Let me talk about a topic that is far more mundane than the usual high-brow theoretical discussions of strategies and algorithms, but that has no less long-term impact on the bottom line: what is the best office environment for research and execution of quantitative trading strategies?
I have worked in different office environments before, so I feel qualified to offer an informed opinion.
At Morgan Stanley, I huddled over a desk that is semi-partitioned from the rest of the office: nobody could see or bother me unless I or they stood up. At Credit Suisse, I shared an office with 2 other prop trading colleagues, one of whom was prone to freely sharing his opinion on various current affairs with his officemates. (On the other hand, he complained my biting an apple for lunch was too loud for him.) At Maple, a hedge fund in New Jersey, I shared an office with about 100 other colleagues on the trading floor, many of whom were prone to same opinion-sharing temptation.
Here at my own firm, I sit in solitude (except for my cat) in my basement office, my beloved classical FM streaming over the internet, my desktop electronically connected to my partner in our Chicago office, our trading servers at Amazon and elsewhere, and other clients and partners around the world, but unmolested throughout the day unless I voluntarily pick up the phone or answer an email or instant message.
Can you guess which environment is the one I find the most productive? Which one has the least stress? And which one contributes most to the bottom line of my employers/partners/clients?
(Hint 1: read Timothy Ferriss' book The 4-Hour Workweek. This guy checks his email only once a week.)
(Hint 2: my trading Sharpe ratio went from negative to >7.)
P.S. I look forward to meeting some of you at the Automated Trading Conference in London this Friday (my talk will start at 0900), and others at my pairs trading workshop on the preceding two days.
Ernie,
ReplyDeleteI just discovered your blog; it's very helpful. Please keep up the good work.
I absolutely agree with you. In any endeavor that requires creative mind, more independence will always bring more success. I have a couple of questions related to this.
1. What do you do for health insurance? I often think about going independent. But, then my biggest worry is health insurance.
2. At my current work place, I'm supposed to share my strategies. In fact, I have to fully disclose and document everything I am doing so that when I'm gone they will be able to continue to use my trading system. I'm very uncomfortable with this arrangement and I think it is having a serious impact on my motivation. I mean, if you happen to find a truly spectacular strategy, would you want to share it with anyone? I don't have much experience with various environments and don't know how common it is that you have to share every detail. Should I be looking for a different environment where I can trade more independently / confidentially?
Thanks,
Anon
Interesting post.
ReplyDeleteI am in a phase where I still work full-time in a non-trading related job (IT) but started an automated trading system project at home.
I do fing it hard though to stay focus on my project with no outside interaction.
This is one of the reasons why I started a blog (ie to try and engage with like-minded community) but I still have to strike the right balance!
Anon,
ReplyDelete1) Have you checked out http://www.freelancersunion.org/ and their group health insurance plan?
2) If you are paid a salary, it is highly unlikely that your employer would let you have ownership or even co-ownership of your intellectual property. On the other hand, all kinds of alternative IP agreements can be struck if you are OK with just profit-sharing, at a prop trading firm or hedge fund.
Ernie
Jez,
ReplyDeleteYes, having outside interaction is important, but that can be obtained through participation in an online trading forum, joining a prop trading firm as a remote trader, or, yes, starting a blog.
Good luck!
Ernie
Thanks Ernie. So, it seems that being paid a salary is the key factor. If you don't need a salary to make a living, you could strike a better deal in terms of protecting your strategies. Am I understanding it right?
ReplyDeleteAnother thing that caught my attention is your Sharpe ratio of 7. If you use the optimal Kelly leverage, that would mean an annual return of over 2000%. Are you actually getting this kind of return? Is that humanly possible?
- Anon
Hi Ernie,
ReplyDeletecould you please share the presentation on the topic you are going to talk about this Friday?
Thanks,
Alex
Alex,
ReplyDeleteMy talk will be on the common biases of backtesting.
Ernie
Anon,
ReplyDeleteYes, better deals are possible without fixed salary. Most prop trading firms don't even care about your IP as long as you make money for them.
Re: Kelly -- We are under-leveraged because our broker won't let us have sufficient buying power.
Ernie
i have been trading from my home office for more than 10 years now...i can't imagine doing this in a loud, social, corporate environment...way too many distractions for me...
ReplyDeleteErnie,
ReplyDeletePlease correct me if I am wrong. I don't want to misuse the most important formula in trading.
Here's my understanding of the Kelly formula.
mu = mean return (annualized)
sigma = stdev return (annualized)
With the leverage of f, the expected annual return is
r = f*mu - f^2*sigma^2/2.
