The Two points of discretion for a quant trader

Came across a couple of interesting articles about quantitative traders recently. One of the most intriuging ones was one about an editor diving into the depths of the High Frequency Trading realm.  The article does well in shedding some light over the entire industry of HFT.  A salient point that i picked out below was this:

Narang lifted his profile on May 6 when he revealed to the Wall Street Journal that his firm turned off its high frequency trading computers during the flash crash. Tradeworx wasn’t the only one to do so. Kansas City–based Tradebot, started by BATS founder David Cummings, also stopped trading. Tradebot is one of the world’s two largest high frequency firms, reportedly trading as many as 1 billion shares a day in U.S. equities. Only Chicago-based Getco is thought to be bigger. Although Getco won’t comment on its daily trading volume, a spokeswoman for the firm did tell me that it continued to provide a two-sided market on all the electronic exchanges during the flash crash.

For all the modeling in the world, there are events whereby you know that your system will not perform resilient in. The choice is then to choose whether to turn it off or not. Other times an old model does not work anymore, as evidently shown by the equity curve of the system. The choice then is to whether to turn it off forever or make changes.

The next point of discretion for a systems trader would be the underlying logic behind it:

At Renaissance, models had to meet four principles, says Mr Frey. These were (and maybe still are): simplicity – “don’t make it more complicated than it needs to be”; commonality – “make it as broad as possible”; stability – “models you have to readjust constantly probably aren’t as good as ones that stand the test of time”; and rationality – “it can’t just be statistically valid”. You have to employ reason to identify a statistically significant but spurious pattern.


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