The House of Quants
Before it was the self-proclaimed largest bookstore on Earth or the
Web's dominant superstore, Amazon.com was an idea floating through the
New York City offices of one of the most unusual firms on Wall Street:
D. E. Shaw & Co.
A quantitative hedge fund, DESCO, as its employees affectionately called
it, was started in 1988 by David E. Shaw, a former Columbia University
computer science professor. Along with the founders of other
groundbreaking quant houses of that era, like Renaissance Technologies
and Tudor Investment Corporation, Shaw pioneered the use of computers
and sophisticated mathematical formulas to exploit anomalous patterns in
global financial markets. When the price of a stock in Europe was
fractionally higher than the price of the same stock in the United
States, for example, the computer jockeys turned Wall Street warriors at
DESCO would write software to quickly execute trades and exploit the
The broader financial community knew very little about D. E. Shaw, and
its polymath founder wanted to keep it that way. The firm preferred
operating far below the radar, deploying private capital from wealthy
investors such as billionaire financier Donald Sussman and the Tisch
family, and keeping its proprietary trading algorithms out of
competitors' hands. Shaw felt strongly that if DESCO was going to be a
firm that pioneered new approaches to investing, the only way to
maintain its lead was to keep its insights secret and avoid teaching
competitors how to think about these new computer-guided frontiers.
David Shaw came of age in the dawning era of powerful new
supercomputers. He earned a PhD in computer science from Stanford in
1980 and then moved to New York to teach in Columbia's computer science
department. Throughout the early eighties, high-tech companies tried to
lure him to the private sector. Inventor Danny Hillis, founder of the
supercomputer manufacturer Thinking Machines Corporation and later one
of Jeff Bezos's closest friends, almost convinced Shaw to come work for
him designing parallel computers. Shaw tentatively accepted the job and
then changed his mind, telling Hillis he wanted to do something more
lucrative and could always return to the supercomputer field after he
got wealthy. Hillis argued that even if Shaw did get rich—which
seemed unlikely—he'd never return to computer science. (Shaw did,
after he became a billionaire and passed on the day-to-day management of
D. E. Shaw to others.) "I was spectacularly wrong on both counts,"
Morgan Stanley finally pried Shaw loose from academia in 1986, adding
him to a famed group working on statistical arbitrage software for the
new wave of automated trading. But Shaw had an urge to set off on his
own. He left Morgan Stanley in 1988, and with a $28 million seed
investment from investor Donald Sussman, he set up shop over a Communist
bookstore in Manhattan's West Village.
By design, D. E. Shaw would be a different kind of Wall Street firm.
Shaw recruited not financiers but scientists and
mathematicians—big brains with unusual backgrounds, lofty academic
credentials, and more than a touch of social cluelessness. Bob Gelfond,
who joined DESCO after the firm moved to a loft on Park Avenue South,
says that "David wanted to see the power of technology and computers
applied to finance in a scientific way" and that he "looked up to
Goldman Sachs and wanted to build an iconic Wall Street firm."
In these ways and many others, David Shaw brought an exacting
sensibility to the management of his company. He regularly sent out
missives instructing employees to spell the firm's name in a specific
manner—with a space between the D. and the E. He
also mandated that everyone use a canonical description of the company's
mission: it was to "trade stocks, bonds, futures, options and various
other financial instruments"—precisely in that order. Shaw's rigor
extended to more substantive matters as well: any of his computer
scientists could suggest trading ideas, but the notions had to pass
demanding scientific scrutiny and statistical tests to prove they were
In 1991, D. E. Shaw was growing rapidly, and the company moved to the
top floors of a midtown Manhattan skyscraper a block from Times Square.
The firm's striking but sparely decorated offices, designed by the
architect Steven Holl, included a two-story lobby with luminescent
colors that were projected into slots cut into the expansive white
walls. That fall, Shaw hosted a thousand-dollar-a-ticket fund-raiser for
presidential candidate Bill Clinton that was attended by the likes of
Jacqueline Onassis, among others. Employees were asked to clear out of
the office that evening before the event. Jeff Bezos, one of the
youngest vice presidents at the firm, left to play volleyball with
colleagues, but first he stopped and got his photo taken with the future
Bezos was in his midtwenties at the time, five foot eight inches tall,
already balding and with the pasty, rumpled appearance of a committed
workaholic. He had spent five years on Wall Street and impressed
seemingly everyone he encountered with his keen intellect and boundless
determination. Upon graduating from Princeton in 1986, Bezos worked for
a pair of Columbia professors at a company called Fitel that was
developing a private transatlantic computer network for stock traders.
