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

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Systematic innovation in trading and investment begins with an analysis of all sources of

market opportunities. In business, most innovations result from a conscious and concerted

pursuit of opportunity. According to Peter Drucker, seven sources of innovation exist:

1. Unexpected Occurrences


2. Incongruities


3. Process Needs


4. Industry and Market Changes


5. Demographic Changes


6. Changes in Perception


7. New Knowledge^25

People make innovations. Now, of course, there are people who are more talented

financial innovators than others, but often their talents lie in well-defined areas such as

trading, quantitative or fundamental analysis, or even technology. The key is finding (or

making) good innovators. According to 3M, the best inventors tend to have great techni-

cal skills, are creative, have broad interests, are problem solvers, are self-motivated, have

a strong work ethic, and are resourceful.^26 However, identifying opportunities is a must.

Two forms of opportunity exist:

● Market-driven, strategic trading or investment opportunities. These are found

through bottom-up innovation.

● Customer demand-driven opportunities. These are found through top-down

innovation.

The more complex the trading/investment strategy, the more difficult it becomes to make

an early assessment of an idea, and the more complex and iterative the research and design

process behind it should be. A high degree of newness makes it more difficult to reduce

market and technological uncertainty. Therefore, most researchers endorse, again, the use

of a cross-functional product team for idea generation and selection. Studies of other indus-

tries show that an interdisciplinary approach to idea generation and selection, more than

any other front end activity, enhances communication and project success, and addition-

ally ensures that investor and seed capital provider needs and technological capabilities are

taken into sufficient consideration. Intensive front end planning helps to develop a common

understanding of project tasks and milestones and therefore reduces uncertainties.

A shared team vision, a shared purpose and a shared plan of action that clarifies real-

istic project targets all help to create a sense of commonality. If all functions are inte-

grated at the beginning, the team develops a common vision and goals and fewer conflicts

occur later on.

4.5.1. Generating Ideas for New Trading/Investment Systems

Rapidly advancing technology, new electronic marketplaces, globalization of financial

markets, and increased competition all impact the success of new trading/investment

systems. Effective new trading/investment system development is emerging as the major

strategic initiative for the decades ahead. One prerequisite to effective trading/investment

4.5. THE FUZZY FRONT END