When f = mu/sigma^2, r is maximized to
r_max = mu^2/sigma^2/2 = S^2/2, where S is the Sharpe ratio.
Since I know your Sharpe ratio to be S = 7, I know your r_max = 49/2 = 24.5 = 2450%. Of course, I don't know your actual return because I don't know your actual leverage f.
I also have the problem of under-leverage. Many of my strategies have the Kelly fraction well over the leverage available to me. At that point, the Kelly formula seems almost irrelevant and I wonder what is the benefit of having such high Sharpe ratio or Kelly fraction if I cannot access the optimal leverage.
- Anon
Anon,
ReplyDeleteYour formula is correct. If I have access to arbitrarily high leverage, then indeed you can infer my returns from my Sharpe ratio.
Even though we are constrained by the leverage given to us, Kelly formula is still useful for capital allocation among different strategies.
Ernie
It's really amazing how unproductive an office environment can make you. I work in a room of two hundred people right now and there is no partitioning of any sort and all media devices of any sort are prohibited, so I can't even listen to headphones while I work. I'm constantly forced to listen to what everyone at my island of eight people is constantly saying (or complaining about), along with the loud voice of someone from general affairs who prefers to just yell at the top of her lungs to tell people stuff...when we have email, telephones, post-its and feet.
ReplyDeleteThis is an all time low for productivity in my life.
...and my dream is to work on my own with my own office. When I was in college, I worked remotely for a company and it was the most productive time I've ever spent.
Ernie,
ReplyDeleteAre your broker imposed leverage caps due to perceived left-tailed risk, lack of cross-margining across asset classes or something else?
Jacques,
ReplyDeleteAs Bill Clinton once said: I feel your pain!
Ernie
Anon,
ReplyDeleteOur main broker (Interactive Brokers) seems to have imposed a portfolio margin limit of < x4 intraday on practically everybody after Oct 2008, no matter whether they are market neutral or not.
Ernie
Hi Ernie,
ReplyDeleteThis means once you created and traded a profitable simple moving average model at a hedge fund (assume you signed the IP agreement) then you can't trade anything using SMA anywhere else due to IP agreement. Am I correct?
Yasha
Yasha,
ReplyDeleteThat is true, unless SMA was already in the public domain when you applied it, in which case it does not belong to any one firm.
Ernie
Thanks Ernie.
ReplyDeleteI believe most people are still working around those published technical analysis stuff, and just change parameters or combine a few of them. This means one day when you tried all technical methods and all possible combinations from those books, you finished. It appears that a trader's career is pretty short...
Interesting blog.. I did some basic qunting in mid 90s but things have changed as I see... but lurking around Ive found also kind of change in definitions..as It appears some say-sell as trading chaos, but at the very end It appears me just quant adapted....am I correct I guess TIA
ReplyDeleteHi Erine
ReplyDeleteWill you make your pair trading workshop as a video for sell. Not everyone can off from the job to fly to other conuntry for a course
Hi Anonymous,
ReplyDeleteIf you are interested in a audio/video version of the course (or just the lecture notes, or whether the course will be offered in the US and elsewhere), please contact the editor at the Technical Analyst magazine (http://www.technicalanalyst.co.uk/contact.htm).
Thanks.
Ernie
I believe IB offers portfolio margin which bypass Reg T and is closer to SPAN calculation? Additionally I believe the requirement for Prime Brokerage for IB is pretty low (few MM AUM)
ReplyDeleteHi Ernie
ReplyDeleteDO you know any website which provides some useful information of building an automated trading strategy in quantitative approach for spot FX, I was told it was difficult for do that as it is too volatile.
Thanks
Grace
N N,
ReplyDeleteIB does offer portfolio margin. But depending your specific portfolio, the margin can be lower than the Reg T limit.
I haven't checked out IB's prime brokerage, but we are exploring others which seem to offer much better buying power, also for about $5MM AUM.
What is SPAN?
Ernie
Hi Grace,
ReplyDeleteI think volatility is a plus for quant strategies.
I don't know of websites specifically for FX strategies, but I would go to the general forums such as elitetrader.com or wealth-lab.com to search for ideas. Please see my book for comprehensive list of resources.
Ernie
Hi Ernie
ReplyDeleteWhich type of trading platform you are using, as a retail investor, is it worth to get a bloomberg professional platform, I heard the information, data and news are instantly update. Is it good to have one as it is not cheap
Thanks
Kat
Hi Kat,
ReplyDeleteBloomberg indeed has the most up-to-date news, and price data is very clean too.
Whether it is worth your money depends on how much profit you expect to make. I would say at minimum 5-figure profit/month is needed.
Ernie