When Quants Open Up

It's been a rough fall, and the proof is in the numbers. Anemic job news and dire warnings from Europe have not provided businesses, political leaders or ordinary citizens with much hope of ending the year on a high note. In fact, at press time, September 2011 was the single worst month for hedge fund performance since the same time in 2008. And we don't need a reminder of what happened on Wall Street then. Meanwhile, as Europe teeters and the U.S. Congress stalls, the stock markets have been as volatile as ever. One day they're up 100 points, and the next they are down 200.

Adding to the drama, we now have protesters occupying Wall Street. While the aims of the protests might be lofty in locution and yet vague in execution -- more income equality, less greed -- there were a few signs among the crowds calling for the reinstatement of, of all things, the Glass-Steagall Act. It's nice to see that someone knows his Depression-era financial history.

A portion of the blame for the market's current volatility and the great divide of wealth in this nation can be laid at the feet of algorithmic trading. In the six years since we began publishing Advanced Trading, hedge funds have taken off, and algorithmic trading has simply exploded. It's been a period of true change, during which high-frequency trading has flourished thanks to faster technology, widespread connectivity, and smart formulas designed to sniff out liquidity and make huge deals in less time than it takes to blink your eye.

In a recent special issue of Advanced Trading, the 2011 Quant Gold Book, our editors profile four traders who are leading their firms in the high-speed race. In getting to know these quant traders, we found out a few things about them that surprised us. First, despite the general fear of volatility characterizing the environment, they actually love it. And second, the idea that the buy side shies away from building its own technology is bunk; buy-side firms do indeed build their own tools. In fact, one Gold Book honoree has homemade trading, execution and TCA tools and even handcrafts her own algos. The idea of using a third-party formula never even occurs to her, she says.

Also in that same issue, editor-at-large Ivy Schmerken takes us on a tour of brokerage firm ITG's New York trading floor and provides an inside look at JP Morgan's newly renovated electronic trading services. In addition, associate editor Justin Grant delves into hedge funds' bleak outlook, and in further quant news, I speak with a noted London quant professor who says today's risk programs all have a fundamental flaw that traders are happy to exploit.

Maybe the protesters have a point.