Attack of the Data Miners

BACK IN THE PALEOCAPITALISTIC ERA, as long ago as 10 years, anthropologists studying the breeding, feeding and plumage patterns of Wall Street concentrated on carnivores -- called gunslingers -- grownup frat boys in yellow ties and red suspenders who peddled junk bonds, drove BMWs and bought $2 million co-ops on Manhattan's East Side. Forget them: today they're fuddled old greedsters sitting around in their East Hampton beach houses wondering what happened.

What did? Well, yellow ties are out, but avarice remains popular, and the financial universe -- Is anyone surprised? -- still has masters. These new barbarians at the gates of international commerce may have the geeky, high- water-pants look of the typical math grad student, and they may caress their Sun Microsystems workstations rather than I-got-mine mobiles. But nearly everyone agrees that they are even scarier than the gunslingers. They are "math jockeys," "nerds," "pop eyes," "quarks," "techies." Call them quants, for quantitative analysts. They are odd birds indeed, the field biologist discovers, and . . . Hark, here's one now!

". . . European portfolio MITTS in a market-index, targeted-term security. It's an equity-link note. This one had 90% principal protection, plus equity upside in its European portfolio." The specimen is Jamie Greenwald, 30, managing director of global equity derivatives for Merrill Lynch. He reports, with satisfaction, that the Japan index "provides upside in the market in Japan in a domestic instrument, U.S. dollar-based, no currency risk, no downside risk: worst case you've got about a . . . ((pause)) . . . 2.34% yield. That was very applicable to pension funds, to insurance companies, to mutual funds."

There is a perilous impulse here to say, "Sure, if you say so." And not just outsiders are baffled by such impressively technical discourse. Older managers weren't taught this stuff. "The guy who heads your group, a head trader, he's never solved a quantitative problem before," says a 30-year-old Ph.D. at a leading brokerage house. "An important problem that could take you three weeks to solve properly, he'll want it done in two days. It's very difficult for a quant who thinks of himself as a Ph.D. from a top-notch school and comes to Wall Street, and a high school dropout screams at him and calls him an idiot." His colleague, an engineer, agrees: "Many times, what your boss is saying is just hilarious. It's wrong, you know; mathematically it makes no sense. You can't even say, 'Look, you don't know what you're talking about.' "

But Wall Street and the quants are stuck with each other. Stanley Diller, 58, an early quant who is managing director of fixed-income research at Paine Webber, left a job as an economics professor at Columbia in the mid-'70s to join Goldman, Sachs & Co.'s equity-research department. In those days, he says, "research was largely an image builder. It was something that brought in the customers." Now quantitative research "is the whole deal." If you don't have it, says Diller, you can't produce the new financial instruments, " 'cause you get crushed trying to hedge them." Meaning that Wall Street's new products are so complicated and interdependent that only the advanced number crunching of the quants can untangle the risks involved; without it, the market crushes you.