Sunday, September 30, 2012

Winning against the Quants

You can read the full article Here.

Nicholas Colas, group chief market strategist at ConvergEx, recently attended an algorithm-themed conference, and discovered — to his surprise — that quants aren’t really like regular people.

I was a stranger in a strange land, but there’s a strong case to be made that adoption of this quant-first approach to investing is set to accelerate.

Most computerized trading models try to either do something faster than a human trader/investor, or do it more consistently. We can’t beat them on speed, so forget the first one. But can a human investor learn what these new algorithms will look for, and then base an investment style around front-running the machines? Or at least stay out of their way.

There is a lot of money to be made adding fundamental and news inputs to what are still pretty brute-force high frequency trading strategies. This will happen, and quickly. The second is that this approach is very rules based, and is subject to the same fad-chasing practices as the “Traditional” money management community. There will still be outperformance to be had as this transition occurs – you’ll just need to be a step ahead of the machines.

My Notes: Nicholas Colas says that computerized trading models and high frequency trading is here to stay. Yet, individual traders can outperform because of a simple reason: Most models will start doing the same thing - the herd mentality. The Trader can shift focus, change tactics and do better than the herd of computers. Sounds good to me.


Zumit Zingh said...

Couldn't agree more. The psychology of trading can never be static. After all there are so many out there to catch the pattern and make money. I believe high frequency trading is more associated with scalping where before the pattern is established, the trader book the profit and get out. But then these traders are professionals and retail traders like us shouldn't tread these paths.

Dinesh said...

Dear Sir,

I worked in the IT industry for more than 20 years and can say that in this kind of scenario it is possible to program every known strategies with a speed which human brain can not imagine. So, by the time someone finds an opportunity, the software had already initiated and may be closed the trade by making profits. Although, I agree that software could do only what it had been told /programmed and is not like a human brain which can spot a completely new opportunity.
I think the solution lies in using software and also keep improving on it by adding latest strategies that humans have spotted. There are data mining softwares available too. This type of softwares can use terabytes of real data to do business intelligence and spot new strategies which can be programmed.