Welcome!

Microservices Expo Authors: Pat Romanski, Elizabeth White, Liz McMillan, Yeshim Deniz, Carmen Gonzalez

Related Topics: Wearables, Java IoT, Industrial IoT, Mobile IoT, Microservices Expo, ColdFusion, IBM Cloud, PowerBuilder, Weblogic, Microsoft Cloud, Linux Containers, Adobe Flex, Symbian, Open Source Cloud, SYS-CON MEDIA, Eclipse, Cognitive Computing , Machine Learning , PHP, Agile Computing

Wearables: Article

New Column: A Geek's Bookshelf

Book Review: A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Invocation

Geeks like to read – and not only programming books. Most of us read incessantly. Whether it’s popular science, sci-fi or fantasy, a good thriller or an occasional popular history book or biography, it’s a rare geek who isn’t in love with books. And I am no exception, although I have to confess I am rather an extreme case since my love of books and eclectic tastes borders on the “gentle madness” aka “bibliomania.” 

What I am going to do in this regular column is feed my habit by highlighting some of the books I am reading, and (mostly) enjoying. (I will only rarely write negative reviews; it’s a rare book that I “do not put down gently but throw across the room with great force” after all.)

Finally, since I remain involved with Apress (www.apress.com), the publishing company for IT professionals I helped found, is there any potential for a conflict of interest? I don’t think so nor do the kind people at SYS-CON; the kind of books I will be reviewing are the books I read “non-professionally” –for fun – in my spare time. It is only these books, rather than professional books, that I will review.

Title: A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Invocation
Author: by Richard Bookstaber
Publisher: John Wiley 2007, ISBN 978-0-471-22727-4.
Price: $27.95

Talk about prescience, this amazingly relevant book, 10 years in the making, was actually published in April of 2007 – four months before the market meltdown that was caused by subprime mortgage-backed instruments going very, very south. Yet, in this extremely interesting, extraordinarily well-written book, Bookstaber essentially predicted this, and also (alas) he predicts more crises to come. The first paragraph of the book sets the stage:

“While it is not strictly true that I caused the two great financial crisis of the late 20th century – the 1987 stock market crash and the Long-Term Capital Management (hedge fund debacle)…”

Who is Bookstaber? He was one of the early “quants” on Wall Street. These are the physicists, mathematicians, statisticians, and mathematical who revolutionized trading on Wall Street by trying to search out hidden patterns and values. The foremost among them, the great mathematician James Simon, made a mere $1.7 billion last year by apparently doing exactly this.

The idea, roughly speaking, of most of these strategies is: can you find two (seemingly) equivalent securities that should trade in parallel but are currently not? Buy one and sell short the other, wait (hope) for a regression to the mean and make a bundle. Only you won’t make a bundle unless you use a lot of leverage because the anomalies are small at best. And leverage, as the old Wall Street adage has it, cuts both ways. If something really strange happens (a “black swan event,” in the words of best-selling author Nicolas Taleb whose very interesting book I’ll review soon) that makes the divergence greater than historical norms, your billions upon billions of leveraged investments often leads to catastrophic losses. And they did. What’s worse, there is a Heisenberg quality to this kind of historical/statistical arbitrage. As Bookstaber puts it: “Predicated on their conviction that the relationship had long-term stability, they would take positions based on the assumption that it would return, or converge, back to its historical value. What they did not appreciate was that they had changed history. There had never been someone trading hundreds of billions of dollars in the middle of this relationship before.”

Of course, it isn’t only about statistical arbitrage affected by the size of the investments made by people playing the game. As Bookstaber often points out, there is a certain amount of stupidity, cupidity, and outright deceit at work here. For example, the Enron-related transactions of Citigroup were described by the then head of risk management at CitiBank as: “[our] accounting is aggressive and a franchise risk to us if there is publicity,” which Bookstaber translates beautifully as: “we’re making this up and if anyone finds out, we’re in trouble.” Of course, Enron was found out and billions upon billions were lost and some of the people who went beyond merely aggressive accounting actually went to jail. (He has a wonderful suggestion about how to handle financial reporting by the way – one that will appeal to programmers: replace a lot of the hocus pocus in financial reports by requiring that the raw data be made available in basically XML form, and thus let smart data miners make sense of it without it being filtered through high-priced accounting firms with potential stakes in the matter.)

