Winning Isn’t Just About Being Faster, It’s About Being Better

Quant and prop traders share perspectives with Weng Cheah, Managing Director of Xinfin, about the evolution of high frequency trading.
It is unsurprising that we feel swamped by our rapidly changing industry. However, to bring some experience to these words, I had a number of conversations with quantitative and proprietary trading professionals who are responsible for managing money for themselves, or in a fund. Whilst it is not appropriate to name these individuals, the following reflects some of their perspectives.
Trading has changed dramatically in the last 25 years; firstly in that we are no longer physically present in the pit. One US-based hedge fund manager I spoke to went so far as to say that the industry had “never seen so much change in one person’s lifetime.”
This ‘electronification’ of the markets was the necessary catalyst to what has been a continuous evolution in trading, where technology has been a constant companion. However tempting it is to assume, one thing is certain, where we are today did not start by someone saying “I need to be microsecond quick to win.”
Information Process
The investment process tries to manage uncertainty by seeking information that can be sorted into a model through which we can understand the value of an asset. Information is at the heart of all investment, what is curious is that all investors do not select the same information.
There are those who will research the company and build fundamental models from the financial statements and returns as their basis for trading, and a tactical allocation model based on how macroeconomic trends could set their trade quantum.
However, there are also traders who would look at asset price history and examine price actions to set their strategy. As one US-based fund manager said “the price of corn knows more about corn than I do” reinforcing the idea that price is the source of all information.
Quantitatively they recognise that they can increase their absolute return without taking on any additional risk, by stepping up the frequency of trading. Although transaction costs are higher, this is more easily managed than market risk.