Kumiega / Vliet Quality Money Management

Process Engineering and Best Practices for Systematic Trading and Investment
1. Auflage 2011
ISBN: 978-0-08-055991-9
Verlag: Elsevier Science & Techn.
Format: PDF
Kopierschutz: 1 - PDF Watermark

E-Book, Englisch, 304 Seiten, Web PDF

The financial markets industry is at the same crossroads as the automotive industry in the late 1970s. Margins are collapsing and customization is rapidly increasing. The automotive industry turned to quality and its no coincidence that in the money management industry many of the spectacular failures have been due largely to problems in quality control. The financial industry in on the verge of a quality revolution.
New and old firms alike are creating new investment vehicles and new strategies that are radically changing the nature of the industry. To compete, mutual funds, hedge fund industries, banks and proprietary trading firms are being forced to quicklyy research, test and implement trade selection and execution systems. And, just as in the early stages of factory automation, quality suffers and leads to defects. Many financial firms fall short of quality, lacking processes and methodologies for proper development and evaluation of trading and investment systems.
Authors Kumiega and Van Vliet present a new step-by-step methodology for such development. Their methodology (called K|V) has been presented in numerous journal articles and at academic and industry conferences and is rapidly being accepted as the preferred business process for the institutional trading and hedge fund industries for development, presentation, and evaluation of trading and investment systems. The K|V model for trading system development combines new product development, project management and software development methodologies into one robust system. After four stages, the methodology requires repeating the entire waterfall for continuous improvement.
The discussion quality and its applications to the front office is presented using lessons learned by the authors after using the methodology in the real world. As a result, it is flexible and modifiable to fit various projects in finance in different types of firms. Their methodology works equally well for short-term trading systems, longer-term portfolio management or mutual fund style investment strategies as well as more sophisticated ones employing derivative instruments in hedge funds.
Additionally, readers will be able to quickly modify the standard K|V methodology to meet their unique needs and to quickly build other quantitatively drive applications for finance. At the beginning and the end of the book the authors pose a key question: Are you willing to change and embrace quality for the 21st century or are willing to accept extinction?
The real gem in this book is that the concepts give the reader a road map to avoid extinction.
* Presents a robust process engineering framework for developing and evaluating trading and investment systems
* Best practices along the step-by-step process will mitigate project risk, model risk, and ensure data quality.
* Includes a quality model for backtesting and managing market risk of working systems.

Ben Van Vliet is a Lecturer at the Illinois Institute of Technology (IIT), where he also serves as the Associate Director of the M.S. Financial Markets program. At IIT he teaches courses in quantitative finance, C++ and .NET programming, and automated trading system design and development. He is vice chairman of the Institute for Market Technology, where he chairs the advisory board for the Certified Trading System Developer (CTSD) program. He also serves as series editor of the Financial Markets Technology series for Elsevier/Academic Press and consults extensively in the financial markets industry.
Mr. Van Vliet is also the author of 'Modeling Financial Markets' with Robert Hendry (2003, McGraw Hill) and 'Building Automated Trading Systems'(2007, Academic Press. Additionally, he has published several articles in the areas of finance and technology, and presented his research at several academic and professional conferences.

Autoren/Hrsg.

