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Quant funds in a box

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How QuantConnect’s open source algorithmic trading platform is empowering quants to launch trading strategies at low cost…

Quantitative trading strategies, sometimes referred to as ‘black box’ strategies because of the complex algorithms that power them, have long been a source of mystery to investors. Run by proprietary trading desks, hedge funds and individual traders with PhDs in mathematics, quantitative finance and physics (aka “Quants”) these black box strategies have operated in rarefied air. 

Until now that is.

New York-based QuantConnect is an open source, community-driven algorithmic trading platform. The firm has a simple vision: to bring quantitative trading to the masses, providing the infrastructure, data and talent for anyone to build their own algorithmic trading strategy. QuantConnect believes that eventually, quantitative trading will be the primary investment vehicle of the future.

From budding retail investors with a working knowledge of C# (pronounced ‘C Sharp’) to professional quant traders, the ability to set up a quant fund using QuantConnect, powered by Lean, the back-end engine, has perhaps never been easier or more cost efficient. 

Anyone with a trading strategy can leverage the platform to get to market quickly, and without the formidable costs associated with setting up the trading infrastructure. By using QuantConnect they can do all the design work, hone their strategy, run a paper strategy and then, when they are happy with the algorithm, proceed to live trading to build a track record. 

“We have 12,000 engineers around the world who use our open source technology to design algorithmic trading strategies,” explains Jared Broad (pictured), CEO and co-founder of QuantConnect along with Gustavo Aviles. “The barriers to entry to establishing a quant strategy are high given the technical expertise that is required, the amount of financial data that is required. We make all of that open and free to use on the platform.”

Within QuantConnect there is a community page where one can read and contribute to discussion threads. Any discussion thread that shows an embedded graph means that someone has shared their algorithm with the community. Anyone is then free to clone the algorithm to modify it, improve it and so on. As Broad recalls, a recent engineer shared an algorithmic strategy that performed badly; no doubt because of poor coding. 

“It was an Intraday Buy Low strategy that a user in Argentina shared in a discussion thread. One of the community reviewed the code, fixed it, and re-shared it on the discussion thread. There is collaboration between users all over the world,” says Broad. “Managers today have such narrow margins, a lot of legal overheads, so the last thing they need are a lot of engineering overheads. By using an open source framework, and our core infrastructure, all one needs to do is download it and straightaway somebody has saved a significant amount of dollars at the start-up phase.”

One might think that this is all very utopian; a global quant community interacting, sharing ideas, improving each other’s algorithms etc. What should be clear is that it is mainly those improving their quant trading skills that tend to share algorithms. Those at the top of the food chain are very protective of their trading strategies. 

Broad confirms that an end user’s code is completely private and can only be accessed by Broad and Aviles with their permission. The last thing a quant trader wants is to make his secret sauce available. But they are more than happy to share their expertise, as the above example given by Broad illustrates.

“We chose a business model where there are no conflicts of interest. We are an infrastructure service provider. Our revenues come from hosting the strategy when it is live and taking a commission from the broker,” confirms Broad.

With respect to live trading, QuantConnect currently uses two brokerage firms: Interactive Brokers and Tradier Brokerage. Indeed, Broad confirms that they have been able to get Tradier to agree to a USD1 flat trade, which is the lowest equity trading fee in the industry. More brokerages will be added moving forward. 

What makes this platform so appealing to budding or established quants is that it gives them the opportunity to quickly develop their trading strategy and catch the eye of potential investors, and indeed quant-focused hedge fund managers who are constantly searching for new talent.

“We can help introduce quants to hedge funds. People can run paper trading and live trading to build up a track record for their strategy and then scale their trading with a hedge fund. There is a lot of interaction between quants and hedge funds using our platform. At the end of the day we want to help power people’s strategies and make them successful,” comments Broad.

Before long, we will all be building our own algorithms thanks to platforms like QuantConnect. 

The revolution in quantitative trading is well and truly underway. 

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