Graciela Chichilnisky, one of the cofounders and Bezos's boss, remembers
him as a capable and upbeat employee who worked tirelessly and at
different times managed the firm's operations in London and Tokyo. "He
was not concerned about what other people were thinking," Chichilnisky
says. "When you gave him a good solid intellectual issue, he would just
chew on it and get it done."
Bezos moved to the financial firm Bankers Trust in 1988, but by then,
frustrated by what he viewed as institutional reluctance at companies to
challenge the status quo, he was already looking for an opportunity to
start his own business. Between 1989 and 1990 he spent several months
working in his spare time on a startup with a young Merrill Lynch
employee named Halsey Minor, who would later go on to start the online
news network CNET. Their fledgling venture, aimed at sending a
customized newsletter to people over their fax machines, collapsed when
Merrill Lynch withdrew the promised funding. But Bezos nevertheless made
an impression. Minor remembers that Bezos had closely studied several
wealthy businessmen and that he particularly admired a man named Frank
Meeks, a Virginia entrepreneur who had made a fortune owning Domino's
Pizza franchises. Bezos also revered pioneering computer scientist Alan
Kay and often quoted his observation that "point of view is worth 80 IQ
points"—a reminder that looking at things in new ways can enhance
one's understanding. "He went to school on everybody," Minor says. "I
don't think there was anybody Jeff knew that he didn't walk away from
with whatever lessons he could."
Bezos was ready to leave Wall Street altogether when a headhunter
convinced him to meet executives at just one more financial firm, a
company with an unusual pedigree. Bezos would later say he found a kind
of workplace soul mate in David Shaw—"one of the few people I know
who has a fully developed left brain and a fully developed right brain."
At DESCO, Bezos displayed many of the idiosyncratic qualities his
employees would later observe at Amazon. He was disciplined and precise,
constantly recording ideas in a notebook he carried with him, as if they
might float out of his mind if he didn't jot them down. He quickly
abandoned old notions and embraced new ones when better options
presented themselves. He already exhibited the same boyish excitement
and conversation-stopping laugh that the world would later come to know.
Bezos thought analytically about everything, including social
situations. Single at the time, he started taking ballroom-dance
classes, calculating that it would increase his exposure to what he
called n+ women. He later famously admitted to thinking about how to
increase his "women flow," a Wall Street corollary to deal flow,
the number of new opportunities a banker can access. Jeff Holden, who
worked for Bezos first at D. E. Shaw & Co. and later at Amazon, says
he was "the most introspective guy I ever met. He was very methodical
about everything in his life."
D. E. Shaw had none of the gratuitous formalities of other Wall Street
firms; in outward temperament, at least, it was closer to a Silicon
Valley startup. Employees wore jeans or khakis, not suits and ties, and
the hierarchy was flat (though key information about trading formulas
was tightly held). Bezos seemed to love the idea of the nonstop workday;
he kept a rolled-up sleeping bag in his office and some egg-crate foam
on his windowsill in case he needed to bunk down for the night. Nicholas
Lovejoy, a colleague who would later join him at Amazon, believes the
sleeping bag "was as much a prop as it was actually useful." When they
did leave the office, Bezos and his DESCO colleagues often socialized
together, playing backgammon or bridge until the early hours of the
morning, usually for money.
As the company grew, David Shaw started to think about how to broaden
its talent base. He looked beyond math and science geeks to what he
called generalists, those who'd recently graduated at the tops of their
classes and who showed significant aptitude in particular subjects. The
firm also combed through the ranks of Fulbright scholars and dean's-list
students at the best colleges and sent hundreds of unsolicited letters
to them introducing the firm and proclaiming, "We approach our
recruiting in unapologetically elitist fashion."
Respondents to the letters who seemed particularly extraordinary and who
had high enough grade point averages and aptitude-test scores were flown
to New York for a grueling day of interviews. Members of the firm
delighted in asking these recruits random questions, such as "How many
fax machines are in the United States?" The intent was to see how
candidates tried to solve difficult problems. After the interviews,
everyone who had participated in the hiring process gathered and
expressed one of four opinions about each individual: strong no hire;
inclined not to hire; inclined to hire; or strong hire. One holdout
could sink an applicant.
Bezos would later take these exact processes, along with the seeds of
other Shaw management techniques, to Seattle. Even today, Amazon
employees use those categories to vote on prospective new hires.
