Inside the Black Box

Inside the Black Box : A Simple Guide to Quantitative and High Frequency Trading

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New edition of book that demystifies quant and algo trading In this updated edition of his bestselling book, Rishi K Narang offers in a straightforward, nontechnical style supplemented by real-world examples and informative anecdotes a reliable resource takes you on a detailed tour through the black box. He skillfully sheds light upon the work that quants do, lifting the veil of mystery around quantitative trading and allowing anyone interested in doing so to understand quants and their strategies. This new edition includes information on High Frequency Trading. * Offers an update on the bestselling book for explaining in non-mathematical terms what quant and algo trading are and how they work * Provides key information for investors to evaluate the best hedge fund investments * Explains how quant strategies fit into a portfolio, why they are valuable, and how to evaluate a quant manager This new edition of Inside the Black Box explains quant investing without the jargon and goes a long way toward educating investment professionals.
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Product details

  • Hardback | 336 pages
  • 156 x 239 x 29mm | 544g
  • New York, United States
  • English
  • 2nd Edition
  • 1118362411
  • 9781118362419
  • 73,151

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Whether you call it quant, algo, or black box trading, it all adds up to the same thing: systematic trading performed by computers.

While some decry it as dangerously detached from human control, and a driver of excessive volatility in the markets, others see quantitative trading as a welcome departure from the unruly passions and cognitive biases that inform human investment decision making.

Say what you will about quant trading, the fact is, overall, quant funds consistently outperform the markets--which may be why so many smart investors are keen to avail themselves of that black box magic.

Unfortunately, much remains obscure about quantitative trading, thanks in great part to the extreme guardedness of quants when it comes to the details of how their systems work. But, as quant-trader and master explainer Rishi Narang deftly shows in this updated edition of his bestselling guide, quantitative trading is much easier to understand and take advantage of than you think.

Designed to make quantitative trading comprehensible to even the most math- or technophobic investor, this book takes you on a guided tour inside the black box. In plain English, Mr. Narang turns the lights up on what the quants are up to, once and for all lifting the veil of mystery surrounding quantitative trading and quantitative trading strategies.

Following a concise introduction to quantitative trading principles and general practices, Mr. Narang cuts to the chase with a detailed inventory of the contents of a typical black box system, explaining, in non-technical terms, what each one is and how it fits together with the others.

Then, with the help of numerous real-world examples and lively anecdotes, he clearly explains:

The most common quant system structures How quants capture alpha The level of discretion in quant trading High-frequency trading and the infrastructure that supports it Execution algorithms and how they work How quants model risk and how to know if a particular model really works The important difference between theory-driven systems vs. data-mining strategies How to evaluate quant managers and their strategies How quant strategies can fit into an overall portfolio strategy--and why they're so important Current and future trends in quant trading and the role it will play in the years ahead

A book that lifts the lid on black box trading, making it transparent, intuitively sensible, and readily understandable, Inside the Black Box is a must-read for institutional investors, asset managers, investment advisors, pension fund managers, and all savvy investors looking to gain an edge in today's turbulent financial markets.
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Back cover copy

High Praise for Inside the Black Box

"Rishi provides a comprehensive overview of quantitative investing that should prove useful both to those allocating money to quant strategies and those interested in becoming quants themselves. Rishi's experience as a well-respected quant Fund of Funds manager and his solid relationships with many practitioners provide ample useful material for his work."
--PETER MULLER, founder, PDT Partners

"Quantitative trading, like all investment strategies, gets more complex yet more interesting the deeper you dig into it. Rishi deftly peels back the layers, walking readers through each building block and their combination, then providing useful chapters on evaluating model-based approaches and finally a new section surveying high-frequency trading. Anyone approaching the space will learn something from this clear, thorough, and readable book."
--ALEKSANDER WEILER, CFA, Senior Portfolio Manager, Public Market Investments, Canada Pension Plan Investment Board

"Rishi continues to demystify even more quantitative trading areas in this excellent new edition. Significant updates include several new chapters that shine much-needed light on high-speed and high-frequency trading. This book continues to be a must-read for anyone interested in quantitative trading."
--STEVE EVANS, Managing Director of Quantitative Trading, Tudor Investment Corporation

"In Inside the Black Box: A Simple Guide to Quantitative and High-Frequency Trading, Rishi Narang demystifies quantitative trading. His explanation and classification of alpha will enlighten even a seasoned veteran."
--BLAIR HULL, former founder of Hull Trading Co. and founder of Ketchum Trading

"In this updated edition, Rishi again provides an insightfultaxonomy of a wide range of systematic trading strategies in liquid instruments. Without the extensive use of complex formulae, this book offers intutitive explanations of some of the choices faced by quants in constructing trading systems, and is a valuable read for investors and quantitative trading practitioners alike."
--ROSS GARON, Managing Director, Quantitative Strategies, SAC Capital Advisors, LP