As this book is just filled with interesting information and great anecdotes, I could go on for a long time describing its virtues. For example, there’s a wonderful discussion of what portfolio insurance is and how it (inevitably with hindsight) led to the crash of 1987, for example. In the end, however, the whole point of this book can be summed up by the following passage:

“The danger to the system is the system…despite all the risks we can control, the greatest ones remain beyond our control. Those are the risks we do not see, things beyond the veil…”

Combine this inescapable fact with the amazing leverage that modern hedge funds can use, throw in the usual amounts of human stupidty and cupidity, the speed with which things happen in our modern era, the interconnections of everything with everything and Bookstaber has convinced me at least that more and more disasters await the financial system.

Before I leave this review though I do want to point out some parts of the book that will be especially interesting to programmers. Here is an amusingly scary one that occurred in the past and perhaps is not so relevant anymore; however, it remains of vital importance to everything we do. He describes how one early crisis (1995) was caused by the use of a now exotic programming language called APL (“A Programming Language”) created by Turing award-winner Ken Iverson. APL was an amazingly fun language for math types. You could invert a matrix with a single key stroke and write the most amazing one-liners. But let’s forget about the maintenance problems of a language that makes PERL seem like COBOL in it lucidity; the real problem was that APL was interpreted in an era when JITs were still a decade away and computers were hundreds of times slower. But many financial calculations require zillions of iterative calculations to compute prospective values, and APL, since it was not compiled in those days, simply couldn’t do them. So oddball situations weren’t well modeled in the financial models built with APL, and, once upon a time, this failure to use a compiled language led to a loss of between 100 and 250 million dollars to UBS – and this was back when a quarter of a billion dollars was real money.  

But more important is his stressing that the worst nightmare of financial machinations is our worse nightmare as well: the effects of tight coupling on systems. OOP was designed to solve this problem but it hasn’t proven the panacea its early proponents had hoped for. And, as anyone who was on the Vista team can testify (for example), tight coupling remains the biggest problem we face for large software projects.

In sum, get this book. Read it and learn. It’s beautifully written and full of insights that apply not only to financial management but to “life, the universe, and everything.”

More Stories By Gary Cornell

Gary Cornell has a PHD in mathematics from Brown University. At various times and among other things he has been a professor, a program director at the National Science Foundation, and a visiting scientist at IBM's Watson Labs. He has written or co-written numerous best-selling and award-winning computer books. Most recently he co-founded Apress (www.apress.com), which under his leadership became one of the largest publishers of books for IT professionals in the world. And he did all this while simultaneously having a truly serious case of the 'gentle madness,' AKA bibliomania.

Comments (4) View Comments

Share your thoughts on this story.

Add your comment
You must be signed in to add a comment. Sign-in | Register

In accordance with our Comment Policy, we encourage comments that are on topic, relevant and to-the-point. We will remove comments that include profanity, personal attacks, racial slurs, threats of violence, or other inappropriate material that violates our Terms and Conditions, and will block users who make repeated violations. We ask all readers to expect diversity of opinion and to treat one another with dignity and respect.


Most Recent Comments
Debbie Moynihan 10/15/07 01:52:26 PM EDT

Interesting review, I love the idea of a geek book review column. The suggestion to make raw financial data available in XML would be interesting. It would be cool to be able to grab data from various companies and do interesting things with it, but that might be a bit scary to some people...

Jane 10/11/07 04:39:13 PM EDT

Nice start to your new column, Gary. Great review of an interesting sounding book.

Paul E. Hanson 10/11/07 04:48:04 AM EDT

I did get a laugh (on a morbid level) that the blame for LTCM debacle does not lay where popularly thought. I will not give away the source for future readers.

