Introduction Quantitative trading is the job of programming computers to trade. Quant trading combines programming and trading. Programming is the fastest way to take an idea and turn it into reality compare it to writing a book, publishing, etc or to architecting a building, getting zoning permits, doing construction, etc. Trading is the most direct approach to making money compare it with starting the next facebook, programming, hiring, advertising, etc or to creating a retail chain, hiring, waiting for money to ow in to reinvest, etc. Combining programming and trading, you have the most direct path from an idea in your brain to cash.
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Introduction Quantitative trading is the job of programming computers to trade. Quant trading combines programming and trading. Programming is the fastest way to take an idea and turn it into reality compare it to writing a book, publishing, etc or to architecting a building, getting zoning permits, doing construction, etc.
Trading is the most direct approach to making money compare it with starting the next facebook, programming, hiring, advertising, etc or to creating a retail chain, hiring, waiting for money to ow in to reinvest, etc. Combining programming and trading, you have the most direct path from an idea in your brain to cash. And so on. Traders are disproportionately well-represented so are trust funders. Note that this is only the US.
In many countries such as Russia, corruption is a better career path. List above from Forbes. Quant trading is intellectually very satisfying because it draws heavily from elds as diverse as computer science, statistics, math, psychology, economics, business, operations research, and history. I thought about running my own automated trading programs from my dorm room. I started a website about automated trading to document ideas and to hopefully meet some interesting people. It has become one of the commonly known trading blogs and opened a lot of doors.
This script summarizes the content on my blog, Max Dama on Automated Trading maxdama. In a few months I will be joining a high frequency trading rm and will be restricted from updating the site.
The purpose of this script is to give you the knowledge to get a job in the eld. That is a huge body of information but I will give you enough to be a great asset to any quant group. I will give you advice on which companies to join, how the interviews work, and what other skills you should develop before graduating.
This script also serves as the course notes for the Quantitative Trading Course I started and taught at UC Berkeley for my last four semesters. It is an accredited student-led class with enrollment of around 15 each semester. The content has evolved over the last 2 years but generally it has served as a place to meet other people interested in quant trading on campus in addition to the lectures.
As such, we play a couple of games Fix-it and a Pit Trading Simulation, which are included here. I expect the audience for this script will be pretty diverse. It has parts that are inappropriate to some readers, but I know most quants are already used to jumping around when they read books about trading to 2 try to extract all the useful bits, and sift through the mumbo jumbo and ller.
I have attempted to omit all the ller and of course mumbo jumbo. Besides this sentence, I try to ignore this compulsion. This book has a lower price than any other book on quant trading because I have no editor. It has fewer pages because the pages are much bigger to accommodate code more clearly. Please take it for what it is. The best way to read this script is to jump to sections you are interested in. However, read the Risk and Execution sections sequentially because they follow a logical ow.
If you are completely new to quant trading, e. Please email me at maxfdama gmail. Industry Work shall set you free 2. The content is ctional but draws lots of questions about how markets and dierent products function. It is many students rst introduction to how markets work. Sketches on the whiteboard are a big part of the lecture but are not included here. Wall Street seems pretty complicated today, but if you look at how trading started, its much easier to understand.
Arabia 0 B. The mix of banks, hedge funds, prop shops, dierent strategies, trading frequencies, etc, is confusing. This is a simplied picture. I recommend front oce buy side jobs and the rest of the course explains the knowledge needed for the job. Here is a simple taxonomy of the eld, including the sell side since some strategies can be augmented using derivatives and since algorithmic execution can decrease transaction costs: Front Oce Asset management at a big bank.
Hedge fund strategies constrained to prospectus Prop trading fastest moving Matlab, Java, Functional Languages. The easiest way to understand the dierence between the buy and sell side is to think of an IPO. The sell side is the investment bank which prices the oering and markets it. The buy side, consisting of hedge funds, insurance companies, and pension funds, learns about the new shares available from the sell side and buys them if theyre interested.
Front oce refers to someone who interacts with clients or works in a revenue-generating group. Back oce quants facilitate the front oce team whenever they have a request. Front and back oce describe the organization of big banks there is less distinction at hedge funds and prop shops. To summarize the easiest cookie-cutter career path in a sentence, its best to start in the front oce on the sell side, specialize in a certain product, and then transition to the buy side about halfway in your career around VP level of course staying front oce.
