Category Archives: History

The Two Fathers of Quants: Donald Sussman and D.E. Shaw

Early Computer: Commodore 64.

The birth of stock trading based on computer modeling is an interesting, if not so well-known story. It begins in 1988, when 37-year-old David E. Shaw phoned hedge fund manager Donald Sussman.

Shaw was a Californian who had a Ph.D. from Stanford University and had formerly been a computer science professor at Columbia University, but was now working for the giant investment bank Morgan Stanley. Shaw wanted to talk to Sussman about his new-found career on Wall Street. Shaw had just been offered a new job at Goldman Sachs, one of Morgan Stanley’s chief competitors, and wanted advice from Sussman about what to do.

Back in the late 1980s Wall Street and computers did not mix. What Shaw was doing at Morgan Stanley was brand new, and was even kept as a company secret. Shaw needed Sussman’s advice about what his next move should be: stay at Morgan Stanley;  move to Goldman Sachs; or perhaps there was a third option?

Donald Sussman, the founder of Paloma Partners, was intrigued by Shaw. He was an expert in recognizing and financing hedge-fund talent. He became excited by what Shaw told him about the potential for computer technology to revolutionize the finance industry. Shaw’s ideas not only eventually led to the transformation of the culture of Wall Street, but also led directly to the development of on-line retailing, paving the way for such successful ventures as Amazon.

In 1988, at the birth of this brave new world, Shaw just told Sussman, “I think I can use technology to trade securities.”

Sussman was not impressed with the Goldman offer. He told Shaw: “If you’re confident this idea is going to work, you should come work for me.”

During a three-day cruise around Long Island Sound on Sussman’s 45-foot boat Shaw and his partner, Peter Laventhol convinced Sussman that their idea had great potential.

Sussman recalls that the pair “convinced me they believed they could generate models that would identify portfolios that would be market-neutral and able to outperform others.” In other words, the plan had the potential to make a lot of money with minimal risk.

Sussman’s Paloma Partners invested $30 million with D.E. Shaw. Since that moment in history the company flowered into a $47 billion firm, earning its investors over $25 billion as of 2016. The company made millionaires out of many employees and David Shaw into a billionaire.

Today, because of the genius of David Shaw and the vision of Donald Sussman, the quantitative revolution has become the most wide-spread trend on Wall Street, and especially in hedge fund investing, managing $500 million of the industry’s $3 trillion in assets. Seven of the ten best performing funds are “quants,” including, of course, D.E. Shaw. Not surprisingly, one of those other seven, Two Sigma, was launched by former D.E. Shaw employees.

The world of finance, retail and more, owe quite a bit to these two pioneers, Donald Sussman and David Shaw.

Whatever Happened to the Thousand Dollar Bill?

Rarely Seen $1,000 Bill

Rarely seen by ordinary people, both the $500 and $1,000 bills are genuine U.S. legal tender. These bills, however, were last printed by the US mint in 1945. In 1969 the government completely halted the distribution of these large denomination bills.

Today large transactions are almost exclusively done electronically, with no need to ever exchange cash in large amounts. Collectors might be interested to know that it is possible to purchase $500 notes, which bare the likeness of President William McKinley. Notes printed in 1928 can sell for about $2,300, while notes from 1934 cost about $1,000.

Featuring the face of President Grover Cleveland in profile, $1,000 notes printed in 1928 can be acquired for about $3,500 to $4,000. Notes printed in 1934 are valued today at about $2,250 to $3,000.

Revisiting the Cuban Embargo: Fifty Years of No Cigars

Fidel Castro

The 50th anniversary of the start of the economic boycott on Cuba took place on Tuesday. Since February 7th, 1962 there has been a nearly hermetic seal on trade with communist-led Cuba.

Yes or No to Embargo

Supporters of the embargo say it is an appropriate response to a repressive government that has been a relentless “thorn in the side” of the Unites States for all these years. Opponents of the embargo say the policy is a failed one, which has hurt ordinary Cuban citizens, and not the government against which the embargo is directed.

Failed its Main Goal

Both sides agree, however, that the embargo failed in its most central goal, to oust Cuba’s leaders, Fidel and Raul Castro.

