84 CHAPTER ◆ 7 STAGE 1: Overview
The first loop is competitor analysis, an attempt to gain as much knowledge as possi-
ble about competitors ’ products and trading/investment strategies. The competition for
the particular strategy is firms offering the same or similar trading/investment prod-
ucts either now or in the future, or firms that could remove the competitive advantage
a trading/investment system has. By knowing competitors, firms may be able to predict
the competition ’ s next move, exploit their weaknesses, and undermine their strengths.
Benchmarking quantitative methods starts with a competitive intelligence program. As
Sun Tzu, the great Chinese military strategist, wrote in Art of War around 500 BC:If you are ignorant of both your enemy and yourself, then you are a fool and certain to be defeated in
every battle... If you know yourself, but not your enemy, for every battle won, you will suffer a loss...
If you know your enemy and yourself, you will win every battle.No trading or investment company is an island. Quantitative finance electronic trading
promotes the clustering of researchers in financial centers to facilitate the sharing of inno-
vations between firms, “ because we can learn what our competitors are up to and share
ideas about new applications of quantitative modes with colleagues—what might work,
what doesn ’ t, go to seminars about new ideas. ”^3 Effectively, businesses fight to gain com-
petitive advantage and the attention of investors. Like war, successful firms understand
the competition and the strategies employed by their competition, including:● How the competition thinks.
● What their core competencies are, that is, their strengths and weaknesses.
● What competitive advantage they exercise.
● Where the competition can and cannot be overcome.7.2. LOOP 2: Develop New Strategies
STEP 1: Review Knowledge and Plan New Research
STEP 2: Research New Methods
STEP 3: Prototype New Calculations
STEP 4: Perform Gray Box Testing with Inputs and OutputsThe second loop (and, if your implementation of the K|V methodology consists of more
than three loops, all loops prior to the final one) refines the broad output requirements
set forth in the Money Document through empirical research into quantitative methods.
Benchmarking continues with a research survey and new formulas, an application of
known and unknown knowledge to an unknown problem.7.3. LOOP 3: Consolidate Trading/
Investment System Design
STEP 1: Consolidate Trading System Details (All Equations and Logic Rules)
STEP 2: Research Performance Metrics and Reporting Methods
STEP 3: Build Consolidated Prototype
STEP 4: Perform Black Box Testing, Documenting Results using Inputs and Outputs