Quality is never an accident; it is always the result of high intention, sincere effort, intelligent direction and skillful execution.

—William A. Foster

So far in our tour through the black box, we have seen how quants determine what portfolio they want to own. Quants build alpha models, risk models, and transaction cost models. These modules are fed into a portfolio construction model, which determines a target portfolio. But having a target portfolio on a piece of paper or computer screen is considerably different from actually owning that portfolio. The final part of the black box itself is to implement the portfolio decisions made by the portfolio construction model, which is accomplished by executing the desired trades.

There are two basic ways to execute a trade: either electronically or through a human intermediary (e.g., a broker). Most quants elect to utilize the electronic method, because the number of transactions is frequently so large that it would be unreasonable and unnecessary to expect people to succeed at it. Electronic execution is accomplished through direct market access (DMA), which allows traders to utilize the infrastructure and exchange connectivity of their brokerage firms to trade directly on electronic markets such as ECNs. For ease, I will refer to any type of liquidity pool—whether ECN, exchange, or otherwise—as an exchange, unless a specific point needs to be made about a particular type of market center.

Several points bear ...

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