Quantitative trading

Quantitative trading (also called quant trading) involves the use of computer algorithms and programs—based on simple or complex mathematical models—to identify and capitalize on available trading opportunities. At the back end, quant trading also involves research work on historical data with an aim to identify profit opportunities.

How Has Quantitative Trading Evolved?

Earlier, markets were physical and floor-based, where traders and market makers interacted, agreed on a security, price, and quantity, and settled the trade on paper. Among other qualifications, a loud clear voice and a good strong build were considered an asset for trading job aspirants because these made them impressive on the trading floor.

As markets became digital with global reach and expansion, the floors emptied out. Traders who had little to offer but a loud voice began to vanish, making way for the computer-savvy techies. Electronic markets offered vast expansion, loads of trading data, new assets, and securities, and there came the opportunity for data mining, research, analysis, and automated trading systems.

In the last two decades, MBAs and Ph.D. holders in finance, computer science, and even neural networks are taking traders' jobs at reputed trading institutions.

The Profile of a Quant Trader

A quant trader may work for a small-, mid- or large-size trading firm for a handsome salary with high bonus payouts, based on the generated trading profits. Employers include the trading desks of global investment banks, hedge funds, or arbitrage trading firms, in addition to small-sized local trading firms.

Today, getting a trader’s job at established firms often requires a specialized master’s degree in a quantitative stream (MBA, Ph.D., CFA), unless one is a seasoned trader with proven work experience. Other less experienced younger quants can start at small-sized firms, or start as junior analysts and work their way up over a long period, although it is a fiercely competitive field.

What Are the Steps to Become a Quant?

Most firms require at least a master's degree, or preferably a Ph.D., in a quantitative subject (mathematics, economics, finance, or statistics). Master's degrees in financial engineering or computational finance may also be effective entry points for careers as a quant trader.

If you hold an MBA degree, you will likely also need a very strong mathematical or computational skill set, in addition to some solid experience in the real world in order to be hired as a quant trader.54

Alongside their educational requirements, quant traders must also have advanced software skills. C++ is typically used for high-frequency trading applications, and offline statistical analysis would be performed in MATLAB, SAS, S-PLUS, or a similar package. Pricing knowledge may also be embedded in trading tools created with Java, .NET or VBA, and are often integrated with Excel. 

The Bottom Line

A quant trader’s job and associated perks appear very lucrative, but the ones qualifying for this highly competitive field need multifaceted skills, knowledge, and temperament. Quantitative traders usually have a moderate success rate, and many diversify or move out to other streams after a few years due to burnout. Apart from all the necessary infrastructure, skills, and knowledge, one needs to have the right mindset to be successful as a quant.

credit: investopedia