August 2004
Intermediate to advanced
224 pages
5h 35m
English
Content preview from Pairs Trading: Quantitative Methods and Analysis
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CHAPTER 5
Overview
HISTORY
The first practice of statistical pairs trading is attributed to Wall Street quant Nunzio Tartaglia, who was at Morgan Stanley in the mid 1980s. At the time, he assembled a group of mathematicians, physicists, and computer scientists. Their mission was to develop quantitative arbitrage strategies using state-of-the-art statistical techniques. The strategies developed by the group were automated to the point where they could generate trades in a mechanical fashion and, if needed, execute them seamlessly through automated trading systems. At that time, trading systems of this kind were considered the cutting edge of technology.
One of the techniques they used for trading involved trading securities in pairs. The process involved identifying pairs of securities whose prices tended to move together. Whenever an anomaly in the relationship was noticed, the pair would be traded with the idea that the anomaly would correct itself. This came to be known on the street as “pairs trading.” Tartaglia and his group employed pairs trading with great success in 1987. The group, however, disbanded in 1989. Members of the group found themselves in various other trading firms, and knowledge of the idea of pairs trading gradually spread. Pairs trading has since increased in popularity and has become a common trading strategy used by hedge funds and institutional investors. ...
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