PRIOR to 2007, systematic or quantitative trading were all the rage, especially on Wall Street.
Back then, quantitative equity managers enjoyed a strong performance which provided significant assets.
The long, almost uninterrupted, record of positive returns attracted interest from institutional investors who wanted to diversify from underperforming fund managers.
Furthermore, multi-strategy hedge funds saw quantitative equity market neutral strategies as a complement to their broader portfolios.
The continued performance attracted large inflows, which was soon combined with increasingly high levels of leverage within systematic strategies.
This left the quantitative equity landscape financially fragile, and thus not surprisingly, the famous “Quant Quake” of August 2007 occurred.
Quant funds lost billion of dollars as highly-correlated trading algorithms inexplicably dumped stocks leading to the 2009 financial crisis.
Systematic trading still exists, but its popularity is vastly different from a decade ago.
What is systematic trading and what is used for?
It is a method of trading using automated computer systems and frameworks, which streamlines processes and reduces the likelihood that a trade may be missed due to a human error.
It is primarily used to make investment and trading decisions in a methodical way, allowing investors to set trade goals and risk controls.
It is mainly based on technical analysis of market data. It includes both algorithmic trading and passive index tracking.
Typically, systematic trading supplements a trader’s usual trading habits, as it guides a trader in their entry, stop loss, and profit taking which are based on their trading criteria.
By following the criteria, it would provide a consistent performance and better emotional control.
StarBizWeek speaks to Kenanga Investment Bank Bhd head, quant and artifical intelligence trading solutions Chan Ken Yew, and his assistant vice-president Adrian Ng, to get a better understanding of how systematic trading works. Below are excerpts of the interview:
Quant funds aren’t known to create big returns compared with value investing. What are your thoughts on this?
Chan: It depends on which type of quant funds, as value investing can be done in a quantitative manner. We believe that regardless of value investing or price action trading, as long it can be quantified it can be classified as a quantitative fund.
How would you advise an investor now?
Chan: We believe that investors must first access their risk appetite and targeted return before starting their journey in investments or trading.
There is consistency in systematic trading. The approach in adopting systematic trading provides the investor or trader a set of methods in approaching their investments or trades be it long-term or short-term, without emotions.
The elimination of emotions in investments and trade is key to help an investor or trader to make rational decisions, as emotions like fear and greed most often drive investors to make irrational decisions.
What are the flexibility and potential goals; both short-term and long-term for systematic trading?
Ng: The possibilities are endless as one can design their short-term and long-term systematic trading strategies to their own preference.
Most importantly, one must design trading strategies based on their risk appetite and goals.
We believe that with systematic trading, there are opportunities to still achieve certain targeted returns regardless of market situation.
When putting your money to work, it depends on the design of the strategy. It could be based on fundamental data or technical data, be it revenue, earnings growth, low price earnings, or just price and volume.
However, we must note that it is critical to have a clear objective and goals in designing our trading system and risk appetite.
How can traders leverage on systematic trading to supplement their usual trading habits?
Despite relatively low return, what can traders expect in the long run?Ng: We believe that by adopting the approach of systematic trading, anyone can be a trader as it is highly-scalable, as it allows users to execute their trading strategies without much thought.
However, we note that in systematic trading, backtesting and proof of concept is critical and is a must before users begin trading systematically. Trading systematically without any backtesting or proof of concept can be disastrous as one might be trading on a strategy that was never profitable.
With the social distancing and change in the way people meet and communicate, what are some of the effective platforms used to communicate trading updates with traders and potential traders?
Ng: For us, prior to the movement control order (MCO), we were sharing our trading ideas through our Kenanga Trade to Win telegram channel where it encompasses technical, fundamental and systematic trading ideas.
After the MCO was implemented, we believed that it was a good opportunity to introduce short-term systematic trading (day-trading in a systematically way).
Thus, we would share with our followers in telegram on, for example, five stocks that we are looking for trading opportunities before the market opens.
As the market goes live, we would monitor for entry levels for the stocks.
If prices trigger any of our entry levels on these stocks, our followers will receive an updated message.
We follow up on our calls with reminders should the prices begin closing into our target or stop-loss levels, prompting followers that there are profits that are realisable or losses that should be stopped.
Since we started our short-term systematic trading calls on March 30 until May 20, we have made 116 trading calls.
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