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Of Black Holes and Bank Notes: Chaos Theory and Astrophysics are Changing the Stock Market, but You and I Won't Benefit

Status: [CLOSED]
By Robert X. Cringely
bob@cringely.com

If I have been writing a lot about money lately, blame it on the new PBS show I am shooting right now. Money is what the show is all about, or more specifically, it's about how computers and information technology have changed money during our lifetimes. It's a big story about how money was transformed from greenbacks down at the bank to electrons zapping around the world. The show has given me the opportunity in the last couple weeks alone to spend time with four Nobel prize winners, and I have to say that we all should be thankful for video editing. These guys speak in a language that can put almost anyone to sleep, which is funny given the sexiness of the underlying theme, greed.

There is something fascinating about unearned income, money that just seems to arrive. That's what all those day traders are dreaming of as they churn their Datek and E*Trade accounts, hoping their personal computers will generate wealth for them. I used to think this was impossible to do, but I was wrong. It turns out to be only very difficult, not impossible. Right now, there is a Sun Enterprise 6000 computer doing exactly this in the Chicago office of Warburg Dillon Read, an investment banking house. The computer makes the trades on its own, but the folks who wrote and maintain the computer program are in Santa Fe, New Mexico. They are astrophysicists, not economists, and the business they run in a former brothel is called the Prediction Company. I met recently with company founders Doyne Farmer and Norman Packard over a buffalo burger at the Cowgirl Hall of Fame Bar and Restaurant in Santa Fe.

The Prediction Company story is the basis of a fun book called The Predictors by Thomas A. Bass. If you don't want to read a whole book on this subject, my extremely short version of the story has Farmer and Packard growing up together in a tiny town in western New Mexico, becoming astrophysicists at UC Santa Cruz, devoting years to making money at roulette through the use of a computer in a shoe that could effectively change the odds from 35-to-1 against the player to about 4-to-1 in favor of the player. Then they came to the blinding realization that casinos are filled with smoke and strange people and maybe the stock market was an easier game to fix, hence the Prediction Company.

They apply the same statistical techniques used to sift radio telescope Data, only instead of quasars and black holes, they are seeking small pockets of profit that can be sucked out of the market. More specifically, what the Prediction Company does is find pricing anomalies rather like the one I described in the Forbes piece. This business of setting a price the proper price for any transaction seems more and more important to me as I'm shooting this show. And all it takes to do this is 30 rocket scientists in New Mexico, who worked for three years on the problem before making their first trade five years ago. One aspect of this I found especially fascinating was how the use of historical data for testing trading schemes effectively "burns" that data, making it unusable in future. Apparently, you can't go home again.

The folks at the Prediction Company won't say how much money they manage or how much profit they make, because their one and only customer is UBS, the giant Swiss bank, and Swiss bankers are notoriously secretive. But here are two very interesting data points to consider: a) that UBS just extended their contract with the Prediction Company and bought a quarter of the company (that suggests to me they are beating the market by a considerable margin), and b) the day we shot that Enterprise 6000 making trades in Chicago was the day NASDAQ had its second biggest fall ever, yet the Prediction Company folks made a profit for the day.

Jumping from greed to GREED, you may have noticed stories lately about how the Department of Justice will propose the breakup of Microsoft. I believe this is mainly posturing on the part of the DoJ, attempting one more time to push Bill Gates into a reasonable settlement. It won't work. Microsoft is confident it will win the case on appeal and will seriously consider a true settlement only if the appeal fails.

The more interesting question is what kind of settlement would adequately end Microsoft's bullying. Gates argues that the market is changing in such a way that Microsoft's power has probably already peaked. I believe this to be true. But where Gates sees this as justification for no penalty at all, I still see room for remedy. One thing the DoJ could do is a cashectomy, sucking a few billion dollars out of Microsoft to help pay off the national debt. It's funny how nobody has yet talked about a simple fine. Going further, I still stand by the suggested remedy I wrote about months ago. Just in case Judge Jackson is reading this, the short version of my suggested penalty would be for Microsoft to publish (and follow) a uniform pricing schedule for all its products and for the company to get out of the language and programming tools businesses. Being forced to use other folks' languages would decouple Microsoft from most of the easy technical shenanigans it has played over the years. It's a simple plan, which means they won't do it.

Another person who won't be pushed around is Apple CEO Steve Jobs, who still seems to think that he is the company's interim CEO. Apple employees used to get a sabbatical every five years, but this has been replaced at the New Apple with the choice of either a lapel pin or a certificate. On the certificate is a place for the CEO to sign, but Jobs hasn't been signing. Like Dimaggio, perhaps he thinks his signature will increase in value over time, especially if he refuses to sign. The lame excuse being given to employees is still that he's the interim CEO. Apple must not be reading its own press releases.

Recently, a woman approached Jobs in a hallway at Apple, presented her certificate for 15 years service and asked him to sign it. Jobs read the certificate, handed it back unsigned and said, "Nobody should stay 15 years at one company." Then he walked away.

If anyone tells you Steve Jobs has changed, they are wrong.

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