Wayne Smith, who was a young US diplomat in Havana, Cuba in 1961 when relations between the US and Cuba were cut. Smith returned to Cuba as the head American diplomat when relations were partially re-established under the administration of President Jimmy Carter.

“All this time has gone by, and yet we keep it (the embargo) in place,” Smith said.

“We talk to the Russians, we talk to the Chinese, we have normal relations even with Vietnam. We trade with all of them,” Smith added. “So why not with Cuba?”

President Kennedy announced the embargo on February 3rd, 1962, saying that “the subversive offensive of Sino-Soviet communism with which the government of Cuba is publicly aligned,” and it went into effect four days later.

Outdated Policy?

Those were the days when the cold war was at its height, but critics of the embargo say that many of the reasons the embargo was begun no longer exist, such as the struggle to halt the spread of Soviet influence and the exportation of communism by Fidel Castro to the rest of Latin America.

But supporters cite other justifications, such as the need to pressure Cuba to give more personal and political freedom to its citizens, and the confiscation of US property in Cuba.

“We have a hemispheric commitment to freedom and democracy and respect for human rights,” said Jose Cardenas, a former National Security Council staffer on Cuba under President George W. Bush. “I still think that those are worthy aspirations.”

Shapell’s Manuscript Foundation & The White House

Certainly, it came as quite a shock to Theodore Roosevelt when, on September 14, 1901, he became the President of the United States. Assuming that President McKinley would recover from his gunshot wounds, Vice President Roosevelt was hiking the highest peak in New York State when he was called back to take the highest office.

The letter that the Shapell Manuscript Foundation has as part of its “Between the Lines” program offers a rare glimpse into Roosevelt’s state of mind and into the future of the presidency at the time.  Writing to a dear friend on the day that he would take office, Roosevelt wrote, “I have about as heavy and painful a task out upon me as can fall to the lot of any man in a civilized country…”

Along with many other changes that Roosevelt would make as President, he would be the first President to call the building in which he resided by its official name – The White House.  The letter featured with the Shapell Manuscript Foundation is written from stationary that had the heading “Executive Mansion” on it.  President Roosevelt, breaking with this traditional, would instigate the new and lasting name for the building, changing the stationery to say “The White House” and starting to call the building by this name.

President Roosevelt would have many “firsts” behind him, as the first President to ride in an automobile and the first to travel outside of the United States.  Here, we see that he was also the first to do away with the stationery and the title “Executive Mansion” and to live, as he should, in “The White House.”

Czolgosz Shoots McKinley

Assassination of America’s 25th President

On July 30, 1901, US-born unemployed wire mill worker Leon Czolgosz, wrote a note – today in the possession of the Shapell Manuscript Foundation – that could have given a clue as to the far-reaching actions he took some six weeks later.

The letter – written for John Grinder (one of Czolgosz’s colleagues from the wire mill) is not so easy to decipher.  There was however, one small phrase that made sense.  He wrote: “there is a streetcar to Buffalo in his new town, and it’s just a nickel ride.”

It was at the Pan-American Exposition in Buffalo, on September 6, that same year, that William McKinley was assassinated by Leon Czolgosz.  Following one shot to the stomach and another to the chest with his .32 caliber revolver, he calmly stated, “I have done my duty.”

Leon Czolgosz’s Background

Perhaps – in hindsight – his actions should not have been such a shock, given the assassinator’s background.  Prior to this he had left his factory job due to a mental breakdown.  But there could have also been other sources for his inspiration.  For example, exactly four months before Czolgosz assassinated America’s 25th President, he had heard a talk by Emma Goldman at the Federal Liberal Club and thereafter spoken to her.  On other occasions he went to places where she spoke on anarchism.  Indeed, Abraham Isaak was quite sure that – due to his almost stalk-like activities – Czolgosz was a spy and even issued a warning about him in the Free Society, his journal.

Had attention been given to the weird and somewhat worrying behavior of Czolgosz, perhaps William McKinley’s life would have ended somewhat differently and the note held at the Shapell Manuscript Foundation would have a very different meaning today.