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2.2. Best Practices
Best practices are techniques or processes that are more effective at delivering a particu-
lar outcome than alternative ones. It is important to recognize that as financial markets
change and technology evolves, best practices also change. So, the term “ best practices ”
is better defined as a learning process for continual improvement.^6
Best practices in trading, according to Philip Weisberg, CEO of FXAll in their publica-
tion Best Practice in Foreign Exchange Markets , “ all stem from a few core goals—control,
transparency, efficiency and responsibility to clients, whether this means best execution or
advising them on the most appropriate financial product. ” Weisberg also notes that “ to add
value to our clients we have to create efficiencies right across the life cycle. ” Furthermore,
“ there is growing pressure on hedge funds to save money and cut operating costs. ” And, “ it
is clear that technological and administrative capabilities, such as automated trading and
post-trade operational efficiency, are becoming increasingly important to hedge funds. ”
“ The rapid advance of technology in markets is driving the movement towards best
practices. Systems and processes that might have been unattainable are now within the
bounds of possibility—and hence of best practices. ”^7
In the end, Paul Wilmott too predicts that “ importance of good business practices will
return, replacing blind reliance on mathematical models. ”^82.3. Capital
With respect to trading/investment system start-ups, we distinguish between types of cap-
ital, provided by two separate groups of investors:- Seed capital, which enables the management company to progress through the design
and development process. - Investment capital, which the management company invests according to the trading/
investment strategy on behalf of clients, to whom the firm has a fiduciary
responsibility.
2.4. Conformance
If the performance metrics, that is, process outputs, that a trading/investment system is gen-
erating are consistent with those generated during backtesting or with the benchmark, we say
that the system is in conformance, or conforming to specifications, and only common cause
variation exists. The presence of defects, or special cause variation, events that are inconsis-
tent with the backtesting or benchmark, implies nonconformance with specifications.2.5. Continuous Improvement, or Kaizen
ISO defines continuous improvement as “ recurring activity to increase the ability to fulfill
requirements. ” In trading, continuous improvement describes the ongoing firmwide effort
to better:
● existing trading/investment systems through more effective trade selection algo-
rithms, position management techniques, risk management techniques, and faster
and more robust technology, as well as,
● the process of trading/investment system development and refinement.2.5. C ONTINUOUS IMPROVEMENT, OR KAIZEN