Quantitative Trading ARI SIEGEL PRINCIPAL TURNING WHEEL CAPITAL [email protected] What is Quantitative Analysis? “A business or financial analysis technique that seeks to understand behavior by using complex mathematical and statistical modeling, measurement and research. By assigning a numerical value to variables, quantitative analysts try to replicate reality mathematically.” – www.investopedia.com Observe behavior Counting Statistics Price movement vs. technical vs. fundamentals Market moves may not repeat, but they often rhyme Where quants work Buy side Hedge Funds Banks Other prop trading desks (Trade, Insurance co’s, etc.) Self Sell side Sales & Trading Derivatives Hedging Quant Roles Trader Programmer Analyst P/L vs. non-P/L Strategy generation vs. analysis and programming What is a trader? A trader buys or sells securities in a market. Execution Discretionary Proprietary Market Maker Floor Trade Speculator Trader vs. Securities Analyst TRADER Direction Size Entry Price & Strategy Hold time Risk Management Exit Price & Strategy Act on Analysis P/L Responsibility High Compensation Long Hours Ever-morphing puzzle ANALYST YES NO ? YES (ROUGH) NO YES NO ? ? YES YES? How to find a Quantitative trade Idea (observation, original thought) Data collection Price/technical/fundamentals database Charts Internet Other resources Data scrubbing Testing – pencil/paper, Excel, statistical software Trade it in small size for some time Scientific method Statistics Conditions Forward expectation Average move (Mu) Standard Deviation (s) # of observations (n) T-score = Mu / (s/SQRT(n)) Regressions, neural networks, AI Quant Trade Process Part 1 Find a Trade Conditions Short term Long term Seasonal Intermarket Test Compare to other patterns, current data Quant Trade Process Part 2 Create a plan Direction Size Entry (Price, Time) Exit (Price, Time) What ifs Quant Trade Process Part 3 Trade your plan Entry issues Unusual moves What ifs New data – change the plan? Exit issues Quant Trade Process Part 4 Improve your trading Track trades P/L Short vs. Long Decisions – overrides, adds, longer holds, etc. Analyze trading results Optimize Evolve Quant Trading Scenarios Black box vs. Human execution System vs. Discretionary Unusual circumstances Changing Cycles Efficient Markets??? NOT ALWAYS! Trading Futures What are futures? Physical vs Financial, delivery vs cash-settled Index futures S&P 500 futures= Very liquid Very transparent (marked-to-market each day) Low commissions ($2.40 per $74,000) High leverage Low barriers to entry Managed futures My Company – Turning Wheel Capital Start up trading business similar to hedge fund Manage money for outside clients and myself Began Jan 1 2007 with $25,000 of my own $ while working at a hedge fund August 1 2007 $62,000 in assets, my own $ November 2007 $1.2MM in assets, 3 outside clients Goals February 2008 $3MM AUM November 2008 $10MM December 2009 $100MM My background Victor Niederhoffer 2004-2007 apprenticeship MBA, Yale SOM 2004 Start up companies 1999-2002 Poker 1997-1999 Start up companies 1994-1997 Music 1988-1994 NYU B.A. Music Technology 1992? UNC-Chapel Hill 1987 Money making personality Appetite for risk Analytical mind Competitive Driven to win Sports, Poker, Games Survivor Quant Trader Characteristics Puzzles, games Counting Logical, analytical, problem solving Music Patterns Be a star Figure out what you truly want – 95% of the game Be honest with yourself and others Take risk – but try to weigh consequences Hold out for what you want – don’t settle Trust your gut – have conviction Do your own research – question the experts Don’t be a sheep Try to be the best in your field, reach for brass ring Focus on the process and the results will come 800% return in 2007 Market Wizards by Jack Schwager Questions?