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Trading Technology

04:00 PM
Greg MacSweeney
Greg MacSweeney
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Quants Are Taking the Fun Out of Investing

Quants are Wall Street's version of the highly-efficient and near emotionless NFL scoring machine: the New England Patriots.

I don't profess to be an expert on football's 3-4 defense, but I am a fan of the game. And this season it has been amazing to watch the efficiency and skill of the still-unbeaten (13-0 at press time) New England Patriots. The Pats have posted 38.7 points per game, which is almost eight points better than the average per game score of the league's most potent offensive teams since 2000 (30.8 points). Moreover, the Patriots are outscoring their opponents this year by an average of three touchdowns (21.6 points) a game.

The Patriots are treating the rest of the league like a highly paid practice squad. The team's quarterback, Tom Brady, is in total control on the field, throwing for 4,095 yards and 45 touchdowns (so far). In a game driven by emotion, power, speed and toughness, the Pats' quirky coach, Bill Belichick, has turned football into an almost emotionless, statistical process of scoring touchdowns while rewriting the definition of excellence for an NFL team.

Meanwhile, on Wall Street, quantitative analysts are taking the adrenaline out of trading and turning the traditional method of stock picking into a game of spreadsheets and algorithms. Much like the way in which the Patriots and Brady pick apart opposing teams' defenses, the quants are looking to exploit the inefficiencies of the market to build better trading models. To be fair, the quants haven't developed a model that can dominate the market like the Patriots have done to the other NFL teams, but it could come soon.

Still, the Patriots didn't reach this level overnight (though they have won three Super Bowls since 2001). It took a few years of tweaking to turn the Patriots into the juggernaut we see today. Similarly, on Wall Street, quants continue to refine their models. But algorithms powered by high-performance computing and low-latency data feeds already have supplanted many traders. And as models improve, the role of the trader will continue to evolve and likely decrease in importance. It's only a matter of time before quants discover the secret sauce that will allow them to change the face of trading forever.

But is the dominance of program trading a good thing? Yes, if the change is for the better. Could it be bad? Sure -- just look at how financial innovation moved CDOs so far ahead of risk management and regulation that they almost crippled the economy. Good or bad, model trading will dominate. But when it does happen, will you be playing for Wall Street's version of the Patriots, or will you be with the rest of the Street on the practice squad?

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio
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