August 13, 2007 (LPAC)--A small but satisfying by-product of the recent market hysteria, may be the demise of computer-assisted trading. Some of the market's biggest losers recently were ardent adherents of these "quants," or quantitative strategies, which presume that "machines are better than people" because they make fewer mistakes. James Simons, known as the "king of quants," at Renaissance Technologies, and Clifford Asness of AQR Capital Management, all lost big, as did Goldman Sachs and Highbridge Capital Management.

Many quant theories use past trading patterns to predict future market moves, not a good idea in a volatile market. In addition, some companies are now being forced to buy up stock they had just "shorted," (sold what they didn't yet own), which then collapsed the price, triggering further computerized selling. Complicating things even further, is the fact that these computerized systems tend to "think" alike, and thus march in lock-step to their doom, as happened with the LTCM (Long Term Capital Management) collapse in 1998. This, combined with the reliance on heavily borrowed (leveraged) funds, leads to a "perfect storm" of market blow-out. As one analyst at Lehman Brothers noted, systems, his own included, "were behaving in the opposite way to tried and tested predictions."

Unfortunately, as noted by Monday's Financial Times, some of the biggest players in this game are US pension funds.