Curated Interviews From Quants: Algorithmic Trading and High Frequency Trading (From Reddit’s IAmA) Part 2

What is it exactly that quants do?

This is the third post in a series of curated interviews from Reddit’s IAmA subreddit, a place where individuals of various professions and backgrounds can request the community to “ask me anything”. There has been a lot of new readers to the blog recently, so I strongly recommend new readers to first read my first post on investment bankers and my second post on algorithmic trading and high frequency trading.

I have selected some curated questions and responses from that, in my opinion, comprise some of the best quant/algorithmic trading/high frequency trading interviews on Reddit.

IAMA 100% automated independent retail trader. I trade around 800k to 1.5 million shares a day and make 2cents/trade on average. AMAA

  • What books do you recommend?

Early on, I was in nasty drawdown period and I was having trouble figuring out what was off. I made the same mistake virtually all traders make, I caved to the vast collection of trading psychology books. When the guy mentoring me found out what I was reading, he gave me the following gem: Only pikers worry about psychology, either you have an edge and you exploit it, or you don’t have one and you lose and chase every other excuse.

Trading and Exchanges
Options, Futures & Other Derivatives
Option Volatility & Pricing
Volatility Trading
Dynamic Hedging

99% of finance books are garbage, but those are the ones I thought helped me in some way or another. There’s also plenty of interesting research papers if you’ve got access to some databases.

  • What was your process in developing your model?

I don’t have just 1 strategy/model/whatever you want to call it. I have a portfolio of 6 strategies, the oldest being the one I initially started out with. I have had to retire several strategies. When a strategy falls below benchmark performance I evaluate and then either continue or retire it. My strategies range from high accuracy with 2:1 risk:reward ratios to low accuracy and low risk:reward ratios. When I develop a model, I attempt to exploit some fundamental behavior whether that be news, volume, trader driven. From there, I systematically formalize rules and test.

  • What is your process in strategy development? In other words, how were the patterns discovered?
  • I rarely look at bar/candlestick charts. I’ll peek at one after hours or when I pull up the S&Ps or something like that. I personally don’t put much weight into price patterns/indicators, so I tend to ignore those. That being said, I do visualize data to spot behavior, such as mean reversion. I have a whole suite of scripts in Matlab and more recently R to help me analyze timeseries. When I develop a strategy, I lay down what I’m trying to exploit. For example, if I notice that an instrument is poised to be range bound for some period of time, I’ll go with a mean reverting model and adjust as needed.
  • I do use volume, but it’s become a diminishing factor.
  • I use any information I can get my hands on. From tick data to fundamentals, news, relative strength to other equities, etc.

IAmA High-Frequency Trader. AMA.

  •  I seem to get that it’s a very computer-oriented thing, so what exactly are you doing? Telling the computer what to do? What was your field of study in college?

 Mainly, we create statistical models of a variety of products in order to have some type of predicted price. I was in Computer Science, making the discrete math and probability right up my alley.

  •  What kind of resources would one need to pull together a high frequency trading program?

My best estimate: about half a dozen people, six to twelve months, and about $5-10 million to get a workable (but simple and narrow) high frequency trading firm. The capital needed for trading isn’t very high, but the technological outlay is pretty big.

  •  Legal issues aside, how easy is it (if it’s possible at all) for an employee to take the system/software and run a copy at home for his own gain?

 Impossible. The amount of money that must be spent on infrastructure to even think about putting together a simple HF trade is probably close to the $10 million mark. Plus, you have no reason to. Work on your trade at work, and, while you won’t get 100% of the profits, you’ll get a good enough chunk to make up for all the infrastructure you get.

Algo Trader at a NYC HFT firm

  • Where exactly do you come in? I assume you are not executing or approving individual trades (as they would be moving way to fast), nor do you seem to be writing the code. (I might be wrong here.) Are you setting strategy – i.e. something like “today we are going to try to exploit the spread between natty gas and crude”?

Good question, because you’re right – I am neither writing code, nor manually trading all day. What it comes down to is really watching everything, and reacting. Not everything can be automated. This may sounds simple, but it takes a holistic understanding of both your products, your aims, your markets, your exchanges, to do it well. There are times when for 2 hours i will be doing nothing than doing mental math, checking that every trade the system does is good. This is in quiet times.

