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Doyne Farmer Looks Back

By Nina Mehta

Starting a financial trading firm was anything but easy for physicists Doyne Farmer and Norman Packard. Even agreeing on a suitable name was difficult. But after dismissing Infinite Regress, Nostradamus, The Vision Thing and Dukes of Destiny, they settled on Prediction Company—a name that calmly summed up the firm's intention to foretell the future of the markets.

The story of the company's tumultuous evolution roars through Thomas Bass' The Predictors: How a Band of Maverick Physicists Used Chaos Theory to Trade Their Way to A Fortune on Wall Street.

Did the firm make money? Yes, indeed, and lots of it. Did it take money from the capital markets like candy from a child? Not exactly.

Farmer, Packard and a motley crew of five other physicists, plus one non-physicist, launched Prediction Company in 1991, determined to use chaos theory to split the markets open and extract valuable patterns of information from the murky soup of bond and stock prices. Farmer and Packard, the company's globetrotting stars, were two of the five physicists who, in the late 1970s, had formed the Chaos Cabal in the graduate physics department at the University of California at Santa Cruz—a ragtag group that helped launch the field that launched a thousand dissertations and now feeds academic departments around the world.

"We started out assuming that simply using sophisticated time-series techniques would give us a clear advantage that would allow us to make profits,” Farmer says now. "But we found there were no magic bullets. We had to think harder about how the markets worked and structure our models to make the data speak to us. The data didn't speak to us automatically.”

There were discouraging times. The firm didn't get off the ground immediately, and it was three years after the firm settled into its offices, within sight of the Sangre de Cristos (Blood of Christ) mountains, that it was trading in earnest—and several years after that "before we were really trading in a way that was profitable,” says Farmer. Along the way, there were several false starts, and the company went for months without making a profit. The Predictors swings through the highs and lows of the company, from paying for office furniture to hauling the company dog-and-pony show to the kingpins of Wall Street in search of a funding partner. (The Chicago-based O'Connor & Associates wound up spouse.)

There were also surprises. "It was easier to get Wall Street interested than we had thought,” recalls Farmer. "Perhaps the timing was right, or they just liked our sales pitch. Also, I think Norman and I underestimated the value of our credentials—they were taken seriously.” One thing that wasn't so easy, however, was the day-to-day logistics of production—"actually running the models in live trading proved to be harder than we imagined,” he says.

Management also proved to be something of a briar patch for Packard and Farmer, who had previously run a small company that tried to beat the roulette wheel in Las Vegas with a toe-operated computer. (Bass recounted that hardscrabble effort in an earlier book,The Eudaemonic Pie.) "It was difficult learning to listen to other people, and learning to understand other people's psychology well enough to keep them happy and get them to work hard,” says Farmer. "Frankly, I had assumed that since I was outgoing and liked people that would have been easier.”

So what are the Dukes of Destiny doing now?

Packard remains at Prediction, modeling the future as CEO of the 24-person firm, which now advises UBS on how to use Prediction Company models to control a proprietary fund (O'Connor wound up in the kitty of the Swiss bank). Farmer is at the Santa Fe Institute, developing a nonequilibrium theory for price formation based on likening the financial strategies developed by "agents” in the markets to the evolution of biological species. "If patterns in the market are equivalent to food sources, for instance, speculators can formulate strategies to exploit those patterns for profit, just as animals fight for sources of food,” he explains.

In the offing: If not another book, then at least a mathematical food-fight theory to make sense of the ever-dyspeptic financial markets.


Briefly
  • Algorithmics has announced a number of changes. Geoff Owen will be vice president of sales; Michel van Leeuwen will be regional managing director for sales in Northern, Central and Eastern Europe; Natan Rosen will be regional managing director for sales in Latin America and Southern Europe; Masana Seki will be regional managing director and general manager in charge of Korea and Japan; Andrew Raymond will be regional managing director responsible for the balance of Southeast Asia and Australasia; and Steve Wilson, CFO, will be responsible for the global client services groups. Tom Severance remains regional managing director for sales in North America.
  • Chase Manhattan Corp. has hired Richard Noble as vice president of its proprietary trading desk. He had been head of U.K. gilt trading at Salomon Smith Barney.
  • Hiroshi Kawashima has been named head of derivatives sales in Tokyo at Bank of America. He had been executive director in structured finance at Credit–Agricole Indosuez in Tokyo.
  • Roxanne Runwasi has been named director of consultant relations at CDC Investment Management Corp. She had been manager of the consultant services division at Oppenheimer Capital.
  • Chase has announced four new hires in equity derivatives. Olivier Robin has been named a senior exotic equity derivatives trader; he had been head of equity derivatives trading for Europe at Citibank. Adrian Brindle and Joel Smalley have been named senior equity derivatives traders; Brindle had been an equity derivatives trader at CIBC in Tokyo, and Smalley had been head of convertible bond arbitrage and an asset swaps and credit derivatives trader at Daiwa Europe. Jimmy Chan has joined the firm as an exotic equity derivatives trader. He previously worked at UBS trading equity structured products.
  • Commerzbank Global Equities has appointed Dean Curnutt and James Pasquale to the equity derivatives team in New York. Curnutt will be a senior salesperson responsible for hedge funds coverage. He had been a senior marketer of structured products in equity derivatives at Lehman Brothers. Pasquale will manage mid-office areas associated with the firm's index-arbitrage program-trading and OTC businesses. He previously worked at UBS.
  • Sophis has named Olivier Cohen vice president of client services. He had been an internal auditor at Societe Generale. Sophis UK has also named Katy Birch marketing manager. She previously held a similar position at Rolfe & Nolan.
  • Sakura Dellsher has named Ikuko Yamanaka sales associate in the firm's London office. She had been at Daiwa Europe. The firm has also named Michael Hughes, former vice president of sales at Carr Futures, vice president of sales and research.
  • Daniel Stone, an independent financial markets consultant, has been named head of sales and training at FENICS.
  • OptiMark Technologies has appointed Robert Warshaw executive vice president and chief technology officer. He had been chief information officer at Lazard Freres.
  • Ian Clague, a former managing director at Merrill Lynch, has been appointed a nonexecutive company director at Kalahari Software.
  • Putnam Investments has announced the appointment of Erwin Martens as a managing director, in charge of risk management. He had been head of global market risk management, fixed income and derivatives at Lehman Brothers.
  • The Chicago Board Options Exchange has elected four new public directors to serve on the exchange's expanded board of directors. They are R. Eden Martin, partner at the law firm of Sidley & Austin; Roderick Palmore, senior vice president, general counsel and secretary of Sara Lee Corp.; Susan Phillips, dean and professor of finance at the School of Business and Public Management at George Washington University; and David Vitale, former vice chairman and director of Bank One Corp. The CBOE membership also elected Michael Post, president of Seats Exchange, as lessor director.
  • The Chicago Mercantile Exchange has promoted John Curran from senior director for financial product research to vice president of strategic development. The Merc also promoted Arman Falsafi from senior director of technology strategy to vice president of technology strategy.
  • Alaron Trading Corp. has named Daniel Lazarus general counsel and vice president for regulatory affairs. He had been the in-house counsel at the Chicago Mercantile Exchange. The firm also named Robert Pagliuco, former vice president at Rosenthal Collins Group, chief financial officer.
  • Michael Leonard has been named managing director of global finance and credit at Global Fixed Income Advisors. He had been a managing director and principal in the global U.S. dollar reverse-repurchase department at Nomura Securities International. >
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