Quality Money Management : Process Engineering and Best Practices for Systematic Trading and Investment

100 CHAPTER ◆ 9 Research Quantitative Methods

that copycats ’ access to information is delayed. The advantage is that copycats pay lower

research costs.^4 Information can be gleaned by:

● Observing positions that the competitions ’ trading/investment system takes.

● Gathering information about the strategies and technologies the competitor uses.

● Searching for quantitative methods that replicate the competitor ’ s performance.

● Comparing the performance of a copycat system to the performance of the competi-

tor ’ s system.

Information will come from within the organization and external to it. Traders, quants,

programmers, and even human resource and sales and marketing professionals deal on

a daily basis with vendors, news media, other traders, professional associations, patent

attorneys, and academics and will hear about impending competitive pressures. Mutual

funds publicly disclose their portfolio holdings periodically, revealing which stocks or

bonds the fund manager believes are undervalued. That is useful information to competi-

tors. Also, public pensions regularly hold meetings where money managers compete for

investment dollars. Fund overseers usually grill managers about strategies and expenses

at these meetings, which are often by law open to the public. Attending these meetings

can reveal a lot about what your competition is doing and how they sell.

The Vanguard Group stopped reporting information about the net cash flows into its funds because

third parties were apparently using this information to trade ahead of Vanguard funds, thereby raising

Vanguard ’ s effective cost of executing stock transactions. 5

Though not as simple, information can sometimes be had on the Internet, at trade

shows and conferences, and by interviewing industry experts, even by talking to or inter-

viewing the competitions ’ customers and employees (for some firms this is part of their

routine), and by reading marketing materials and prospectuses. Sometimes vendors will

brag about how your competitors use their system. Whatever the case, information can

be filed on paper or in a database so that when new information comes along, it can be

quickly linked to similar information that had previously been found.

9.2.1. Reverse Engineering

Reverse engineering is the process of capturing the specifications of existing trading/

investment systems and then using the information as a foundation for designing a new

system. The new design could be a replica of the original or an entirely new adaptation of

its underlying strategy. Reverse engineering can be viewed as the process of analyzing a

system to:

● Identify the system ’ s components and their interrelationships.

● Create prototype models of the system in another form or a higher level of abstraction.

● Create the technological implementation of that system.

Reverse engineering includes any activity a product team may engage in to determine how a

trading/investment system works, or to understand the strategies and technologies that make

it run. Given, for example, a competitor ’ s returns, the product teams perform regression and