Rajat Bhatia 10/11/07 04:28:17 AM EDT

Derivatives, trading and hedge funds are here to stay. They perform a valuable service to the financial markets, though Warren Buffet will disagree with me.

Nevertheless, it is the mis-use of derivatives and the excessive use of leverage that leads to financial disasters. This book provides an excellent insight into why we witness financial turmoil in some of the most liquid markets.

@MicroservicesExpo Stories
Building custom add-ons does not need to be limited to the ideas you see on a marketplace. In his session at 20th Cloud Expo, Sukhbir Dhillon, CEO and founder of Addteq, will go over some adventures they faced in developing integrations using Atlassian SDK and other technologies/platforms and how it has enabled development teams to experiment with newer paradigms like Serverless and newer features of Atlassian SDKs. In this presentation, you will be taken on a journey of Add-On and Integration ...
Culture is the most important ingredient of DevOps. The challenge for most organizations is defining and communicating a vision of beneficial DevOps culture for their organizations, and then facilitating the changes needed to achieve that. Often this comes down to an ability to provide true leadership. As a CIO, are your direct reports IT managers or are they IT leaders? The hard truth is that many IT managers have risen through the ranks based on their technical skills, not their leadership abi...
The essence of cloud computing is that all consumable IT resources are delivered as services. In his session at 15th Cloud Expo, Yung Chou, Technology Evangelist at Microsoft, demonstrated the concepts and implementations of two important cloud computing deliveries: Infrastructure as a Service (IaaS) and Platform as a Service (PaaS). He discussed from business and technical viewpoints what exactly they are, why we care, how they are different and in what ways, and the strategies for IT to transi...
Without a clear strategy for cost control and an architecture designed with cloud services in mind, costs and operational performance can quickly get out of control. To avoid multiple architectural redesigns requires extensive thought and planning. Boundary (now part of BMC) launched a new public-facing multi-tenant high resolution monitoring service on Amazon AWS two years ago, facing challenges and learning best practices in the early days of the new service.
All organizations that did not originate this moment have a pre-existing culture as well as legacy technology and processes that can be more or less amenable to DevOps implementation. That organizational culture is influenced by the personalities and management styles of Executive Management, the wider culture in which the organization is situated, and the personalities of key team members at all levels of the organization. This culture and entrenched interests usually throw a wrench in the work...
DevOps is often described as a combination of technology and culture. Without both, DevOps isn't complete. However, applying the culture to outdated technology is a recipe for disaster; as response times grow and connections between teams are delayed by technology, the culture will die. A Nutanix Enterprise Cloud has many benefits that provide the needed base for a true DevOps paradigm.
As software becomes more and more complex, we, as software developers, have been splitting up our code into smaller and smaller components. This is also true for the environment in which we run our code: going from bare metal, to VMs to the modern-day Cloud Native world of containers, schedulers and micro services. While we have figured out how to run containerized applications in the cloud using schedulers, we've yet to come up with a good solution to bridge the gap between getting your contain...
As organizations realize the scope of the Internet of Things, gaining key insights from Big Data, through the use of advanced analytics, becomes crucial. However, IoT also creates the need for petabyte scale storage of data from millions of devices. A new type of Storage is required which seamlessly integrates robust data analytics with massive scale. These storage systems will act as “smart systems” provide in-place analytics that speed discovery and enable businesses to quickly derive meaningf...
DevOps is often described as a combination of technology and culture. Without both, DevOps isn't complete. However, applying the culture to outdated technology is a recipe for disaster; as response times grow and connections between teams are delayed by technology, the culture will die. A Nutanix Enterprise Cloud has many benefits that provide the needed base for a true DevOps paradigm. In his Day 3 Keynote at 20th Cloud Expo, Chris Brown, a Solutions Marketing Manager at Nutanix, will explore t...