"Rishi takes a complicated subject and distills it down to its essentials using non-technical language and numerous concrete examples to bring concepts alive. Inside the Black Box provides readers with a valuable framework to understand the various components of quant strategies and insights on how to evaluate and interview quant managers. Inside the Black Box is a useful reference guide for any institutional allocator to quant strategies."
--DAREN SMITH, CFA, CAIA, FSA, Managing Director, Manager Selection & Portfolio Construction, University of Toronto Asset Managment

"If a car were a black box, Rishi would be the gentle voice of the navigation system. Not the one driving, but if you want to know where everyone is going: just listen."
--HAROLD de BOER, CEO, Transtrend
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Table of contents

Preface to the Second Edition xiii Acknowledgments xvii Part ONE The Quant Universe Chapter 1 Why Does Quant Trading Matter? 3 The Benefit of Deep Thought 8 The Measurement and Mismeasurement of Risk 9 Disciplined Implementation 10 Summary 11 Notes 11 Chapter 2 An Introduction to Quantitative Trading 13 What Is a Quant? 14 What Is the Typical Structure of a Quantitative Trading System? 16 Summary 19 Notes 20 Part two Inside the Black Box Chapter 3 Alpha Models: How Quants Make Money 23 Types of Alpha Models: Theory-Driven and Data-Driven 24 Theory-Driven Alpha Models 26 Data-Driven Alpha Models 42 Implementing the Strategies 45 Blending Alpha Models 56 Summary 62 Notes 64 Chapter 4 Risk Models 67 Limiting the Amount of Risk 69 Limiting the Types of Risk 72 Summary 76 Notes 78 Chapter 5 Transaction Cost Models 79 Defining Transaction Costs 80 Types of Transaction Cost Models 85 Summary 90 Note 91 Chapter 6 Portfolio Construction Models 93 Rule-Based Portfolio Construction Models 94 Portfolio Optimizers 98 Output of Portfolio Construction Models 112 How Quants Choose a Portfolio Construction Model 113 Summary 113 Notes 115 Chapter 7 Execution 117 Order Execution Algorithms 119 Trading Infrastructure 128 Summary 130 Notes 131 Chapter 8 Data 133 The Importance of Data 133 Types of Data 135 Sources of Data 137 Cleaning Data 139 Storing Data 144 Summary 145 Notes 146 Chapter 9 Research 147 Blueprint for Research: The Scientific Method 147 Idea Generation 149 Testing 151 Summary 170 Note 171 Part three A Practical Guide for Investors in Quantitative Strategies Chapter 10 Risks Inherent to Quant Strategies 175 Model Risk 176 Regime Change Risk 180 Exogenous Shock Risk 184 Contagion, or Common Investor, Risk 186 How Quants Monitor Risk 193 Summary 195 Notes 195 Chapter 11 Criticisms of Quant Trading 197 Trading Is an Art, Not a Science 197 Quants Cause More Market Volatility by Underestimating Risk 199 Quants Cannot Handle Unusual Events or Rapid Changes in Market Conditions 204 Quants Are All the Same 206 Only a Few Large Quants Can Thrive in the Long Run 207 Quants Are Guilty of Data Mining 210 Summary 213 Notes 213 Chapter 12 Evaluating Quants and Quant Strategies 215 Gathering Information 216 Evaluating a Quantitative Trading Strategy 218 Evaluating the Acumen of Quantitative Traders 221 The Edge 223 Evaluating Integrity 227 How Quants Fit into a Portfolio 229 Summary 231 Note 233 Part four High-Speed and High-Frequency Trading Chapter 13 An Introduction to High-Speed and High-Frequency Trading* 237 Notes 241 Chapter 14 High-Speed Trading 243 Why Speed Matters 244 Sources of Latency 252 Summary 262 Notes 263 Chapter 15 High-Frequency Trading 265 Contractual Market Making 265 Noncontractual Market Making 269 Arbitrage 271 Fast Alpha 273 HFT Risk Management and Portfolio Construction 274 Summary 277 Note 277 Chapter 16 Controversy Regarding High-Frequency Trading 279 Does HFT Create Unfair Competition? 280 Does HFT Lead to Front-Running or Market Manipulation? 283 Does HFT Lead to Greater Volatility or Structural Instability? 289 Does HFT Lack Social Value? 296 Regulatory Considerations 297 Summary 299 Notes 300 Chapter 17 Looking to the Future of Quant Trading 303 About the Author 307 Index 309
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About Rishi K. Narang

Rishi K. Narang is the Founding Principal of Telesis Capital LLC, which invests in quantitative trading strategies. Previously, he was managing director and co portfolio manager at Santa Barbara Alpha Strategies. Narang cofounded and was president of Tradeworx, Inc., a quantitative hedge fund manager, from 1999 2002. He has been involved in the hedge fund industry, with a focus on quantitative trading strategies, since 1996. Narang graduated from the University of California, Berkeley, with a BA in economics.
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Rating details

76 ratings
3.86 out of 5 stars
5 24% (18)
4 50% (38)
3 18% (14)
2 5% (4)
1 3% (2)
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