QUANTS VS. PROPS

Lately the jargon and lingo we use to describe trading and traders has become a little bit jumbled. You’ve probably heard the terms like “quant,” “prop” and “algorithmic trading” thrown around. But what is really the difference? Can’t we just say “stock trader” anymore?

Well, to be honest, even we are a little bit lost in the semantic jungle. There is the old joke that a prop trader trades with his mouse, while a quant trader trades with his glasses. Ha! But really, what is the difference?

First, let’s go to the textbook definitions. The term “prop” trader, or proprietary trading, first hit us about 10 years ago. The key word there is the term “proprietary.” The connotation is that there is some method or idea that is proprietary to the particular trader or firm involved in the markets. This proprietary idea usually involves some type of fundamental analysis. For example, someone who works in corporate agriculture may have a proprietary idea based on growing patterns and shipments of soybeans. He would then basis trading approach on this proprietary knowledge of this agricultural industry. Or, let’s say that there is a trader who sees an arbitrage opportunity with a commodity that is sold internationally. He may have an idea regarding the future exchange rate of the currency in which the commodity is traded. This exchange rate may be the proprietary theory or basis for his involvement with this commodity.

Another earmark of the textbook definition of “proprietary” trading is that usually the individual trader is trading a bigger pot of money than his own. This could be the leverage of the firm against larger assets, or it could be a pooling of money among partners, investors, or even other traders. And, typically a prop firm would take on more shorter-term trading than a larger institution or hedge fund.

Now let’s turn our attention to the word “quant.” Of course this is short for quantitative analysis. Here we get the glasses crowd. This is a newer term that has become more popular in the last 7 or 8 years. Here we think of quantitative mathematical formulas. Machine learning. Artificial intelligence. Degrees in higher math. So with the quants, there is more technical analysis of market data involved.

Now let’s look at some practical realities of why we are writing this article. These terms may be more important than you may think on global financial scale. And certainly more important to the financial community and industry than you may realize.

Recently, executives at some very large banks and financial institutions have been asked how the new administration in Washington will affect their trading. Specifically, they were asked about Donald Trump’s musings about repealing Dodd-Frank and even the Volcker Rule. All of them assured their interviewers that under no circumstances would they be returning to “proprietary” trading. But they never said anything about “quant” or algorithmic” trading. Just look at the trader job postings on Linkedin.com or indeed.com and you will see that the same entities described in the above paragraph are tripping over each other to higher quantitative traders or algorithmic traders. It seems that these financial giants have learned political semantics. Yes, they are running back to trading and diving into the deep end. All in. But they are changing the name to reassure the general public that has been taught that “evil Wall Street” is responsible for their financial ills. So “prop” trading may now be called “quantitative trading” or “algorithmic trading.” Much less dangerous and risky than “prop” trading. But whatever the name they seem to be ramping up to go all in for the next four years.

Another interesting facet we have noticed is that there seems to be many more young people entering the market calling themselves “quants.” I guess the new name precludes their fellow millennials from recognizing the vile nature of their endeavors of profiting from the markets. Whiz kids with the IT knowledge, higher degree in quantitative analysis and machine learning. But when you ask them what their approach to the markets are, they look at you with a blank stare through those glasses. And when you follow that up by asking them how they plan to make money, they do not know. They are leaving all that to the older “prop” crowd. Those who have about 30 or 40 years of trading experience in a pile of money. But they plan to do the coding.

We are very reassured by all this. Because with all these geniuses trying to brute force the cause of increasingly shorter market runs, imbalances, and penny – wide arbitrage is, no one is going to get the secret sauce. Now is the time to beat the machines by trading the causes of market movements.



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