Its also becoming more common to jump straight into a quant hedge fund or prop trading group right out of college and skip the banking years. The distinctions are sometimes hazy. The frequency a rm trades monthly, daily, millisecondly, etc has a big impact on the rms investment strategy. High Frequency - intraday: hardware is key 4 Market Making Get inside the bid-ask spread and buy low, sell high Arbitrage Take advantage of things trading at dierent prices on dierent exchanges or through dierent derivatives Momentum If its going up, its going to go up more: lters are key Mean Reversion If its going up, its going to go down: lters are key Low Frequency - monthly holding period: bigger better models win Relative Value model stock-vs-stock by management quality, accounting criteria often normalized by sector , analyst estimates, news, etc Tactical Asset Allocation model sector-vs-currency-vs-commodities by macroeconomic trends, commodity prices, FX rates: the key word is factors - research them and add them to the companys model Specialty Emerging market for example the India Fund Behavioral model human-vs-self News Based text mining, web scraping, NLP 2.
The best way to get a job is not to carefully court a specic rm, but to apply to as many as possible. However it is usually the rst step available to new grads to get into the industry. Its hard to say which banks are good or bad because it varies desk to desk, product to product. Derivatives When most people talk about nancial engineering, they are referring to derivatives. Derivatives are not a topic of this script either so I briey give the main idea of them here and then move on.
Most derivatives are just combinations of swaps and options. You should already be familiar with options. Swaps are basically pieces of paper that entitle the signing parties to get money from each other depending on what happens in the future. For example interest rate swaps entitle one party to payments based on the level of lets say LIBOR while the other gets xed payments. Another example are credit default swaps which entitle one party to a lump sum of cash if a company fails to pay interest on a loan defaults while the other gets periodic payments in normal conditions.
A nal example are equity swaps. A bank will buy a stock you want to own and then sell you a peice of paper saying you owe them for it. The bank hedges their risk by selling the stock and you dont have to worry if there is a tech bubble because you essentially dumped your stock.
In general, derivatives are designed for one or more of the following reasons: Avoid or shield taxes Decrease capital or margin requirements Repackage risk factors ex. In Chicago it will mean using a computer to place trades to try to make a prot.
In New York it means to use a computer to work client orders to try to minimize impact. We will talk more about algos later in the context of transaction cost minimization. However realize that this is one popular quant job for college grads. Brainteasers When you laugh, the world laughs with you. When you cry, you cry alone. Korean proverb I never wanted to do brainteasers.
I thought I should spend my time learning something useful and not try to game job interviews. Then I talked to a trader at Deutche Bank that hated brainteasers but he told me that he, his boss, and all his co-workers did brainteasers with each other everyday because if DB ever failed or they somehow found themselves out of a job even the boss , then they knew they would have to do brainteasers to get another.
So I bit the bullet and found out it does not take a genius to be good at brainteasers, just a lot of practice. In this section are brainteasers I have gotten in interviews with quantitative high frequency trading groups.
Given that you see an H, what is the probability that it was the HH coin? Explain in laymans terms. Flip fair coins. You are oered a bet that the sum is less than You can bet 1, 2, How much will you bet. How much will you bet if someone tells you that the sum of the coins is less than ? Roll a die repeatedly. Say that you stop when the sum goes above What is the probability that the second to last value was X.
Make a market on this probability. Ie what is your 90 percent condence interval. Two envelopes next to each other are picked up and shued. One is given to you and one is given to your friend. You and you friend then open your own envelopes, look inside, and then decide whether or not to oer to trade.
If you both agree to trade, then you will swap. Should you oer to trade? Generate N random values from a random variable where the value N comes from some other variable.
Trading Code Collector
I thought about running my own automated trading programs from my dorm room. I started a website about automated trading to document ideas and to hopefully meet some interesting people. It has become one of the commonly known trading blogs and opened a lot of doors. It includes a lot of material I never put on the site though. In a few months I will be joining a high frequency trading firm and will be restricted from updating the site.
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