Quality Money Management : Process Engineering and Best Practices for Systematic Trading and Investment

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results agree with the written specifications. While prototypes flow from inputs to quan-

titative methods to outputs, the process of specification should run the other way around;

the results, that is, the objectives of the model, are most important and should determine

the model ’ s structure.^8 Researching quantitative methods is an iterative search for best

practices, benchmarking five things:

1. Trade selection algorithms.


2. Trade execution algorithms and trade cost analysis calculations.


3. Cash management procedures.


4. Risk algorithms.


5. Performance monitoring and reporting.

The plan for the first loop is competitor analysis. Reputations on the street mean

investors know the differences between companies. They may know that a particular firm

has strong quantitative research, while another firm is strong technologically. One firm

may be big in fixed income, while another may be focused on equity options. The com-

petition has secrets that can be the difference between success and failure. Identifying

these secrets to the extent possible may thus be crucial for survival. There are four stages

in monitoring competitors:

● Collecting information.

● Converting information into intelligence by cataloging it and integrating it with

other information, and analyzing it.

● Communicating intelligence.

● Countering competitor actions that may cause special variation in the trading/invest-

ment system.

One mistake many firms make is to start collecting information with no plan on how to

use it. If it cannot be used as a driver of the firm ’ s strategy then the effort spent collecting

information is wasted. If a firm is planning a new trading/investment system, information on

what the competition is doing in the same area will aid decision-making processes for the

new system. Alternatively, a firm may be looking at how the financial industry will evolve

over the next five or ten years. Successful firms identify key areas of concern. Other infor-

mation is ignored or stored for later use. Such study should be focused and planned, and

aimed at answering intelligence requirements relevant to the strategy under development.

Prescott and Gibbons advocate an ongoing competitive intelligence program, “ a for-

malized, yet continuously evolving process by which the management team assesses the

evolution of its industry and the capabilities and behavior of its current and potential

competitors to assist in maintaining or developing a competitive advantage. ”^9 At a mini-

mum, we recommend the product team create a file for each competitor and their compet-

ing system. Any marketing pieces, regulatory filings, prospectuses, information, or ideas

from industry contacts or news articles should be reviewed and filed.

8.4. STEP 1, LOOP 2: Review Knowledge and

Plan New Research

The second loop through this step assumes that the descriptions are inclusive of the equa-

tions researched in the previous loop. In the end, the description will lay out the business

8.4. STEP 1, LOOP 2: REVIEW KNOWLEDGE AND PLAN