4 CHAPTER ◆ 1 Introduction
1.3. Quality and Trading/Money Management
The most successful financial firms operationalize quality through trading/investment sys-
tem design and development processes. Leading a proprietary trading firm, hedge fund,
or mutual fund organization successfully requires managing in a systematic manner—
understanding the product team ’ s work and learning to better allocate their efforts.
Success results from continually improving systematic knowledge-based innovation and
the effectiveness of value-stream processes.
Firms that clarify the fuzzy front end of new trading/investment strategy development
and rapidly investigate hundreds of opportunities, either discarding them (and failure
should be celebrated) or exploiting them, now succeed at the expense of slower firms.
Firms that minimize new trading/investment system development time and expenses,
ongoing management costs, and operational risk provide better returns relative to firms
that are less efficient.
As with all services, however, simply monitoring outputs of a trading/investment sys-
tem will render a firm almost completely helpless to affect the outcome. Traders can-
not inspect returns and prevent delivery of imperfect performance. Once a hedge fund
loses all of its investment capital, it ’ s too late. Does this mean that quality methods,
such as Six Sigma, design of experiments (DoE), and Lean, cannot be applied to trad-
ing and money management services? Certainly not, but it can only be done by con-
trolling the ex ante processes that deliver the trading/investment performance, where
performance and risk data feed back into the system ’ s trade selection and execution algo-
rithms. So, two processes, or systems, exist and can be controlled in trading and money
management:- The process of designing and developing a trading/investment strategy and
its required technologies controlled with product realization (or value stream)
processes. - A working trading/investment system generating measurable performance metrics
controlled with statistical process control (SPC) since the underlying processes are
non-stable, stochastic, and uncontrollable.
Now a common misconception is that quality takes too long. Since individual trading/
investment ideas may be profitable for only a short time, speed to market is paramount.
Anything that appears to slow development is skirted if at all possible. (This is human
nature and generally only addressed after catastrophic failure.) If, in the end, a particu-
lar idea has potential for long-term profitability, only then is adding quality control even
considered. More mature industries, like manufacturing, have overcome this shortsighted
view and adopted quality management techniques. Quality it turns out actually speeds,
not hinders, development.1.4. Managing the Process of Trading/ Investment
System Development
Management at trading and money management firms face many obstacles to success-
fully managing the development and operation of trading/investment systems. These
obstacles are not unique to finance. They are the same problems facing just about every
firm that is engaged in new product development and launch.