When: Today, Monday, September 13th
Where: CNBC's "Fast Money Halftime Report" at 12:30pm ET
Following are excerpts from the unofficial transcript of a CNBC EXCLUSIVE one-on-one interview CNBC's Melissa Lee and James Simons, the hedge fund legend behind Renaissance Technologies, today on CNBC. This is Simons first interview since the flash crash. Excerpts of the interview will run on "Fast Money Halftime Report" (12:30 PM ET) and "Fast Money " (5PM-6PM ET).
Video can also be found on www.cnbc.com.
All references must be sourced to CNBC.
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SIMONS ON WHERE HE WAS DURING FLASH CRASH
JIM SIMONS: I was-- I wasn't on my boat. But I was certainly-- got a call. I got a call, and-- from-- from Peter Brown, I think. He says, "Jim, you should know the market's down whatever it was, nine percent or ten percent." I said, "It is?"
MELISSA LEE: What was your reaction?
JIM SIMONS: I said, "It is?" And he said, "No, wait a minute, it's only down eight percent." I said, "It is?" He said, "No, now it's only down seven percent." Oh, now-- so-- my-- I didn't even have time to react to-- the first piece of news, by the time I was getting the second piece of news that whatever-- whatever it was, it-- it-- it was coming back. I said, "Well, what did we do?" And he said, well, we did the obvious thing. We cancelled some orders because it was-- there-- there was this m-- these minutes of tumult. So you don't necessarily-- run in-- tumult. Now--
MELISSA LEE: Cancelled the orders? Did-- did Renaissance actually step away? Because that was what a lot of high frequency traders did, they stepped away from the market thinking that their trades would be broken.
JIM SIMONS: Sure. We stepped away to s-- we stepped away for one round of-- of-- of putting down trades. But we came back. See, when the-- when the specialists of the-- of the old days stepped away, they always stepped away. And the s-- the specialists were pictured as people who would, you know, keep order in the market. They were the first ones to run-- once the-- once their-- their order book was exhausted. They weren't gonna spend very much of their own money-- supporting some crashing thing, so they would step back.
JIM SIMONS: All the specialists would step back, and you'd get these big gaps. So-- high frequency traders, low frequency traders, everybody for a few minutes stepped back when they saw that kind of sharp, sharp decline. It was just plain human nature.
JIM SIMONS: And-- so-- but-- then-- then it-- then it-- then it recovered. So I would say that was-- that was-- a good thing. Obviously, the recovery was a good thing. And it showed the system was-- was pretty robust, as I said, again, in spite of the exchanges making it more difficult by having conflicting rules.
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SIMONS ON HIS MARKET OUTLOOK
JIM SIMONS: What's my take on the market? It's-- surprisingly resilient-- as far as I can see. I would've expected it to be lower. I-- definitely pred-- predicted the bond market right. I-- I knew that it was gonna go through the roof, although-- not everyone agreed with that. But it certainly has been extremely strong.
JIM SIMONS: But I just felt the bo-- stock market-- but I don't know. Some companies are making money, and-- and that-- and that's okay. So my thought on the market, it's resilient, and-- and maybe-- you know, it won't go much lower. I think that housing prices will go lower from-- from whatever I can tell. I think consumer spending is gonna come back at a very slow rate.
MELISSA LEE: Right.
JIM SIMONS: Because the nation's balance sheet has been decimated. People just don't feel as wealthy 'cause they're not as wealthy.
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SIMONS ON WHAT CAUSED FLASH CRASH AND WHY HIGH FREQUENCY TRADING HELPED THAT DAY
MELISSA LEE: There's such a fascination-- with high frequency trading, with black box trading, with computerized trading, can man actually compete against the machine. And funds like yours have been vilified-- in the press, and in just, sort of, the public discussion as-- the source for many of the p-- market's problems, the-- the reason why there was a flash crash on May sixth. What do you tell people?
JIM SIMONS: Well, of course, we don't know the reason for the flash crash-- detailed reason. It seemed to be caused by the absolute normal thing that some people-- just didn't wanna trade-- especially buy when things were-- were dropping like a shot, and some orders got canceled. That was exacerbated by-- one of the exchanges stopping and the other-- another principle exchange not.
MELISSA LEE: Right.
JIM SIMONS: So that the folks who would normally-- maybe step in-- to buy something on-- on New York, I think it was-- couldn't, and so there was-- there was less-- there-- they could go to the alternate-- thing. So-- it didn't last for very long. Can you compare the flash crash with the crash of '87 (?)?
