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Phil Albinus
Phil Albinus
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The Secrets of the Quants

How does an algo take flight? What are hedge funds demanding? An experts spills the beans.

Yesterday, Advanced Trading visited the offices of a major global investment firm -- no names, titles or hints, sorry -- and we spoke with a senior head of trading. Nice guy, smart and very well-versed for a propellerhead. Here are some highlights of what he told us:

Are buy side firms and hedge funds asking for customized algorithms? Yes, not only that but they are asking for customized algos for different traders inside their firm, he told us. So, if AT Editor-at-Large Ivy Schmerken and I started our own hedge fund you would create separate algos for us, I asked. Yes, he said. Say Ivy does more high-speed trading in different asset classes she would get a high-speed algo and if I were to do some low risk, low-paced trading in a specific asset class, like in fixed income, I would have my very own algo.

How long does it take to create a new algo? Six months, start to finish, he told Advanced Trading. It starts with a concept and then it goes to their quants and they work on it. Sometimes the buy-side firms will even put in their requests for features or attributes. It is stress tested inside their investment firm and then a beta version is sent to a few clients who put it through its paces.

Things weren't so formalized in the old days. Back then, he recalls, someone would write a new formula on the white board and then shout out to the trading floor to tell everyone to stop trading. "Then you'd type in the new algo, send it to everyone on the floor and tell them to go ahead and use it."

I asked if they had a basement full of Russians who do the quantitative formulas. He chuckled and swept his arm to the people outside on the open office area. I asked about the origins of the first Wall Street quants being exiles from the Russian navy who did calculations for war games back in the 1980s. "More like physicists and rocket scientists," he said.

Are we going to see more events like the Flash Crash of 2010? Our investment firm expert doesn't think so but he did say that we have had other events like the Flash Crash before 2010 and no one made much of a fuss. He then turned to his desk and brought out a copy of an SEC report from a flash crash -- dated 1962. Apparently one day back then, stock prices plummeted and people were left scratching their heads as to where the liquidity went.

The Kennedy-era SEC report had a few recommendations that sound rather familiar to current ears. "The summary said the industry should do everything it can to shore up the market, limit short sellers and put in systems to slow down or stop trading in events of this small crashes," he paraphrased.

Looking over his glasses, he smiled and said, "This sounds like it could have been written today."

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio
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