Inside the Black Box: A Simple Guide to Quantitative and High Frequency Trading, 2nd Edition

CHAPTER 11

Criticisms of Quant Trading

Computers are useless. They can only give you answers.

—Pablo Picasso

Recently, and periodically in the past, people have loved to hate quants. In 1987, a quant strategy known as portfolio insurance was blamed for the crash that occurred that October. In 1998, people blamed quant models for the LTCM crisis and the near-collapse of financial markets. In the summer of 2007, though, it might well be that the tide of public opinion turned from leery and suspicious to overtly negative. There could be many and various reasons for this sentiment. Some of the predilection is likely owed to widespread hatred of math classes in grade school, some of it to fear of the unknown, and some to occasional and sensational blowups by one or several black boxes. But, as is the case with many things that are not widely understood, the arguments against quant trading range from entirely valid to utterly ridiculous. It is worth noting that almost every type of trading in capital markets faces valid criticisms. In other words, quant trading, like any other type of trading, has its pluses and minuses.

This chapter addresses many of the most common criticisms of quant trading and some of my own. Where relevant, I also present counterpoints in defense of quants.

TRADING IS AN ART, NOT A SCIENCE

The markets are largely driven by humans' responses to the information they receive. Not all this information is understandable systematically. Furthermore, the process by which ...