The future of quantitative trading methods is at risk of being indistinguishable from anything else in a transition to a new quant landscape where its success, warns TABB Group in new research, will require magnitudes more data.
"Micro-market structure arbitrate strategies are near full saturation across all asset classes, products and regions," says TABB principal Paul Rowady, director of data and analytics (DnA) research who wrote "Propeller-Head Ubiquity: The Next-Generation of Quantitative Trading."
It details the current landscape, views on the future landscape based on a March 2014 survey of market participants, recent regulatory filings by two leading proprietary trading firms and TABB’s internal knowledge base. It also showcases four components of competitive advantage, a firm’s "special sauce," and how they are shifting across quant trading.
"Rankings were different than what we expected," says Rowady.
TABB’s original hypotheses drawn from a 2011 report by Rowady, "Quantitative Research: The World After High-Speed Saturation," was that firms engaged in the highest-turnover strategies, primarily focused on US equities, would need to look elsewhere, focusing in other regions, asset classes and products, including slower turnover frequencies, during an era TABB labeled "Multidimensional Alpha."
Based on new data, TABB has an updated vision for quant trading’s future:
- Saturation has spread beyond US equities into other regions, products and asset classes. Today, fewer players are capturing more of the available theoretical capacity for global high-speed alpha. At the same time, that theoretical capacity has been shrinking (due mainly to volatility suppression strategies deployed by coordinated central bank interventionism).
- That said, the future for quantitative methods has never been brighter. According to Rowady, "Our multi-dimensional alpha concept is still intact, but the bridge from here to there, as we said in 2011, will require new skills and the digestion of considerably more data."
- Quantitative methods will continue to permeate more of the traditional investment strategy spectrum and front-to-back office workflows to the point of "propeller-head ubiquity."
"Oddly enough," says Rowady, "ubiquity will shroud quants in a cloak of invisibility. Automated methods will become indistinguishable from everything else, since automated methods are becoming an increasing component of the whole."
TABB also believes the highest-speed strategies are approaching the limits of their native capacity in the current environment, particularly in cash equities and futures-based strategies in equity-index and commodities. FX market-making strategies across both futures and spot likely have room for incremental growth.
This new generation of quantitative research and trading is not a greenfield, Rowady points out, or even a tilted battlefield. The pattern recognition and performance needs are much more complex than in the high-frequency era. "Firms singularly focused on speed, with less diversification today, are either already gone, or in the process of making an impossible transition."
For those firms that can make the transition, requiring a global, high-performance computing infrastructure capable of identifying and harvesting volatility spikes in a relative-value manner anywhere, at any time, may successfully become a long-standing member of the multidimensional alpha era. Then again, says Rowady, it’s important to remember legendary quant firms have played there for over 20 years.