Quants: The Math Geeks Who Run Wall Street

Quants: The Math Geeks Who Run Wall Street

13 mins read

If you’ve ever wondered what quants do, you’re not alone. The secretive and exclusive community of mathematicians and computer scientists has been quietly taking over Wall Street, and most investors don’t even know it yet.

At their core, quants are highly educated people who use sophisticated algorithms to make buy and sell decisions about the stock market, helping investors of all levels with everything from high-frequency trading to investment advice based on historical data.

On Wall Street, the quants rule, and they’re only getting more powerful. But who are these math geeks who dominate trading floors and determine your retirement account’s fate? And what do they really do? This article explains quantitative trading, and how it works—and why it doesn’t always work as planned.

What are quants?
Quantitative analysts, or quants as they are often called, are a group of highly skilled people who use computer models and advanced math to create trading algorithms.

( Quants Definition )

For these people, computers are an essential tool for their work; programming skills and math skills alike are critical to success in quant trading.

Although many quants work at financial institutions like banks or hedge funds, others choose to go out on their own as independent traders. And some even start their own research firms with other quants so that they can continue developing more efficient algorithms.

Becoming a quant isn’t easy; it typically takes at least a bachelor’s degree in computer science or applied math, and many are Ph.D.s. In addition to knowledge of programming and math, many quants come from finance backgrounds as well, which gives them an edge when it comes to understanding current financial trends and anticipating what may happen next.

How do quants affect the market?

If you want to run a hedge fund—or any other sort of trading operation for that matter—you need someone like Sergei Ponomarev. You also might want him on your side during tough times in financial markets, when price swings and flash crashes are more likely.

A large portion of the market is managed by computers that are programmed with these complex algorithms, which weigh a multitude of factors at once and make decisions accordingly.

This type of quantitative analysis can help explain some of the trends that dominate trading in the stock market on any given day, such as how Dow Jones stocks tend to trade based on their relationships with other members of the index.

Some quants, who are known for working long hours when trading takes place and avoiding social activities, are rumored to have more control over certain parts of the market than others. In reality, though, most quants do nothing more than program computers to follow a specific set of instructions; they cannot (by themselves) single-handedly control any part of the market.

That’s because he can make quantitative models work when others fail—and those models are increasingly how money is made and lost on Wall Street. But what is a quant? And what does one do exactly? To answer those questions, let’s start at the very beginning, which on Wall Street means looking at what stockbrokers used to do.
These days brokers mainly facilitate trades and answer questions about stocks and bonds. In theory they provide investors with all sorts of information so they can invest wisely. In practice, most traders don’t know much about fundamentals or even really care.

Instead they look at charts or listen to their gut feelings (or get their feelings from pundits). In either case they react emotionally to market changes, buying low and selling high in an attempt to outperform other investors (which is nearly impossible over time). This kind of active investing leads inevitably to periods where too many people buy or sell simultaneously—creating a bubble or crash.

How Quants Affect the Markets

What would happen if you could apply a mathematical algorithm to profitably and consistently predict short-term price movements in stocks? Well, there’s been a group of smart people who have taken that question very seriously over the past 40 years, and their answer is called quantitative analysis.

Quantitative analysis (sometimes called quantitative trading or more commonly quants) uses data analysis and complex computer programs to make predictions about securities. In other words, quants use math to play stock market games for real money.

If you’re familiar with scientific fields like physics or chemistry, you know that it can take decades for new theories to go from test tubes to commercial applications.

Some quants are incredibly accurate, while others are just lucky or overconfident. It’s not uncommon for quants to sell their models as one-size-fits-all investment approaches. But that’s dangerous, because an investor who picks a quant with a poor track record is likely to lose money in short order.

If I were working on Wall Street, I would want to work with people who are right almost all of the time and very rarely wrong, says Baruch Lev, a finance professor at New York University’s Stern School of Business. One strategy can’t always be right and that means your financial adviser will probably have certain assets that have done well and others that have underperformed over time. 
Quants have proven to be a profitable tool for investing
. Their accuracy—measured by their ability to capture profits when investing in stocks—has significantly improved over time, although there’s still a lot of variance in predictions depending on which models and data sets you use.

Even so, quant strategies are now firmly entrenched in many financial institutions and hedge funds and account for nearly half of all equity trades (although they’re not typically available to retail investors). If you think that sounds like something you might want to try with your own investments, let’s take a closer look at how it works.

Successful Quantitative Traders
Yes, quants are often math geniuses and are constantly examining numbers. However, they are much more than that. They have to be creative and innovative, think in new ways and see different opportunities in any marketplace they touch.

Quants also need to communicate well with other employees or partners on their teams who aren’t as familiar with mathematical terminology.

A good quant will go beyond mathematics alone – some of them even report having a bit of an artistic side when it comes to looking at trends or other elements that could alter their strategies for success.

Overall, if you want to be a quant trader, you should have analytical skills, creativity and common sense paired with knowledge of math concepts such as calculus, probability and statistics.
Over time, some quants have made a name for themselves by being particularly successful with their strategies.

One example is Dr. James Simons, who has been described as a math genius and currently holds positions as both chairman of one quant hedge fund and chief executive officer at another. He founded an investment firm that now makes up a significant part of his $14 billion net worth.

Other well-known quants include David Harding, who was named 2012 Investment Manager of the Year by Euromoney magazine, and Peter Muller, founder of hedge fund PDT Partners LP who frequently appears on Bloomberg to share his insights on trends in financial markets and trading activities.

Can a Retail Trader use Quantitative Methods?

Yes, a retail trader can use quantitative methods as long as it is done right. A retail trader must fully understand that in many ways they are starting out at a disadvantage compared to institutional traders.

As a rule of thumb, quantitative trading strategies should have an edge over other traders in order to make money consistently for a retail trader.

Using quantitative methods does not guarantee that a trader will make money nor does it increase ones chances of success. Traders need to put in extra time and effort and should be ready to accept less than expected profits from their automated trading program(s).

Retail traders can’t able to compete with them,They are called quants for a reason, they are mathematicians and have a different way of looking at things. It is similar to when you look at a football game in slow motion; you see things that you cannot see at full speed, such as quarterback’s hand movements and receiver’s motions.

For example, there are over 10,000 daily stocks listed on various exchanges in North America alone. Quants have figured out ways to pick successful trades ahead of time using high speed computer systems using statistical analysis applied to all past data available.

Their results should be more consistent compared to retail traders who spend less time with their trading programs and place more trades than professional traders with quantitative methods.

What i can learn from Quants?
Quants, which stands for quantitative analysts, are a group of traders who use math and algorithms to buy and sell stocks. Many quants first find an edge in options, futures or currency markets, then apply it to stocks; some even use their knowledge from one market to try to predict moves in another.

Knowing where and when Quantitative analysts trade is difficult because they rarely discuss their trades publicly. However, we do know that quants have been key players during various market panics such as Black Monday in 1987 and after 9/11 — as well as 2008’s global financial crisis.

In fact, many quants had been warning about impending crashes since 2000 but were either ignored or dismissed.

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