DevOps has often been described in terms of CAMS: Culture, Automation, Measuring, Sharing. While we’ve seen a lot of focus on the “A” and even on the “M”, there are very few examples of why the “C" is equally important in the DevOps equation. In her session at @DevOps Summit, Lori MacVittie, of F5 Networks, explored HTTP/1 and HTTP/2 along with Microservices to illustrate why a collaborative culture between Dev, Ops, and the Network is critical to ensuring success.
With major technology companies and startups seriously embracing Cloud strategies, now is the perfect time to attend @CloudExpo | @ThingsExpo, June 6-8, 2017, at the Javits Center in New York City, NY and October 31 - November 2, 2017, Santa Clara Convention Center, CA. Learn what is going on, contribute to the discussions, and ensure that your enterprise is on the right path to Digital Transformation.
Everyone wants to use containers, but monitoring containers is hard. New ephemeral architecture introduces new challenges in how monitoring tools need to monitor and visualize containers, so your team can make sense of everything. In his session at @DevOpsSummit, David Gildeh, co-founder and CEO of Outlyer, will go through the challenges and show there is light at the end of the tunnel if you use the right tools and understand what you need to be monitoring to successfully use containers in your...
What if you could build a web application that could support true web-scale traffic without having to ever provision or manage a single server? Sounds magical, and it is! In his session at 20th Cloud Expo, Chris Munns, Senior Developer Advocate for Serverless Applications at Amazon Web Services, will show how to build a serverless website that scales automatically using services like AWS Lambda, Amazon API Gateway, and Amazon S3. We will review several frameworks that can help you build serverle...
The IT industry is undergoing a significant evolution to keep up with cloud application demand. We see this happening as a mindset shift, from traditional IT teams to more well-rounded, cloud-focused job roles. The IT industry has become so cloud-minded that Gartner predicts that by 2020, this cloud shift will impact more than $1 trillion of global IT spending. This shift, however, has left some IT professionals feeling a little anxious about what lies ahead. The good news is that cloud computin...
SYS-CON Events announced today that HTBase will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. HTBase (Gartner 2016 Cool Vendor) delivers a Composable IT infrastructure solution architected for agility and increased efficiency. It turns compute, storage, and fabric into fluid pools of resources that are easily composed and re-composed to meet each application’s needs. With HTBase, companies can quickly prov...
An overall theme of Cloud computing and the specific practices within it is fundamentally one of automation. The core value of technology is to continually automate low level procedures to free up people to work on more value add activities, ultimately leading to the utopian goal of full Autonomic Computing. For example a great way to define your plan for DevOps tool chain adoption is through this lens. In this TechTarget article they outline a simple maturity model for planning this.
While DevOps most critically and famously fosters collaboration, communication, and integration through cultural change, culture is more of an output than an input. In order to actively drive cultural evolution, organizations must make substantial organizational and process changes, and adopt new technologies, to encourage a DevOps culture. Moderated by Andi Mann, panelists discussed how to balance these three pillars of DevOps, where to focus attention (and resources), where organizations might...
The rise of containers and microservices has skyrocketed the rate at which new applications are moved into production environments today. While developers have been deploying containers to speed up the development processes for some time, there still remain challenges with running microservices efficiently. Most existing IT monitoring tools don’t actually maintain visibility into the containers that make up microservices. As those container applications move into production, some IT operations t...
For organizations that have amassed large sums of software complexity, taking a microservices approach is the first step toward DevOps and continuous improvement / development. Integrating system-level analysis with microservices makes it easier to change and add functionality to applications at any time without the increase of risk. Before you start big transformation projects or a cloud migration, make sure these changes won’t take down your entire organization.
Software development is a moving target. You have to keep your eye on trends in the tech space that haven’t even happened yet just to stay current. Consider what’s happened with augmented reality (AR) in this year alone. If you said you were working on an AR app in 2015, you might have gotten a lot of blank stares or jokes about Google Glass. Then Pokémon GO happened. Like AR, the trends listed below have been building steam for some time, but they’ll be taking off in surprising new directions b...