Career: Trader or Quant?


This can happen for a number of reasons.

Strategy Identification

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Private Support Private support - nobody else could see your topics except you and us. Use this thread ONLY for sensitive things you don't want others to see! Ask other forum users to help - either for free or as paid service. This frees you up to concentrate on further research, as well as allow you to run multiple strategies or even strategies of higher frequency in fact, HFT is essentially impossible without automated execution. As an anecdote, in the fund I used to be employed at, we had a 10 minute "trading loop" where we would download new market data every 10 minutes and then execute trades based on that information in the same time frame.

This was using an optimised Python script. In a larger fund it is often not the domain of the quant trader to optimise execution. Bear that in mind if you wish to be employed by a fund. Your programming skills will be as important, if not more so, than your statistics and econometrics talents!

Another major issue which falls under the banner of execution is that of transaction cost minimisation. There are generally three components to transaction costs: Note that the spread is NOT constant and is dependent upon the current liquidity i. Transaction costs can make the difference between an extremely profitable strategy with a good Sharpe ratio and an extremely unprofitable strategy with a terrible Sharpe ratio.

It can be a challenge to correctly predict transaction costs from a backtest. Entire teams of quants are dedicated to optimisation of execution in the larger funds, for these reasons. Consider the scenario where a fund needs to offload a substantial quantity of trades of which the reasons to do so are many and varied!

By "dumping" so many shares onto the market, they will rapidly depress the price and may not obtain optimal execution. Hence algorithms which "drip feed" orders onto the market exist, although then the fund runs the risk of slippage. Further to that, other strategies "prey" on these necessities and can exploit the inefficiencies.

This is the domain of fund structure arbitrage. The final major issue for execution systems concerns divergence of strategy performance from backtested performance. This can happen for a number of reasons. We've already discussed look-ahead bias and optimisation bias in depth, when considering backtests. However, some strategies do not make it easy to test for these biases prior to deployment.

This occurs in HFT most predominantly. There may be bugs in the execution system as well as the trading strategy itself that do not show up on a backtest but DO show up in live trading. The market may have been subject to a regime change subsequent to the deployment of your strategy. New regulatory environments, changing investor sentiment and macroeconomic phenomena can all lead to divergences in how the market behaves and thus the profitability of your strategy.

The final piece to the quantitative trading puzzle is the process of risk management. It includes technology risk, such as servers co-located at the exchange suddenly developing a hard disk malfunction. It includes brokerage risk, such as the broker becoming bankrupt not as crazy as it sounds, given the recent scare with MF Global! In short it covers nearly everything that could possibly interfere with the trading implementation, of which there are many sources.

Whole books are devoted to risk management for quantitative strategies so I wont't attempt to elucidate on all possible sources of risk here.

Risk management also encompasses what is known as optimal capital allocation , which is a branch of portfolio theory. This is the means by which capital is allocated to a set of different strategies and to the trades within those strategies. It is a complex area and relies on some non-trivial mathematics. The industry standard by which optimal capital allocation and leverage of the strategies are related is called the Kelly criterion. Since this is an introductory article, I won't dwell on its calculation.

The Kelly criterion makes some assumptions about the statistical nature of returns, which do not often hold true in financial markets, so traders are often conservative when it comes to the implementation.

Another key component of risk management is in dealing with one's own psychological profile. There are many cognitive biases that can creep in to trading. Although this is admittedly less problematic with algorithmic trading if the strategy is left alone!

A common bias is that of loss aversion where a losing position will not be closed out due to the pain of having to realise a loss. Similarly, profits can be taken too early because the fear of losing an already gained profit can be too great.

Another common bias is known as recency bias. This manifests itself when traders put too much emphasis on recent events and not on the longer term.

Then of course there are the classic pair of emotional biases - fear and greed. These can often lead to under- or over-leveraging, which can cause blow-up i. As can be seen, quantitative trading is an extremely complex, albeit very interesting, area of quantitative finance.

Jul 27, 1. Onamor , Jul 27, Jul 27, 2. You may be overestimating your employment prospects. I too have a masters in physics, and, on top of that, some fairly interesting background in software engineering I've been sending copies of my resume to prospective finance employers for the last couple of months, I hit up all major investment banks and a couple of recruiters. I'd started studying some quant textbooks, but I obviously can't put that into the resume, and, seeing as how the employers don't even acknowledge the receipt of my emails, I really don't see the point any more.

My feeling is, you really need to have a masters in financial engineering to be able to get into the industry. Masters in physics does not cut it the way it used to 10 years ago.

Besides, we're dealing with bureaucratic behemoths GS, for example, has 40 thousand employees , those systems tend to demand conformance. If you don't conform, unless you have a man on the inside, not much you can do. But I'm sure that we have more knowledgeable people who can answer your questions from their perspectives. Here's my perspective though. Finance is not the only avenue for an intelligent person, nor is it the most intellectually rewarding one.

People go into finance for the money. If you don't want to get into physics as well you shouldn't, since you're not in China and you don't need a green card , and you want to do something that matters, look elsewhere.

If you want to have a foot boat, a maid, and a gardener, get a MFE, and do it while you're single and you don't have to support a wife and kids. Jul 27, 3.