Kumiega, Andrew

Vliet, Benjamin van

Inhaltsverzeichnis

1;Cover;1
2;Contents;6
3;Preface;8
4;Chapter 1 Introduction;10
4.1;1.1. A Brief History of the Quality Revolution;11
4.2;1.2. A Brief History of Finance and Engineering;12
4.3;1.3. Quality and Trading/Money Management;13
4.4;1.4. Managing the Process of Trading/Investment System Development;13
4.5;1.5. Operational Risk;16
4.6;1.6. Project Risk;16
4.7;1.7. Buy versus Build;17
4.8;1.8. A Quality Approach to Development;18
4.9;1.9. Who Is This Book For?;20
4.10;1.10. THE KEY: Design Your Own Process;21
4.11;1.11. Summary;21
5;Chapter 2 Key Concepts and Definitions of Terms;24
5.1;2.1. Benchmarking;24
5.2;2.2. Best Practices;26
5.3;2.3. Capital;26
5.4;2.4. Conformance;26
5.5;2.5. Continuous Improvement, or Kaizen;26
5.6;2.6. Customer, Client, and Investor;27
5.7;2.7. Corrective Action;27
5.8;2.8. Delphi Techniques;27
5.9;2.9. Design and Development;28
5.10;2.10. Document;28
5.11;2.11. Financial Engineering;28
5.12;2.12. Gate;29
5.13;2.13. Innovation;29
5.14;2.14. Life Cycle;30
5.15;2.15. Modeling Software;30
5.16;2.16. Preventive Action;30
5.17;2.17. Process or System;30
5.18;2.18. Process Approach to Management;31
5.19;2.19. Product;31
5.20;2.20. Product Realization;31
5.21;2.21. Product Team;32
5.22;2.22. Quality;32
5.23;2.23. Quality Money Management;32
5.24;2.24. Quality Planning;33
5.25;2.25. Software Quality Attributes;33
5.26;2.26. Stable or Stationary System;33
5.27;2.27. Standard;34
5.28;2.28. Statistical Process Control;34
5.29;2.29. Timeboxing;34
5.30;2.30. Top Management;34
5.31;2.31. Trading/Investing;34
5.32;2.32. Trading/Investment System;35
5.33;2.33. Trading/Investment System Maturity Model;35
5.34;2.34. Value Stream and Value-Stream Mapping;36
5.35;2.35. Variation;36
5.36;2.36. Vendor;36
5.37;2.37. Summary;36
6;Chapter 3 Overview of the Trading/Investment System Development Methodology;38
6.1;3.1. The Money Document;39
6.2;3.2. Waterfall Methodology;39
6.3;3.3. Spiral Methodology;40
6.4;3.4. Stage-Gate® Methodology;40
6.5;3.5. Six Sigma, Lean, and Agile Development;42
6.6;3.6. Trading/Investment System Development Methodology;42
6.7;3.7. Design and Document Trading/Investment Strategy (Chapter 7);45
6.8;3.8. Gate 1 (Chapter 12);47
6.9;3.9. Backtest (Chapter 13);47
6.10;3.10. Gate 2 (Chapter 18);49
6.11;3.11. Implement (Chapter 19);49
6.12;3.12. Gate 3 (Chapter 24);51
6.13;3.13. Manage Portfolio and Risk (Chapter 25);51
6.14;3.14. Repeat the Entire Waterfall Process for Continuous Improvement (Kaizen) (Chapter 30);52
7;Chapter 4 Managing Design and Development;54
7.1;4.1. Trading and Money Management Firms;54
7.2;4.2. Portfolios of Trading/Investment Systems;55
7.3;4.3. The Role of Top Management;58
7.4;4.4. The Role of the Product Team;62
7.5;4.5. The Fuzzy Front End;65
7.6;4.6. Summary;68
8;Chapter 5 Types of Trading Systems;70
8.1;5.1. Trigger Systems;70
8.2;5.2. Filter Systems;71
8.3;5.3. Signal Strength Systems;71
8.4;5.4. Example Trigger System: Statistical Arbitrage;72
8.5;5.5. Example Filter System: Buy Write;73
8.6;5.6. Example Signal Strength System: Multifactor Long–Short;74
8.7;5.7. Conclusion;74
9;Chapter 6 STAGE 0: The Money Document;76
9.1;6.1. Business Description;78
9.2;6.2. Market Analysis;80
9.3;6.3. Request Seed Capital;83
9.4;6.4. Conclusion;86
10;STAGE I: Design and Document Trading/Investment Strategy;88
10.1;Chapter 7 STAGE 1: Overview;90
10.1.1;7.1. LOOP 1: Analyze Competing Strategies;92
10.1.2;7.2. LOOP 2: Develop New Strategies;93
10.1.3;7.3. LOOP 3: Consolidate Trading/Investment System Design;93
10.1.4;7.4. Outputs/Deliverables;94
10.1.5;7.5. Summary;94
10.2;Chapter 8 Describe Trading/Investment Idea;96
10.2.1;8.1. Writing Descriptions Effectively;99
10.2.2;8.2. Logic Leaks;100
10.2.3;8.3. STEP 1, LOOP 1: Review Money Document Description;101
10.2.4;8.4. STEP 1, LOOP 2: Review Knowledge and Plan New Research;102
