Monday, 9 February 2009

Prop trading tech

A friend of mine is dipping a toe into writing code to support prop trading. So, in the spirit of telling tales out of school, let me make some observations about this business.
  • The users don't know what they want. And they cannot spare the time to tell you even their incoherent and ill-posed ideas about what they think they want.
  • As soon as they get something, what they think they want changes.
  • What they want also changes are the market moves, as new research comes out, and as their ideas turn out to be worthless.
  • The less the analytics depend on one particular paradigm, the better. Flexibility is the key to profitability.
  • Expect that things will work for a while, then fail. This means you need to build in `does it still work' measures which might help avoid sailing over a cliff.
  • Risk measures are nonsense, often, but you have to provide them anyway. Try to give both conventional (often silly but expected) and less conventional (more useful but unconventional) risk measures.
  • Remember that model error is onmi-present and that over-fitting is very common. Expect the model to fail unpredictably and catastrophically.
None of this is a problem as long as you are expecting it. Just don't think that IT development for prop trading is linear...

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