12 CHAPTER ◆ 1 Introduction
1.10. THE KEY: Design Your Own Process
Trading and investment firms and strategies come in all shapes and sizes, and there are cer-
tainly various methodologies in use in different sectors of the financial industry. To simplify,
we will apply our concepts to a trading/investment firm consisting of top management and
financial engineering, trading or portfolio management, information technology, and risk man-
agement departments. Within this structure, we will assume that top management provides
seed capital for trading/investment system development and provides investment capital either
on its own or through a distribution mechanism. Additionally, we will assume that manage-
ment oversees selection of trading/investment systems as well as management of the portfo-
lios of new and working trading/investment systems. We will provide steps and best practices
for a full-scale, fully automated trading system, which you may apply at your firm to manage
large-scale development projects that take months to complete. Whatever your firm ’ s actual
structure and your project ’ s scope, we believe all trading/investment organizations will need
to account for, or at least consider, the functions laid out in the ensuing chapters. We do not
expect, nor do we advocate, that anyone or any firm follow our methodology exactly.
We expect that different companies and trading groups will modify and adjust our stand-
ardized approach to suit their own cultures. Some will prefer a more agile approach (though
one thing is immutable: the first step is to decide what trading/investment system to build, the
second is to backtest it, the third is to build it, and the fourth is to manage the working sys-
tem). We fully expect you or your firm to draw from the concepts we present in this book to
design processes that work in your unique business culture, or for your unique trading/invest-
ment systems. Even if you are not developing trading/investment systems at all, you can easily
adapt our methodology to work well for risk management systems and back office systems.
You may think to yourself “ Quality theories don ’ t apply to us, our situation is differ-
ent. ” Be sure, your situation is different, but the principles that will help improve quality
and performance of your trading/investment and back office systems are universal.1.11. Summary
Trading is an entrepreneurial activity and systematic, knowledge-based innovation is the
key to beating the competition with better, faster, and cheaper-and-faster-to-build-and-run
trading/investment systems. Too often, however, trading innovations fail due to a lack of
effective management, reasons unrelated to the individual talents of traders, financial engi-
neers, and IT professionals or to the validity of the trading/investment strategy.
Over the course of this book we apply quality principles and best practices to the
process of trading/investment system development. Through systematic application, qual-
ity can drive competitive advantage, solve management problems, speed time-to-market,
and reduce operational risk. So, make no mistake, processes are important and necessary.
But we advocate processes and documentation that are lean, where work is guided by
direction, not burdened by paperwork. Being lean means no wasted steps and no waiting.
By implementing quality, trading and money management organizations:Can... AND...Deliver better performing trading systems Lower the cost of development and management.
Create more strategies Develop and evaluate them more quickly.
Build more robust systems Shorten the design and development time.
Reduce operational risk Make entrepreneurial reward.
Satisfy fiduciary responsibility Prove effective self-evaluation.