10.2.5;8.5. STEP 1, LOOP 3: Consolidate Trading System Details (All Equations and Logic Rules);103
10.2.6;8.6. Summary;103
10.3;Chapter 9 Research Quantitative Methods;106
10.3.1;9.1. Benchmarking Quantitative Methods;107
10.3.2;9.2. STEP 2, LOOP 1: Research Similar/Competing Systems;108
10.3.3;9.3. STEP 2, LOOP 2: Research New Methods;110
10.3.4;9.4. STEP 2, LOOP 3: Consolidate Trading/Investment System Design;111
10.3.5;9.5. Summary;112
10.4;Chapter 10 Prototype in Modeling Software;114
10.4.1;10.1. Rapid Development;115
10.4.2;10.2. Prototyping Components;116
10.4.3;10.3. Spreadsheet Modeling;120
10.4.4;10.4. STEP 3, LOOP 1: Prototype Known Calculations;121
10.4.5;10.5. STEP 3, LOOP 2: Prototype New Calculations;122
10.4.6;10.6. STEP 3, LOOP 3: Build Consolidated Prototype;122
10.4.7;10.7. Summary;123
10.5;Chapter 11 Check Performance;124
10.5.1;11.1. Walkthroughs and Inspections;124
10.5.2;11.2. Spreadsheet Testing;125
10.5.3;11.3. STEP 4, LOOP 1: White Box Test Formulas;127
10.5.4;11.4. STEP 4, LOOP 2: Perform Gray Box Testing with Inputs and Outputs;128
10.5.5;11.5. STEP 4, LOOP 3: Perform Black Box Testing, Documenting Results Using Inputs and Outputs;128
10.5.6;11.6. Trading the Prototype;129
10.5.7;11.7. Performance Runs and Control;130
10.5.8;11.8. Summary;130
10.6;Chapter 12 Gate 1;132
10.6.1;12.1. Running a Successful Gate Meeting;133
10.6.2;12.2. Inputs/Deliverables;136
10.6.3;12.3. Summary;136
11;STAGE II: Backtest;138
11.1;Chapter 13 STAGE 2: Overview;140
11.1.1;13.1. Converting Prototypes to Coded Models;141
11.1.2;13.2. Information Management and Database Design;142
11.1.3;13.3. LOOP 1: Quality Assurance Testing;143
11.1.4;13.4. LOOP 2: Optimize Signals;144
11.1.5;13.5. LOOP 3: Generate Simulated Track Record;144
11.1.6;13.6. Outputs/Deliverables;145
11.1.7;13.7. Summary;145
11.2;Chapter 14 Gather Historical Data;148
11.2.1;14.1. Purchasing Data from Vendors;149
11.2.2;14.2. STEP 1, LOOP 1: Survey Data Needs and Vendors;149
11.2.3;14.3. STEP 1, LOOP 2: Purchase Data;153
11.2.4;14.4. STEP 1, LOOP 3: Document Data Maps and Results Tables;155
11.2.5;14.5. Summary;155
11.3;Chapter 15 Develop Cleaning Algorithms;158
11.3.1;15.1. STEP 2, LOOP 1: Identify Required Cleaning Activities and Algorithms;159
11.3.2;15.2. STEP 2, LOOP 2: Clean and Adjust for Known Issues;164
11.3.3;15.3. STEP 2, LOOP 3: Document Cleaning Algorithms;164
11.3.4;15.4. Summary;165
11.4;Chapter 16 Perform In-Sample/Out-of-Sample Tests;166
11.4.1;16.1. STEP 3, LOOP 1: Define Testing Methodology;167
11.4.2;16.2. STEP 3, LOOP 2: Perform In-Sample Test for Large Sample;169
11.4.3;16.3. STEP 3, LOOP 3: Perform Out-of-Sample Test;171
11.4.4;16.4. Summary;172
11.5;Chapter 17 Check Performance and Shadow Trade;174
11.5.1;17.1. STEP 4, LOOP 1: Perform Regression Test to Validate Algorithms and Benchmark;175
11.5.2;17.2. STEP 4, LOOP 2: Perform Regression Test of In-Sample Results against Prototype;176
11.5.3;17.3. STEP 4, LOOP 3: Perform Regression Test of OS Test Results against IS Results and SPC Outputs and Shadow Trade;176
11.5.4;17.4. Summary;177
11.6;Chapter 18 Gate 2;178
11.6.1;18.1. Portfolio Review;180
11.6.2;18.2. Inputs/Deliverables;181
11.6.3;18.3. Summary;181
12;STAGE III: Implement;184
12.1;Chapter 19 STAGE 3: Overview;186
12.1.1;19.1. Development Team;187
12.1.2;19.2. Real-Time Systems;189
12.1.3;19.3. LOOP 1: Program and Test Trading/Investment Algorithms;189
12.1.4;19.4. LOOP 2: Build and Test Interfaces;190
12.1.5;19.5. LOOP 3: Create Network Architecture;190
12.1.6;19.6. Outputs/Deliverables;191
12.1.7;19.7. Summary;191
12.2;Chapter 20 Plan and Document Technology Specifications;192
12.2.1;20.1. Software Requirements Specification;193
12.2.2;20.2. Collaborative Planning;195
12.2.3;20.3. Buy versus Build;196
12.2.4;20.4. Hitting Deadlines;197
12.2.5;20.5. LOOP 1: Document Software Requirements;198
