The Origins of Pairs Trading at Morgan Stanley

Pairs trading's popular origin story traces to a quantitative research group inside Morgan Stanley in the early-to-mid 1980s, led by mathematician Nunzio Tartaglia, who brought together physicists, mathematicians, and computer scientists to look for statistical rather than fundamental trading signals — a notable departure from the discretionary, story-driven trading that dominated Wall Street at the time. The idea they landed on was simple to state: find two stocks whose prices have historically moved together (same sector, similar business, historically correlated), and when their prices temporarily diverge from that normal relationship, short the one that has become relatively expensive and buy the one that has become relatively cheap, betting on the spread converging back rather than betting on either stock's direction.

The strategy reportedly produced strong returns for Morgan Stanley through the mid-1980s, and its success helped legitimize systematic, quantitative approaches to trading within large investment banks, seeding a generation of quant desks and hedge funds — some founded by alumni of Tartaglia's original group — that built on the same relative-value logic with increasingly rigorous statistical tools like cointegration testing.