JIM SIMONS: Now, the crash of '87, the market went straight down 22, 23 percent, or whatever it was in a few hours. Nobody stepped in to stopped it. And everybody was selling, and it ended up flat on its back where it stayed for, you know, weeks and months, and-- gradually crawled back. And I said, oh well, you know.
JIM SIMONS: Now, that was caused by portfolio insurance, one of the dumbest products ever. But there it was. And everyone was-- wants to-- certain-- stop loss points-- game, all these portfolio insurance companies were selling and selling to protect their-- their customers. But of course, everyone sells at once, you see what happens. Flash crash lasted seven minutes, maybe.
MELISSA LEE: Yeah.
JIM SIMONS: Seven minutes? Seven minutes in a time when one exchange closed and the other one didn't. And even through that, after seven minutes, there was enough action came back, enough people came back, and the whole thing was reversed, or-- or-- it-- it ended up being-- a much smaller drop. And that-- and that was the end of that.
JIM SIMONS: In my opinion, the system worked beautifully compared to the way it worked, in-- in spite of these-- these-- these conflicting signals that the two exchanges gave off-- compared to October of 1987, 23 years earlier-- I think-- so I think high speed trading is great. It creates tremendous amount of volume, it's brought down the s-- the spreads
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SIMONS ON STILL HIRING MORE FOREIGN PHDs AT HIS FUNDS
MELISSA LEE: You see this in your own business. When we spoke a few years ago, you talked about hiring PhDs. I think you've got about 90--
JIM SIMONS: Yeah.
MELISSA LEE:--on staff at Renaissance.
JIM SIMONS: Yeah.
MELISSA LEE: And most of them are from abroad.
JIM SIMONS: Most of them are from abroad.
MELISSA LEE: Has there been any improvement? Has it gotten worse?
JIM SIMONS: Oh, it's gotten worse. Oh, sure. It will continue to get worse. (LAUGHTER) Yeah. I mean-- you know-- it's just-- American kids are not going in to math and science when they leave high school in the numbers that they should-- in part-- because they're not prepared, and in part, because they're not inspired.
JIM SIMONS: And that's the job of teachers. So those guys and gals filter up through the-- through the system. Some of them-- get the education they need, but-- but-- but many don't. And so we have to import people. And we've been doing it more and more. And so it hasn't improved
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SIMONS ON TEACHING VS WALL STREET
MELISSA LEE: Do you find it a little bit ironic that people who might be interested in math, and-- and gifted at math might choose to go to Wall Street because it's simply more lucrative, than into something like teaching? Do you feel--
JIM SIMONS: Do I find it ironic?
MELISSA LEE: Well, I mean, you're-- you're trying to--
JIM SIMONS: It's human nature-- you know.
MELISSA LEE: Well, it's human nature, of course. But here you are, you're trying to attract the best, or-- or very bright people in to the field--
JIM SIMONS: Right.
MELISSA LEE:--of teaching--
JIM SIMONS: Yes.
MELISSA LEE:--and at the same time, you run a very successful hedge fund that needs mathematicians, and so you have somebody there who's gifted at math, and you have two roads to choose, and they might choose the more lucrative, which--
JIM SIMONS: Yeah.
MELISSA LEE:--is a path to your hedge fund, or-- or many others, or a Wall Street firm out there.
JIM SIMONS: Sure. Well, you know, everyone-- what we wanna do is tip the scale, to some extent, so that having a career, let's say, as a high school teacher is not as-- as-- let's see. How do I-- how do I put it? Is at least com-- to some extent, competitive with-- you know, having-- a career on Wall Street.
JIM SIMONS: I mean, obviously, you're gonna make more money on Wall Street. But you shouldn't necessarily get more respect. And the money that you make in-- as-- as a high school teacher needn't be solo. That-- you know, people have-- different-- different goals-- different things make them happy
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MELISSA LEE: Who got your old office?
JIM SIMONS: Well (LAUGHTER), I don't know, actually.
MELISSA LEE: Oh, really? Oh.
JIM SIMONS: In Long Island, nobody. It was fixed up as-- sort of a two person visitor office. I saw that yesterday. And in New York, there's an obvious person to move into it, but I'm not sure he's had the-- the temerity, or whatever. (LAUGHTER) No, I mean, I don't know. I-- I--
MELISSA LEE: To assume (LAUGHTER) your office?
JIM SIMONS: Maybe they wanna make a shrine out of it, which-- which I doubt. So someone will move in.
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