26 CHAPTER ◆ 2 Key Concepts and Definitions of Terms
2. Probationary trading is live trading, where a system generates signals, but exe-
cutes trades in small quantities.
3. Full trading is live trading, where a fully functioning trading/investment system
generates signals and executes orders in their total quantities.2.32. Trading/Investment System
This book presents solutions to several risks that commonly arise during the development
of trading and money management systems, which we will group together under the term
trading/investment systems.
A trading/investment system consists of the interacting position selection and exe-
cution algorithms, that is, the rules and business logic necessary to enter into and exit
from positions in the financial markets, as well as the technology required to partially
or fully automate the trading, benchmarking, portfolio, and risk management processes.
Such rule-based trading/investment systems apply the science of financial engineering to
the management of portfolios of securities and derivative instruments. Trading/investment
systems can take on the form of traditional long-only mutual funds, hedge funds, and pro-
prietary, high frequency trading systems.
While the ideas and methods presented in this book focus on trading/investment sys-
tems, they will work equally well when applied to creation of other quantitatively focused
financial systems, including execution, risk management, accounting, and other middle
and back office systems.2.33. Trading/Investment System Maturity Model
We use the structure, but modify the wording, of the Software Engineering Institute ’ s
Capability Maturity Model (CMM)^15 to apply to trading/investment system development.
Each level of this model is a well-defined step toward achieving a mature trading/invest-
ment system design and development process.Level 1: Initial. The trading/investment system development and management proc-
esses are ad hoc. Few processes are defined and success depends on individ-
ual effort. At this level, schedule and cost targets are regularly overrun and
firms often implement trading/investment systems using inappropriate tools.
Level 2: Repeatable. Basic design and development processes are established
to track costs, schedules, and trading/investment system specifications.
Successful processes on one project are repeated on subsequent projects
that are similar.
Level 3: Defined. Design and development as well as ongoing management proc-
esses are documented, standardized, and integrated into the culture of the
firm. All projects use an approved, tailored version of the standard process
for design and developing of trading/investment systems.
Level 4: Managed. Detailed measures of the development process and trading/
investment system quality are collected. Both the development process and
working systems are quantitatively understood and controlled.
Level 5: Optimized. Continuous process improvement is facilitated by quantitative
feedback from the design and development process as well as from work-
ing systems, fostering new ideas and technologies.^16