Quant trading is a redundant term: all trading is quant trading. Whether your an arbitrageur or a technician, fund manager or high frequency trader, you are basing your trading on the quantitative analysis of the market, you just might not realize it.
A lot of times there seems to be an artificial divide between the realms of quant trading, technical analysis, and fundamental analysis. Ultimately all these disciplines are really just exercises in data science; every market participant attempts to use the quantitative tools at their disposal to best their competitors.
At times there can be quite a bit of derision from one side to the other; in many ways they resemble rival churches, complete with zealots, scriptures, and holy sacraments.
In practice, however, the term, quant, is usually reserved for a segment of the market which sits in reverence of the constructs of momentum and volatility. Their scriptures include the work of Jegadeesh and Titman; their gospels are numerous. Quants have even endured their own schisms: the forking of absolute and relative momentum, for example. This group elevates the power of mathematics to sublime levels, attempting to conjure the unobservable into reality: they create volatility and correlation based trading instruments and engage in the dark arts of dynamic hedging.
Traders and investors who rely on lines drawn on charts are implicitly using a quantitative model that assigns informational value to these lines. They call some lines support and some resistance, but in either case these lines are assumed to act as repelling barriers, constraining price movement. In this trading model, when prices cross these barriers it is considered significant: break-outs and break-downs can occur. Trend lines projected into the future serve as attractors, pulling prices consistently in a direction. This church’s holy relics include chart patterns like the “cup and handle” or “bull flag” and their ranks are numerous. This can turn their chart patterns into self-fulfilling prophecies.
Algo traders are by defintion quants: their strategies have no logic without mathematics and their actions are driven solely from a stream of data. This church worships speed, data, and execution efficiency. Algorithms have splintered into three sects: high-, medium-, and low-frequency which are divided by their time frames. Like the Knights Templar, HFT’s have become targets for sovereigns jealous of their accumulation of vast treasure hoards and military power (the race to zero latency is often referred to as an “arms race”).
There are many reasons to specialize. As our technology and concepts become more advanced they become harder to wield with skill. Segmenting ourselves into one group or another reduces the complexity of our existence and makes it possible to become a true expert on a subject.
There are dangers to such rigid segmentation, however. I have found that time and again that I produce my best ideas when I’ve been thinking about a broad range of topics. This cross-pollination of thought is necessary to transcend the boundaries imposed by ideological silos.
The good thing about finance is that something that sounds heretical today can become ubiquitous in the future, especially if it works.
What’s heretical, powerful, and bound to become ubiquitous in the future?
Categories: Quantitative Trading