Inside the Black Box: The Simple Truth About Quantitative Trading

Chapter 1. Why Does Quant Trading Matter?

Look into their minds, at what wise men do and don't.

—Marcus Aurelius, Meditations

John is a quant trader running a midsized hedge fund. He completed an undergraduate degree in mathematics and computer science at a top school in the early 1990s. John immediately started working on Wall Street trading desks, eager to capitalize on his quantitative background. After seven years on the Street in various quant-oriented roles, John decided to start his own hedge fund. With partners handling business and operations, John was able to create a quant strategy that recently was trading over $1.5 billion per day in equity volume. More relevant to his investors, the strategy made money on 60 percent of days and 85 percent of months—a rather impressive accomplishment.

Despite trading billions of dollars of stock every day, there is no shouting at John's hedge fund, no orders being given over the phone, and no drama in the air; in fact, the only sign that there is any trading going on at all is the large flat-screen television in John's office that shows the strategy's performance throughout the day and its trading volume. John can't give you a fantastically interesting story about why his strategy is long this stock or short that one. While he is monitoring his universe of thousands of stocks for events that might require intervention, for the most part he lets the automated trading strategy do the hard work. What John monitors quite carefully, however, ...