John Bates
08-23-2010 03:09 PM
Looking for all the world like someone yelled"fire" in a crowded nightclub, prop and quant traders are stampedingout of investment banks and headed for the hedge fund world. Some, mainly theprop traders, are being pushed gently out the door as banks prepare for theVolcker Rule (http://tinyurl.com/39ap28d).Others, like the quants (http://tinyurl.com/23c5h6d), are in search ofthe mega-bonuses that their prop trader or hedge fund manager compatriots are(or were) getting.

 

Impending changes in regulation are prompting banks to spinoff proprietary trading activities, many by expanding their operations overseaswhere Messieurs Dodd and Frank cannot reach them. I'm very concerned about this“regulatory arbitrage” in which firms may move away from the US to find lessstrict regulatory regions. We don't want to lose the lead in this importantarea of the economy.

 

Spin offs and regulatory arbitrage may well leave a herd of UStraders looking for work and many may end up working at - or starting - hedgefunds. The quants, having slaved over hot computers for the last few years toline bankers' pockets, are forming their own trading companies or joining proptrading firms with a profit-sharing deal.

 

Most of these traders will be in for a rude awakening whenthey sit down to work. Prop traders joining hedge funds will find that thetechnology budgets may not be as generous as they were at their last bulgebracket employer's firm. The quants, who are essentially programmers, will facehuge challenges in finding firms that have the kind of low latency, scalablearchitecture that they need to design, tweak and trade with their algorithms. Thelevel of trading freedom is different, too. Hedge fund managers will havesomething to say about a trader's profits - or lack thereof. Quants may findthat designing an algorithm and handing it over to the trading desk is notquite the same as being responsible for the profits that the algo makes - ordoesn't make.

 

Make no mistake, these prop traders and quants are highlyintelligent and adaptable people. There will be many challenges to face goingforward, but technology need not be one of them. There are instantly useable,scalable platforms that quants and hedge funds can use to build and deployalgorithms. These platforms, such as Progress Apama's Complex Event ProcessingPlatform, offer a robust technology infrastructure to successfully create,test, deploy and manage their algorithmic strategies.

 

Algorithmic trading software is constantly transforming. Asthe volume of real-time market data continues to increase, algorithmic trading solutionsdemand an infrastructure that can respond to market data with near zerolatency. To trade effectively in competitive markets requires rapid,opportunistic response to changing market conditions before one's competitioncan seize those opportunities. The people that are running for the doors andinto the arms of hedge funds or other trading firms, will need this advantage.Competition is fierce, and their previous employers already have the technologyadvantage.



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