DESCO's massive recruitment effort and interview processes were finely
tuned to Bezos's mind-set; they even attracted one person who joined
Bezos as his life partner. MacKenzie Tuttle, who graduated from
Princeton in 1992 with a degree in English and who studied with author
Toni Morrison, joined the hedge fund as an administrative assistant and
later went to work directly for Bezos. Lovejoy remembers Bezos hiring a
limousine one night and taking several colleagues to a nightclub. "He
was treating the whole group but he was clearly focused on MacKenzie,"
MacKenzie later said it was she who targeted Bezos, not the other way
around. "My office was next door to his, and all day long I listened to
that fabulous laugh," she told Vogue in 2012. "How could you not
fall in love with that laugh?" She began her campaign to win him over by
suggesting lunch. The couple got engaged three months after they started
dating; they were married three months after that. Their wedding, held
in 1993 at the Breakers, a resort in West Palm Beach, featured game time
for adult guests and a late-night party at the hotel pool. Bob Gelfond
and a computer programmer named Tom Karzes attended from D. E. Shaw.
Meanwhile, DESCO was growing rapidly and, in the process, becoming more
difficult to manage. Several colleagues from that time recall that D. E.
Shaw brought in a consultant who administered the Myers-Briggs
personality test to all the members of the executive team. Not
surprisingly, everyone tested as an introvert. The least introverted
person on the team was Jeff Bezos. At D. E. Shaw in the early 1990s, he
counted as the token extrovert.
Bezos was a natural leader at DESCO. By 1993, he was remotely running
the firm's Chicago-based options trading group and then its high-profile
entry into the third-market business, an alternative over-the-counter
exchange that allowed retail investors to trade equities without the
usual commissions collected by the New York Stock Exchange. Brian Marsh,
a programmer for the firm who would later work at Amazon, says that
Bezos was "incredibly charismatic and persuasive about the third-market
project. It was easy to see then he was a great leader." Bezos's
division faced constant challenges, however. The dominant player in the
space was one Bernard Madoff (the architect of a massive Ponzi scheme
that would unravel in 2008). Madoff's own third-market division
pioneered the business and preserved its market lead. Bezos and his team
could see Madoff's offices in the Lipstick Building on the East Side
through their windows high above the city.
While the rest of Wall Street saw D. E. Shaw as a highly secretive hedge
fund, the firm viewed itself somewhat differently. In David Shaw's
estimation, the company wasn't really a hedge fund but a versatile
technology laboratory full of innovators and talented engineers who
could apply computer science to a variety of different problems.
Investing was only the first domain where it would apply its skills.
So in 1994, when the opportunity of the Internet began to reveal itself
to the few people watching closely, Shaw felt that his company was
uniquely positioned to exploit it. And the person he anointed to
spearhead the effort was Jeff Bezos.
D. E. Shaw was ideally situated to take advantage of the Internet. Most
Shaw employees had, instead of proprietary trading terminals, Sun
workstations with Internet access, and they utilized early Internet
tools like Gopher, Usenet, e- mail, and Mosaic, one of the first Web
browsers. To write documents, they used an academic formatting tool
called LaTeX, though Bezos refused to touch the program, claiming it was
unnecessarily complicated. D. E. Shaw was also among the very first Wall
Street firms to register its URL. Internet records show that Deshaw.com
was claimed in 1992. Goldman Sachs took its domain in 1995, and Morgan
Stanley a year after that.
Shaw, who used the Internet and its predecessor, ARPANET, during his
years as a professor, was passionate about the commercial and social
implications of a single global computer network. Bezos had first
encountered the Internet in an astrophysics class at Princeton in 1985
but hadn't thought about its commercial potential until arriving at
DESCO. Shaw and Bezos would meet for a few hours each week to brainstorm
ideas for this coming technological wave, and then Bezos would take
those ideas and investigate their feasibility.
In early 1994, several prescient business plans emerged from the
discussions between Bezos and Shaw and others at D. E. Shaw. One was the
concept of a free, advertising-supported e-mail service for
consumers—the idea behind Gmail and Yahoo Mail. DESCO would
develop that idea into a company called Juno, which went public in 1999
and soon after merged with NetZero, a rival.
Another idea was to create a new kind of financial service that allowed
Internet users to trade stocks and bonds online. In 1995 Shaw turned
that into a subsidiary called FarSight Financial Services, a precursor
to companies like E- Trade. He later sold it to Merrill Lynch.
Shaw and Bezos discussed another idea as well. They called it "the
Several executives who worked at DESCO at that time say the idea of the
everything store was simple: an Internet company that served as the
intermediary between customers and manufacturers and sold nearly every
type of product, all over the world. One important element in the early
vision was that customers could leave written evaluations of any
product, a more egalitarian and credible version of the old Montgomery
Ward catalog reviews of its own suppliers. Shaw himself confirmed the
Internet-store concept when he told the New York Times Magazine
in 1999, "The idea was always that someone would be allowed to make a
profit as an intermediary. The key question is: Who will get to be that
Excerpted from "The Everything Store: Jeff Bezos and the Age of Amazon" by Brad Stone. Copyright © 2013 by Brad Stone. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher. Excerpts are provided solely for the personal use of visitors to this web site.