund, Method Investment & Advisory. They employ a lot of quants and use our data to see what is of value. There are too many tweets and blogs for any one human to read. We bring a more scientific approach.”

But is there a limit to the rise of quants? Surely our humbled Masters can thrive in this robotopia?

Steve Ruffley, chief market strategist at spreadbetting platform InterTrader, sees a weakness in the quant armoury. “The problem with very intelligent people is that they need numbers; they don’t want to know how you are feeling, they want to tell you,” he says. “The more- scientific people are too regimented, too brutal, too insular to communicate. They won’t let people help them, so they have a ceiling. They don’t have the compassion to build a business, so I would not expect quants to be the next captains of industry.”

It’s a common view, and not merely among traders and brokers. Knowsis’ Mr Freeling-Wilkinson says that, even though investors now demand scientific backing to any investment strategy, the human element remains: “We will never get to the stage where we let computers run everything. Human curation will always be vital.”

So maybe the Masters and quants can co-exist. At legendary City chop house Simpsons Tavern, located by the Bank of England, the mood is buoyant. Proprietor Aaron Singh says: “Quants need to learn how to behave in the right way. It is our job to help them understand the traditions of the City and the value of gentlemanly behaviour. The evidence I’ve seen is that they are keen to learn. If they want to get to the top, they need to.”

Tom Wolfe said of the traders: “They had no suspicion, none at all, of what these ball-less, sofa-bottomed weaklings were up to.”

But the war for dominance in the City isn’t over yet.