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Monday, August 23, 2010

Evacuate the Dancefloor

Posted by John Bates

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

 

Impending changes in regulation are prompting banks to spin off proprietary trading activities, many by expanding their operations overseas where 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 less strict regulatory regions. We don’t want to lose the lead in this important area of the economy.

 

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

 

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

 

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

 

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

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