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Financial Engineering: The Evolution of a Profession by Cara M. Marshall, Tanya Beder

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Chapter 15

Quantitative Trading in Equities

Kun Gao

Tudor Investment Corporation

INTRODUCTION

Equity trading began when the Dutch East India Company issued the first stock in 1606. During most of the more than 400 years that have followed, equity trading was treated more like a game than a science, and many of the more famous players in this game were speculators. But over the last 60 years, advances in financial theory set the stage for a more scientific approach. Together with the rapid development of computer technology and the increasingly fast speed with which information is disseminated, these theoretical advances sparked a quantitative revolution over the past 30 years. The combination of advances in financial theory, mathematics, computer technology, and informational access, together with dramatic reductions in trading costs, have inspired a new scientific approach to the trading of equities that has come to be known as quantitative trading.

Quantitative trading is the systematic trading of securities using rule-based models and executed through computer algorithms. These computer models, sometimes called systems, are often based on economic theory or patterns observed in the market, fully backtested using historical financial data on a large number of stocks across a long period of time, and encoded in programs to be traded automatically via computers with little or no human intervention.

Selected Key Events in Quantitative Equity Trading

1982: James Simons, a noted ...

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