Thursday, December 22, 2011

who sells/buys quant algorithms and strategy

Q: what exactly is advertized, sold and implemented when we see a big bank (like GS) selling a quantitative strategy/algorithm/model?
%%A: trade signals/algo/intelligence, execution service, and trade "sponsorship"

On the buy-side, traders namely "account owners" are always users of a quant algo. I believe Retail traders or institutional traders receive trade signals from the algo (owned by the sell side) and can either ignore it or follow it.

Q2: Physically where is the trade signal generated?
%%A: either in the sell-side system or in the buy-side system These signals are never guaranteed to be profitable. Just imagine you are using your hard-earned savings to trade. Trade signals might contain size, order type (mkt order or limit order or OCO...), and price. Actually, There are resellers for this "product" ie trade signals. A small broker can be the buy-side of an algo vendor, and the sell side to its own retail clients. The algo is the IP of the algo vendor. The same vendor may also provide market data, or DMA, smart order routing ...

Q2b: can a client take the signal and trade through another broker?
%%A: i believe she won't be able to profit from it. The vendor will make sure you route your orders to them. Assuming signal is generated in the sell-side system, then you probably pay for the signals.

In a complex multilateral set-up, always ask
Q: which entity makes trading decisions?
%%A: probably not the algo vendor

In contrast, the block-trade deal is simpler. Trading decisions are made by the sell-side (say GS), on behalf of the buy-side (say Metlife). GS might be the counter-party to Metlife or just a middleman. If GS routes the order to CBOT, then GS sponsors the trade. See http://bigblog.tanbin.com/2009/09/adp-broker-means.html

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