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

102 CHAPTER ◆ 9 Research Quantitative Methods

from building the prototypes (in the following step, K|V 1.3). In this step, team mem-

bers should document the logic behind the trading/investment system in an unambiguous

statement of how prototypes will calculate the results. Clarify a quantitative method first;

replicate second.

Researching quantitative methods means doing some leg work. Team members

assigned this task, namely, the financial engineers, will either derive some proprietary

algorithms or more likely go to the library and Internet, find white papers, published

papers, working papers, and books, and assemble resources and articles. All of the

resources, information, and articles should be organized into folders and the folders cata-

loged by title, concept, and author. (Building an organized library of quantitative methods

is a key to the long-term success of the firm.)

We recommend that researchers standardize the formats of equations. Beta in one

paper may not mean the same thing as beta in another. Some notation conversion must

take place to standardize all the equations into a common format. Also, calculations

should be labeled with journal names and page numbers. These documents should each

have a cover sheet and be placed in bibliographical order.

We recommend product teams do a complete survey and identify all appropriate meth-

ods in order to exhaust all of the information that may exist in the research data, includ-

ing intercorrelations and potentially all of the relevant projections. This process will start

with empirical research, followed by an attempt to improve results with additional, theo-

retical research. (Research is often an imitation, or replication or corroboration, of the

research of others, done with little understanding of what lies beneath the surface or con-

sideration to the process of discovery. The search for better, though not perfect, perform-

ance must be the ultimate objective of research.)

We know a major trading firm that uses a model for a common tradable instrument that is known to be

incorrect. We figure if they had performed a full survey of the body of knowledge, they would be making

even more money. One day the market will punish them.

All equations and algorithms used in trading/investment will inevitably fall into one

of four categories:

1. The model will be used successfully in a production environment.


2. It will be used in desperation for lack of or inability to implement a better model that
   will invariably cause losses and additional cost of rework sometime down the road.


3. It will be totally unusable and discarded.


4. It will be placed into an inventory of models for future research.

9.4. STEP 2, LOOP 3: Consolidate Trading/

Investment System Design

The final loop of system specification is to assemble the component quantified methods

and business rules and fully define the outputs that the trading system will produce. Also

in this final pass over Step 2, team members must agree on what information team mem-

bers and management will require in the form of GUI and reports to oversee the fully

operating trading system, that is, in Stage 4, including what is the purpose of each report

and what will be the appropriate level of detail.