Then there are times, when for some reason an algo starts building up a huge position. And the limits we have on it need to be increased, because we see opportunity. I must manually change this, then think, wait, how will this affect our exposure in X industry. What is our interest rate and currency exposure. Which exposure do I want? Which exposure do fellow desks have? How big do we want to go? Who is the counterparty, if there is a way to know? How can I adjust the algo settings? Maybe be more, or less aggressive? Think about similar algos, how they trade similar ways, and we need to tweak them relatively?

These are a few of the concerns that I automatically consider as I see all my trades aggregating, and I start to make decisions based on all the news and information I have coming into me, be it from Bloomberg, from brokers, even CNBC if I’m too busy to be reading. I cant leave this up to the computer because there is always a human element. And like we all know, leaving it in control of machines can lead to unexpected black swan disasters due to glitches or random inferior machine logic.

  • Say you have a trading idea. How do you test it?

We have databases full of old tick data that we backtest on, but most of them you are pretty certain will work and will just put into use. This is simply by experience and just knowing the markets – as a simple example, if we can have our computers read the ECB’s interest rate announcement first, and be the fastest to trade, we will clearly make money. Most are far more complex, but that’s the idea – most should work. If it loses for the first few days or hours, we retool it and can eventually dump it. But that’s rare – even if it makes only a bit, we keep it. Leverage is used for general company wide leverage, not specific per trade. Books – Hull is one of the basics. Trading ideas, you would probably learn more from reading all of Wikipedia’s finance tabs, Investopedia, and the various industry biographies – like FIASCO, Liar’s poker, Genius Failed, Den of Theives, etc. The more algo based strategies are almost all derivatives of basic trading ideas, just faster. Some elaborate stat stuff, but a lot of it is quite simple. And the elaborate stuff no one is going to share, sorry.

  • Can you explain/describe what your average day is like?

Get in around 7, having read some sort of financial publication on the way to work. Spend first half hour checking positions, reviewing current FX rates, how the Japan markets closed and how the Euro ones have opened, make sure nothing happened in the futures markets to move anything too much. Read general news. Next hour prepping systems, various manual checks and such, checking strategies, double and triple checks, never can be too sure. Then prep for market open.

During open hours, need at least 2 guys of 3 at my desk at any time, one to be eyeing and checking every trade that comes through, another to be doing accounting/admin/checking positions/pnl/random stuff with backoffice and risk. Of course, monitoring, retooling, reacting and pre-acting on various information that comes along.

Then by the close make sure all positions are as we want, otherwise we would have to act on them on the close – various ways to do this, or work with the japanese markets and australians as they start up – or futures – or fx – theres always a market to work on/in.

Then finish up mundane tasks of finishing the day and closing the books by 5 or so. Until 8 or whenever we feel like going home, working on new strats. Sometimes do this intraday depending on vola.

  • I want to do some side investing with my money. Any books that you recommend and particular strategies I should pay attention to?

Totally depends on your risk profile, capital levels, and access to markets.
Go to the local library and read every book on the markets and trading they have. I’d say that would be around 100 books, if you know everything in them you’ll be set. The biggest mistake people make is not knowing enough before they start. Really only trade a few thousand to get a feel for trading, while you are reading and learning, and until you can objectively look at yourself and say, I am more knowledgeable than 80% of market participants. That may take a year of reading a few books a week until you seriously start trading, but it’s the only way to be truly successful.

I will be posting more interviews soon, so please follow Curated Alpha via Email, RSS, or Twitter.

Related posts:

  1. Curated Interviews From Quants: Algorithmic Trading and High Frequency Trading (From Reddit’s IAmA) Part 1
  2. Curated Interviews From Quants: Algorithmic Trading and High Frequency Trading (From Reddit’s IAmA) Part 3
  3. How to Make Money in Microseconds: A Primer on High Frequency Trading
  4. 10 Curated Interviews from Investment Bankers (From Reddit’s IAmA)
  5. Curated Interviews From Traders (From Reddit’s IAmA)

One Response to Curated Interviews From Quants: Algorithmic Trading and High Frequency Trading (From Reddit’s IAmA) Part 2

  1. Brett Kennedy

    Would like to say I love your blogs and as a finance student entering my senior year, your posts have helped me think about what I’m getting into and how to get a start on this stuff. Would love to see more, keep it up!

    -BK

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