12.2.6;20.6. LOOP 2: Document Interface Requirements;199
12.2.7;20.7. LOOP 3: Document Hardware and Network Requirements;199
12.2.8;20.8. Summary;199
12.3;Chapter 21 Design System Architecture;202
12.3.1;21.1. Software Tiers;203
12.3.2;21.2. Design Process;204
12.3.3;21.3. Software Architecture Document;208
12.3.4;21.4. High Frequency Trading Systems;209
12.3.5;21.5. LOOP 1: Design Business Rules Packages;209
12.3.6;21.6. LOOP 2: Design Interface Packages;210
12.3.7;21.7. LOOP 3: Design Network Architecture;211
12.3.8;21.8. Summary;211
12.4;Chapter 22 Build and Document the System;214
12.4.1;22.1. Programming Considerations;215
12.4.2;22.2. Database Connections;217
12.4.3;22.3. Refactoring;217
12.4.4;22.4. LOOP 1: Program Business Rules Packages;218
12.4.5;22.5. LOOP 2: Program Interface Packages;219
12.4.6;22.6. LOOP 3: Buy/Build Network Infrastructure Components;220
12.4.7;22.7. Summary;221
12.5;Chapter 23 Check Performance and Probationary Trade;222
12.5.1;23.1. Quality Assurance;223
12.5.2;23.2. Loop 1: Test against Black Box Results from Stage 2;224
12.5.3;23.3. Loop 2: Test Data and Graphical User Interfaces;225
12.5.4;23.4. Loop 3: Perform Final Audit and Probationary Trade;225
12.5.5;23.5. User Documentation;227
12.5.6;23.6. Probationary Trading;227
12.5.7;23.7. Summary;227
12.6;Chapter 24 Gate 3;230
12.6.1;24.1. Process Improvement and Benchmarking;231
12.6.2;24.2. Deliverables/Inputs;233
12.6.3;24.3. Summary;234
13;STAGE IV: Manage Portfolio and Risk;236
13.1;Chapter 25 STAGE 4: Overview;238
13.1.1;25.1. History of Risk and Return;239
13.1.2;25.2. A Brief History of Quality Control;241
13.1.3;25.3. Combining Performance and Quality Control;241
13.1.4;25.4. LOOP 1: Assess Single Performance;242
13.1.5;25.5. LOOP 2: Measure Performance Attribution;242
13.1.6;25.6. LOOP 3: Assess Value at Risk;243
13.1.7;25.7. Deliverables;243
13.1.8;25.8. Summary;243
13.2;Chapter 26 Plan Performance and Risk Processes;246
13.2.1;26.1. LOOP 1: Specify Single Performance Controls;248
13.2.2;26.2. LOOP 2: Define Benchmarks and Attribution Controls;248
13.2.3;26.3. LOOP 3: Choose VaR Methodology;251
13.2.4;26.4. Summary;252
13.3;Chapter 27 Define Performance Controls;254
13.3.1;27.1. LOOP 1: Benchmark Single Performance Calculations;255
13.3.2;27.2. LOOP 2: Benchmark Attribution Calculations;255
13.3.3;27.3. LOOP 3: Benchmark VaR Calculations and Software;257
13.3.4;27.4. Summary;258
13.4;Chapter 28 Perform SPC Analysis;260
13.4.1;28.1. A Brief History of SPC;261
13.4.2;28.2. Process View;262
13.4.3;28.3. SPC Control Charts;263
13.4.4;28.4. LOOP 1: Perform SPC Analysis on Single Metrics;270
13.4.5;28.5. LOOP 2: Perform SPC on Attribution Metrics;270
13.4.6;28.6. LOOP 3: Perform SPC on VaR Metrics;270
13.4.7;28.7. Summary;270
13.5;Chapter 29 Determine Causes of Variation;272
13.5.1;29.1. Failure Mode and Effects Analysis;273
13.5.2;29.2. The Five Whys;273
13.5.3;29.3. Fishbone Diagram;273
13.5.4;29.4. Pareto Analysis;274
13.5.5;29.5. Design of Experiments;275
13.5.6;29.6. Analysis of Variance;276
13.5.7;29.7. Sources of Assignable Causes;276
13.5.8;29.8. LOOP 1: Determine Causes of Variation in Single Performance;277
13.5.9;29.9. LOOP 2: Determine Causes of Variation in Attribution;277
13.5.10;29.10. LOOP 3: Determine Causes of Variation in VaR;278
13.5.11;29.11. Summary;279
13.6;Chapter 30 Kaizen: Continuous Improvement;280
13.6.1;30.1. Continuous Improvement Processes;280
13.6.2;30.2. ISO 9000;281
13.6.3;30.3. Ford 8D Problem Solving Process;282
13.6.4;30.4. Continuous Improvement and Innovation;282
13.6.5;30.5. In Conclusion;283
14;Endnotes;288
15;Index;296
15.1;A;296
15.2;B;296
15.3;C;297
15.4;D;297
15.5;E;298
15.6;F;298
15.7;G;299
15.8;H;299
15.9;I;299
15.10;K;299
15.11;L;299
15.12;M;300
15.13;N;300
15.14;O;300
15.15;P;300
15.16;Q;301
15.17;R;302
15.18;S;302
15.19;T;303
15.20;U;304
15.21;V;304
15.22;W;304
15.23;X;304