Quant Trading Guide v0-1
Quant Trading Guide v0-1
Callum McDougall
email [email protected]
November 2020
Contents
0 Introduction 2
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0 Introduction
Hello to whoever is reading this!
I decided to write this document because I think there are a ton of misconceptions about careers in quant
trading (and quant finance more generally). The industry definitely isn’t suitable for everyone, but I think
there are way more people who should seriously consider it than who actually do.
In this document, I’ll mainly be focusing on quant trading rather than research. I’ve made a few points
about quant research in section 1.3), and if you think this sounds interesting then I’d definitely recommend
finding other resources specific to research, because the advice here will be a lot less directly relevant.
It’s worth noting here that I’m definitely not an expert on all this stuff. I wrote this guide mainly from
the perspective of “What would I like to have known when I started applying to these places?”. Whatever
position you’re in when you read this, I hope you can get some use out of it!
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1 What is quant trading?
1.1 Common terminology
I’m not going to provide a massive glossary here; there are some great resources online (like Investopedia
or the website of top trading firms). However, I think there are a few terms that it’s important to define
clearly. If you know what all of these mean, feel free to skip this section.
• Market
This is a place where buyers and sellers can meet to trade things. People are constantly quoting bid
and ask prices. The bid price is the highest amount someone is willing to buy at; for instance if
someone has bid £10 it means they are willing to buy for any price ≤ £10. The ask price is the price
someone is willing to sell at, so an ask of £20 means they are willing to sell for any price ≥ £20. These
values are constantly changing as people submit new orders into the market. The ask will always be
higher than the bid; this difference is called the bid-ask spread. A trade happens when someone
crosses the spread, i.e. the inequalities of a buyer and seller cross.
For instance, suppose people are trading shares in company XYZ. If the highest bid for a share is £99
and the lowest offer is £101, and someone makes a bid of £102, they will be able to buy shares for this
price (because the person who was offering £101 will be happy to sell shares to them for £102).
• Liquidity
Liquid markets are markets you can trade on easily. Typically it means there is a lot of order flow (i.e.
lots of people are trading frequently) and a narrow bid-ask spread, so you can normally buy and sell
at close to the current trading price.
For instance, the market for shares in a large US company like Apple will be typically be very liquid,
but it might become less liquid during a time of market panic (e.g. like caused by Covid), because
people will be less sure of what the true value of shares are, and they’ll be less willing to trade. There
is a cost to having a bid/offer open, which is related to the concept of asymmetric information - if
you’re very unsure about the true value of something, it’s much more likely someone will come along
with a much better idea of what the value is, and take advantage of the prices that you’re offering.
• Market making
This is the practice of quoting a bid and ask for a particular good or service. It means the market
maker guarantees to take the other side of a trade at certain prices. The advantage for the rest of
the market is more liquidity, because the bid-ask spread is usually a lot narrower in the presence of a
market-maker than it would be otherwise. The advantage for the market maker is profiting from the
bid-ask spread - on average, they’ll be buying the stock for slightly less than they sell it for.
• Prop trading
This is short for proprietary trading; it just means that the firm trades with its own money, rather
than taking clients’ money. Lots of people interested in quant finance confuse prop trading firms with
hedge funds, which are often very quantitative, but which do take on external money.
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• strong quantitative skills (more on this later)
• being able to make decisions under uncertainty, based on intuition / quick judgements
• having a head for probabilities, risks, expected values, etc
• enjoying strategy games like poker, chess, MTG
One common confusion people have goes something like this: “Why do people have jobs doing quant
trading, when there are algorithms who trade way faster than they can?”. The simple answer to this question
is that you can’t automate everything. Some markets aren’t suitable for algorithms to trade in without
human interaction, maybe because they are very illiquid or there isn’t enough data to create models / train
algs. Also, even in markets where algorithms are trading, you need people to supervise the algorithm in case
it goes off the rails in response to some significant market event, or for some technical reason, or just to step
in if the algorithm builds up too much risk in one area. In fact, it’s often the times when algorithms start
behaving weirdly that traders can add the most value.
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• Bells and alarms
• Cash registers
• Machine guns and blasters
• Animal noises (cats, horses and cows)
After hearing all this, it was hard for me to keep thinking of trading firms as extremely formal, corporate
environments!
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• Bayesian statistics
This comes up a lot in brainteasers in some form. Also, the core ideas of updating beliefs based on
evidence are pretty important in trading. To this end, Bayesian statistics can give you some really
valuable tools (e.g. odds ratios, which provide a natural and intuitive way to understand how much
you should adjust probabilities based on the quality of evidence). I’m a bit biased here, because I
personally think Bayesian statistics is awesome.1
• Statistics & data science
Linear regression is used a lot in finance, so this can definitely be worth getting familiar with. At the
more advanced level, some knowledge of some ML and data science can make your application stand
out, although it’s unlikely to be directly useful for interviews. This is a totally different story for quant
research, when this stuff would be much higher-priority.
• Game theory
A bit more niche, but a very interesting branch of study, that intersects with other fields like maths,
economics, social science and computer science.
• Being involved in a finance society at your uni (e.g. CUFIS or CUATS in Cambridge)
• Reading news sources like the FT, Bloomberg, or Matt Levine’s Money Stuff
• Trading your own account (or on a platform like QuantConnect or Quantopian2 )
• Data-science projects related to finance
• Past internships
But while any of these will boost your application, none of them are a dealbreaker if you don’t have them
on your CV. It’s unlikely to be a great use of your time to try these things just for the sake of impressing
interviewers, so so them if you think they genuinely sound interesting.
1 (because it is!)
