Quant Trading

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Jim Simons | The Man Who Solved the Market | Book Highlights

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For the first time close to 15 odd people asked me to review a book. Something that has never happened to me before. Seems the author and the publisher of the book have done a good job of promoting the book. Nevertheless it was an interesting read, not particularly insightful for someone who has already done his bit of research about Simmons and Medallion and their likes.

However, I would still call it a recommended read for anyone interested in trading. The book does a good job of emphasizing the role of short-term trading strategies in making Medallion what it is.

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What constitutes Quant Trading and what does not?

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What constitutes Quant Trading?

Those of you who follow Indian finwit would have noticed the sudden appearance of the word “Quant”, as if almost everyone has had an overnight epiphany, and in some cases akin to some sort of ‘born again’ revelation. To me it looks like a thoroughly misplaced appropriation of the term. Read on to know more.

So let me clear the air about what actually is Quant Trading, the word Quant refers to Quantitative and Quant Trading is essentially a subset of Quantitative Finance.

Late Prof. Mark Joshi had written a note titled “On Becoming a Quant” in which he intelligibly describes what Quants do.

The operative word here is “mathematical models”. Of course this can include probabilistic and statistical models as well.

So to sum it up, Quant trading is the application of Mathematics, Statistics and Probability theory in the area of trading.

For example, if you are looking at a simple Moving Average Cross over system, you may want to calculate the Conditional Probability and the Probability Distribution for various outcomes in terms of price. But merely trading a Moving Average Cross over system without having done the statistical work does not qualify as Quant trading.

Moving further, it’s important to understand that the Quant piece can be independently applied to the various aspects of trading. In other words you can use Quantitative analysis to find an edge through back-testing, likewise you can access the risk of various outcomes, you can also use Quant for execution to determine optimal sizing at a given point, and so on.

You can call yourself a Quant, if you are using Math or Stats for any of these applications.

The exhibit below is excerpted from the book - Inside the Black Box: A Simple Guide to Quantitative and High Frequency Trading (Wiley Finance Book 885) eBook: Rishi K. Narang - (On a side note, its a must read for any aspiring Quant)

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What does NOT constitute Quant trading?

Mere use of numbers in your trading does not constitute Quant trading. For example you may use number to denote, Price, Volume, Time, Average Time or derivatives of price as Average Price etc. But that does not mean you are a Quant.

You may also use numerical data representing, Bid Price or Ask Price / Orderflow or any numerical variable for that matter. However esoteric the variable may be, it still does not mean anything, so long as no Math or Stat model has been used by you in arriving at it.

I am sorry that things have gotten to a point where I have to say this, but they have. Look at the text I recently received. I rest my case here.