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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
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
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