2 pre-November 2020. RIP Quantopian
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1.4.6 You need an amazing CV
First point to make: if you’re studying a quantitative degree at a good university, that already puts you
ahead of lots of applicants. Lots of people feel intimidated when they write a CV, because they don’t think
they have enough stuff to put on there. However it’s worth remembering, part of what trading firms are
looking for on a CV is just an interesting person who isn’t defined by the degree they’re studying, so if
there’s anything that you’re passionate about, you can include it! Here are a few good things to consider
putting on your CV, if you can:
Second point to make: CVs don’t matter that much at later interview stages. Mostly they are useful to
get you through the door, and if you have some relevant experience/internships then you might be asked
about them (this varies between companies), but in general trading firms care much more about how you
perform in the interview than your actual CV.
Third point to make - referrals can be another good way to get your foot in the door. If you know anyone
who works there / did an internship, this can often suffice to getting a first round interview. Finding talented
people is hard, so companies often like getting referrals as a way of making the finding process easier for
them!
1.4.7 If you make a small mistake in trading, you could lose your job
There can be reasons to be concerned about job security (see Section 1.6), but I don’t think this particular
worry is very well-founded. Everyone makes mistakes, but one thing quant trading firms really value (in fact
one of the things they specifically look for in interviews) is the ability to notice, admit to, and learn from
your mistakes. If you make a mistake while trading and lose some money, but take full responsibility for it
and make sure not to make the same mistake again, it’s very unlikely you’d be fired or demoted for this.
There is a limit to this - obviously if you lose all the firm’s money then it will be a different matter!
However, most firms put measures in place to make sure that one single person can’t screw up badly enough
to really hurt the firm in a significant way. Junior traders will be doing simulated trading, or else overseen
by senior traders, for quite a while when they first join.
All this said, some firms will treat mistakes more harshly than others. Since quant trading firms are
frustratingly opaque, it’s a good idea to speak to as many people as you can, and try and get an idea of
what the culture is like in the firm. If you get the impression that mistakes aren’t really tolerated, that can
be a good sign that you should find a better place to work!
3 I personally hold a Guinness World Record for the lamest possible thing you can imagine. I put this down on my CV, and
was asked about it several times during my interview process for summer 2021 internships!
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1.4.8 Working in finance is morally wrong
The truth is this is a pretty complicated point to address. There are definitely finance companies who have
a net negative impact on the world, but quant trading definitely isn’t in the category of worst offenders. A
lot of what quant traders do is provide liquidity to markets, i.e. make it slightly easier for other market
participants to buy and sell things on exchanges. This is a useful function (since these counterparties can
often be e.g. pension funds), but on the margin it’s hard to argue that quant trading firms are doing an
absolutely necessary societal good.
However, going into quant trading to earn money and donate it to charity can still do a huge amount
of good. This is a big part of what personally motivates me, and I think it’s a really important factor to
consider. As a quick Fermi Estimate: it costs approximately $4000 to save a life according to GiveWell’s
calculator, and so giving 50% of a $200k per annum salary = 25 lives saved per year.
As a caveat to this, if you’re going into quant trading just to earn money (either for yourself or for
charity), you probably won’t be able to stay motivated. Quant trading is a pretty intense job, and to work
here you need to enjoy what you do as well. Also, if you are the kind of person who feels they need to
do something with a direct positive impact, then quant trading might not be for you. However, if you’re
interested in the work, and feel like you would be motivated by the idea of donating a lot to help make the
world a better place, then this is great! For more on this, check out 80,000 Hours’ quant trading resources.
• Intellectually stimulating
Quant trading tends to draw on a wide variety of disciplines: maths, stats, computer science, data
science, finance, game theory, etc. The work is consistently challenging and stimulating, and the
general culture of excellence and high competitiveness means you are always developing and learning
new skills.
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1.6 Bad things about quant trading
In the interests of balance, I thought it would be worth including this section. I think quant trading is a
great career that way more people should consider than actually do, so obviously I’m biased. That being
said, it’s still not for everyone. There are some misguided reasons to choose not to go into quant trading
(see Section 1.4), but there also some genuine reasons why you might not be a good fit for this career. Here
are some of them:
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1.7 What to do if you think you might be interested
If all this stuff sounds cool to you (and the bad stuff isn’t too offputting!) then I’d recommend trying to
learn more about the industry. One of the best ways is to go to events at your university. Most finance
careers events are clustered in the first term, although some places do still run events later in the year. These
events are a fun way to get to know professionals in the industry, as well as ask questions.
However, nothing is a substitute for getting a feel for yourself of what the industry is like, which is why
applying for internships is basically the best thing you can do. In later sections I’ll talk a lot more about the
application process and what interviews are like. For now, I’ll just give the key points: application process is
low-effort (just a CV and cover letter needed, sometimes not even a cover letter), interviews can actually be
kind of fun, and firms put a lot of emphasis on education and making a good internship experience. You’ll
get to interact with traders a lot, probably get a view into lots of different areas in the firm, and the projects
interns are given tend to be really worthwhile and interesting.
Even the interview process itself can be super high value - you’ll get the chance to ask the interviewer
questions, and if you get an offer then you’ll usually have more opportunities to talk with people in the firm
about your main uncertainties. There will probably be a strong bias because they’re sales pitching you the
company, but you can still usually learn a lot of useful things.
One final point to make - some firms run Spring Week events or Insight Days, usually aimed at first or
second years. These can be great ways to get on the radar of these companies, and can often be a stepping
stone to securing an internship. To find out about all this stuff, the best thing is to look on the company
websites or consult your university careers service.
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