Principles of Quantitative Development

3.1 PRE-TRADE ACTIVITIES

After commissioning a trading platform and before the first trade is booked in it, we have to complete a series of validation and approval steps at the product level (see Figure 3.1). These general steps include evaluating the structured product and modelling it. First, the mathematical quants develop the model and deliver it in the form of a standalone program or source code. The developers then integrate the model into the trading system. After the integration, the model validation team in the middle-office analytics team (usually under market risk management) verifies the model characteristics and implementation. The model is then presented for user acceptance tests. Once these steps are completed successfully, a trader is ready to book the first instance of the product.

In addition to these general pre-trade activities, we have other specific trade-level steps to complete before each trade. First of all, the sales team has to make a sale, which involves term sheet generation, negotiations and contract evaluation in the light of ISDA or netting agreements.

A novel product is approved and added to the product repository in a trading platform as the end point of a pricing model from a quant. For a quant, the most interesting point of a trade is the mathematical model behind it. Once he figures out how to write down a closed-form solution for the price and sensitivities of the derivative under consideration (or puts it in a numerical form or a Monte Carlo ...