10 CHAPTER ◆ 1 Introduction
- Project time line with firm deliverables and gates.
- Clearly defined gate documents and review for initial and continuing capital
funding.
The methodology presented in this book should cure these diseases. At each step of our
methodology, we will provide best practice medicines to mitigate relevant operational and
project risks. Quality, built in from the start, can control all manner of risk.^17For automated, high-frequency trading systems, annual maintenance costs can
exceed $5 million a year in addition to start-up costs of as much as $10 million
according to the Wall Street Journal. Already, “ we ’ re seeing banks that only
[a few] years ago made a decision to build their own trading systems now cutting
back, because they weren ’ t able to turn around large projects fast enough ” or bear
the projects ’ expense, according to a vice president of one software firm.^18 Further,
as hedge fund attorney Paul Roth notes “ most hedge funds fail for operational rea-
sons rather than for poor investment decisions. ”^19 Development of and adherence
to a systematic process of trading/investment system evaluation and implementa-
tion drives competitive advantage. Management costs and operational risk control
clearly differentiate superior from inferior performers.^201.8.1. Goals of Our Methodology
The goal of our methodology is Quality Money Management. More specifically, we
define the goals of Quality Money Management to be as follows:● Build trading/investment systems that deliver better performance to investors.
● Shorten the trading/investment system design and development cycle, the time it
takes to turn a trading idea into a finished, working system.
● Formalize the process and increase the speed with which new trading ideas are eval-
uated and either discarded or promoted, called strategy cycling.
● Formalize the process and increase the speed of recognizing and shutting down trad-
ing/investment systems that no longer have a competitive advantage.
● Reduce the total cost of trading/investment system design and development.
● Provide seed capital investors with a real options model for capital burn rates and
stepped commitment of capital.
● Formalize a process of developing, building, and packaging working trading/invest-
ment systems for sale to larger institutions.
● Enable seed capital providers to better allocate scarce resources and prioritize indi-
vidual trading/investment systems within a portfolio of competing systems.
● Lengthen the maturity stage of working trading systems through continuous
improvement.
● Satisfy the demand by investors and regulators for greater transparency through
greater and standardized documentation.
● Create a taxonomy of risk for trading/investment system development and manage-
ment and employ best practices to reduce risks.
● Provide a mechanism for effective self-evaluation, the preferred form of oversight in
the financial industry.