Inside the Black Box (2nd Edition): A Simple Guide to Quantitative and High-Frequency Trading

Whether you call it quant, algo, or black box trading, it all adds up to the same thing: systematic trading performed by computers.

While some decry it as dangerously detached from human control, and a driver of excessive volatility in the markets, others see quantitative trading as a welcome departure from the unruly passions and cognitive biases that inform human investment decision making.

Say what you will about quant trading, the fact is, overall, quant funds consistently outperform the markets―which may be why so many smart investors are keen to avail themselves of that black box magic.

Unfortunately, much remains obscure about quantitative trading, thanks in great part to the extreme guardedness of quants when it comes to the details of how their systems work. But, as quant-trader and master explainer Rishi Narang deftly shows in this updated edition of his bestselling guide, quantitative trading is much easier to understand and take advantage of than you think.

Designed to make quantitative trading comprehensible to even the most math- or technophobic investor, this book takes you on a guided tour inside the black box. In plain English, Narang turns the lights up on what the quants are up to, once and for all lifting the veil of mystery surrounding quantitative trading and quantitative trading strategies.

Following a concise introduction to quantitative trading principles and general practices, Narang cuts to the chase with a detailed inventory of the contents of a typical black box system, explaining, in non-technical terms, what each one is and how it fits together with the others.

Then, with the help of numerous real-world examples and lively anecdotes, he clearly explains:

• The most common quant system structures
• How quants capture alpha
• The level of discretion in quant trading
• High-frequency trading and the infrastructure that supports it
• Execution algorithms and how they work
• How quants model risk and how to know if a particular model really works
• The important difference between theory-driven systems vs. data-mining strategies
• How to evaluate quant managers and their strategies
• How quant strategies can fit into an overall portfolio strategy―and why they’re so important
• Current and future trends in quant trading and the role it will play in the years ahead

A book that lifts the lid on black box trading, making it transparent, intuitively sensible, and readily understandable, Inside the Black Box is a must-read for institutional investors, asset managers, investment advisors, pension fund managers, and all savvy investors looking to gain an edge in today’s turbulent financial markets.

Anout the Author

Rishi K. Narang is the Founding Principal of T2AM LLC, which invests in quantitative strategies. He has been involved in the hedge fund industry variously as an investor in and practitioner of quantitative trading strategies since 1996. He completed his undergraduate degree in economics at the University of California at Berkeley.

Praise for Inside the Black Box

“Rishi provides a comprehensive overview of quantitative investing that should prove useful both to those allocating money to quant strategies and those interested in becoming quants themselves. Rishi’s experience as a well-respected quant Fund of Funds manager and his solid relationships with many practitioners provide ample useful material for his work.” ―Peter Muller, founder, PDT Partners

“Quantitative trading, like all investment strategies, gets more complex yet more interesting the deeper you dig into it. Rishi deftly peels back the layers, walking readers through each building block and their combination, then providing useful chapters on evaluating model-based approaches and finally a new section surveying high-frequency trading. Anyone approaching the space will learn something from this clear, thorough, and readable book.” ―Aleksander Weiler, CFA, Senior Portfolio Manager, Public Market Investments, Canada Pension Plan Investment Board

“Rishi continues to demystify even more quantitative trading areas in this excellent new edition. Significant updates include several new chapters that shine much-needed light on high-speed and high-frequency trading. This book continues to be a must-read for anyone interested in quantitative trading.” ―Steve Evans, Managing Director of Quantitative Trading, Tudor Investment Corporation

“In Inside the Black Box: A Simple Guide to Quantitative and High-Frequency Trading, Rishi Narang demystifies quantitative trading. His explanation and classification of alpha will enlighten even a seasoned veteran.” ―Blair Hull, former founder of Hull Trading Co. and founder of Ketchum Trading

“In this updated edition, Rishi again provides an insightful taxonomy of a wide range of systematic trading strategies in liquid instruments. Without the extensive use of complex formulae, this book offers intuitive explanations of some of the choices faced by quants in constructing trading systems, and is a valuable read for investors and quantitative trading practitioners alike.” ―Ross Garon, Managing Director, Quantitative Strategies, SAC Capital Advisors, LP

“Rishi takes a complicated subject and distills it down to its essentials using non-technical language and numerous concrete examples to bring concepts alive. Inside the Black Box provides readers with a valuable framework to understand the various components of quant strategies and insights on how to evaluate and interview quant managers. Inside the Black Box is a useful reference guide for any institutional allocator to quant strategies.” ―Daren Smith, CFA, CAIA, FSA, Managing Director, Manager Selection & Portfolio Construction, University of Toronto Asset Management

“If a car were a black box, Rishi would be the gentle voice of the navigation system. Not the one driving, but if you want to know where everyone is going: just listen.” ―Harold de Boer, CEO, Transtrend

Dimensions: 15.75 x 3.3 x 23.11 cm