Quantitative vs. Discretionary Trading

Topics: Stock market, Stock exchange, Stock Pages: 10 (3971 words) Published: May 20, 2013
Quantitative versus Discretionary Trading
The American economy affects us as well as the rest of the world, and the stock market influences the economy in a big way. Most Americans are quite familiar with terms like stocks and the stock market, especially after the economic crisis of 08, but many do not know exactly what they mean and how extreme their effects can be on the general economy. Stock is nothing more than pieces or shares of a company which are traded in a specific market. When I purchase stock in a company I have just invested in part ownership of it, usually in the hopes that I will be able to sell it later at a higher price for a profit. The price of a stock is dictated by supply & demand. This essentially means that the last price which the stock has been traded for is now the official price of that stock at that moment. Much of business in the U.S. and around the world is directly or indirectly affected by large corporations and banks, all of which can succeed or fail as a result of their stock. Securities, or tradable and negotiable financial instruments, are responsible for large amounts of money floating around our economy every day. This obviously has big implications. The prices we pay for almost anything you can imagine are subject to speculation and movements in securities markets. Commodities such as metals and agriculture are traded at the commodity exchange, where prices are set for our groceries sometimes weeks or months in advance. The stock markets can influence interest rates, monetary policy, financial and economic laws, and many other entities controlled by government agencies such as the Federal Reserve or the Securities and Exchange Commission. These markets can make people more money than they imagined in a matter of minutes, or leave somebody in bankruptcy in the same short time. Billions if not trillions of dollars change hands every day, creating opportunity and success stories, but also a breeding ground for white collar crimes. The stock market provides a strong element of volatility to our economy as a whole, and as so has made countries thrive or experience periods of great loss. Since the creation of securities trading markets, people have been trying to beat them, and many different strategies have been formed to accommodate changing markets. With ever growing computer based trading at an all-time high, and volume soaring to unseen heights, what strategies are the best and which are the least susceptible or detrimental to the volatile economy? Although there are innumerable trading ideologies and methods, modern practice would imply that they can be broken into two realms: discretionary or quantitative trading. Discretionary trading, practicing the use of one’s discretion to make market decisions, or quantitative which is defined as “the systematic implementation of trading strategies that human beings create through rigorous research” (Narang xi). Discretionary trading is simply good old fashioned human decision making utilizing financial, economic, political, and social analysis. This as opposed to quantitative trading which often uses mathematical models and computer executed algorithms in its trading strategy. Although both can be effective on their own, a balance of the two that relies primarily on the use of human discretion while still utilizing the detailed scientific approach of quantitative trading is ideal.

“Stocks” and their markets have a history that is quite difficult to pin down, largely in part because as is the nature of finance, the definition of a stock is likely to change as innovation and new markets emerge. As early as the 13th century, there are records of private investors in Europe trading simple debt agreements and government bonds. Lenders would loan money to individuals or businesses and then sell that debt to other investors in order to leverage their risk, while the investors would speculate in hopes of profits. This concept carried itself...

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