The media loves to scare you. They write all these articles about the rise of the quants and how they are taking over the world. They make it seem as if the quants are exploiting all the inefficiencies in the marketplace. The make it seem that they have an unfair advantage and that the little guy can’t win. They try to make you believe that the only way to profit from the markets is to be a math geek. How wrong they are.
Here is an article that keeps spreading that tries to hammer that same point:
The article talks about how the financial engineers are becoming quants and working at Wall Street firms and making nice salaries. It states that the number of quant finance programs in grad schools has exploded over the past decade.
The quants may be able to exploit extremely short term inefficiencies with their fast firing algorithms and supercomputers, but that is about it. They may be able to perform high frequency arbitrage opportunities. But they cannot do much else. If they try to engage in more longer term trading and hold their trades for hours, or days, or longer, then their advantage gets severely diminished, and is almost non existent. Why? Because their algorithms do not move the markets for extended periods of times. There are other order flow generators that play a far bigger role.
Strategies like news trading, global macro, and sentiment based inefficiencies are impervious to the high frequency traders. Every time I place a trade using one of those strategies, I don’t really care what the high frequency traders are doing, for they will not generate sufficient order flow.
More often than not, the strategies that the high frequency traders use to profit cannot be used by the small retail forex traders. That is because the high frequency shops have invested a lot of money into technology and infrastructure to find those arbitrage opportunities. Therefore you should not be scared of the high frequency traders.
I am sure there are some quants making good money and know what they are doing. There is nothing wrong with pursuing a path like that. But then again there are far more traders that have been highly successful in the markets using order flow and global macro based strategies.
Many of the greatest trades in financial history were placed using global macro and order flow analysis. Soros breaking the Bank of England, people shorting the subprime market and making billions, traders betting on Australian dollar strength, or Swiss Franc strength. These all involve global macro analysis. They have very little if anything to do with quantitative analysis.
Many of the greatest trades in financial history were placed using global macro and order flow analysis.