QuantitativeTrading-HowtoBuildYourOwnAlgorithmicTradingBusiness.

Quantitative Trading - How to Build Your Own Algorithmic Trading Business.Pl: JYSim JWBK321-Chan September 24, 2008 13: 43 Printer: Yet to comeQuantitativeTradingPl: JYSim JWBK321-Chan September 24, 2008 13: 43 Printer: Yet to comeFounded in 1807, John wiley sons is the oldest independent publish-ing company in the United States. With offices in North America, Europe,Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understandingThe Wiley Trading series features books by traders who have survivedthe market's ever changing temperament and have prospered-some byreinventing systems, others by getting back to basics. Whether a novicetrader, professional, or somewhere in-between, these books will providethe advice and strategies needed to prosper today and well into the futureForalistofavailabletitlesvisitourwebsiteatwww.wileyfinance.comPl: JYSim JWBK321-Chan September 24, 2008 13: 43 Printer: Yet to comeQuantitativeTradingHow to Build your ownAlgorithmic Trading BusinessERNESt。CIANWILEYohn wiley Sons, IncPl: JYSim JWBK321-Chan September 24, 2008 13: 43 Printer: Yet to comeCopyright o 2009 by Ernest P Chan. All rights reserved.Published by Jolul Wiley Sons, Inc, Hobokell New JerseyPublished simultaneously in canadaNo part of this publication may be reproduced, stored in a retrieval system, or transmitted inany form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as periilled under SecTion 107 or 108 of the 1976 United Stales CopyrighT ACL,without either the prior written permission of the Publisher, or authorization through paymentof the appropriate per-copy fee to the Copyright Clearance Center, Inc, 222 Rosewood DriveDanvers,Mao1923,(978)750-8400,fax(978)646-8600,oronthewebatwww.copyright.comRequests to the Publisher for permission should be addressed to the permissions departmentJohn Wiley sons, Inc, 1ll River Street, Hoboken, NJ 07030, (201)748-6011, fax(201)748G008,oronlineathttp://www.wiley.com/go/permissionsLimit of Liability/Disclaimer of Warranty: While the publisher and author have used their bestefforts in preparing this book, they make no representations or warranties with respect to theaccuracy or completeness of the contents of this book and specifically disclaim any impliedwarranties of merchantability or fitness for a particular purpose. No warranty may be createdor extended by sales representatives or written sales materials. The advice and strategies con-tained herein may not be suitable for your situation. You should consult with a professionalwhere appropriate. Neither the publisher nor author shall be liable for any loss of profit or anyother commercial damages, including but not limited to special, incidental, consequential, orother damageFor general information on our other products and services or for technical support, pleasecontact our Customer Care Department within the United States at (800)762-2974, outside theUnited States at. 17572-3399%or fax ( 317572-4002Wiley also publishes its books in a variety of electronic formals Soine conlent Chal appearsin print may not be available in electronic books. For more information about wiley productsvisitourwebsiteatwww.wiley.comLibrary of Congress Cataloging-in-Publication DataChan Ernest pQuantitativc trading: how to build your own algorithmic trading busincss/Emest P Chan.p cm -(Wiley trading series)Includes bibliographical references and index.ISBN9780-470-28488-9( cloth1. Inveslllenl alalysisStocks. 3. STockbrokers. TilleHG4529C44520092.64dc222008020125Printed in the united states of america1098765432Pl: JYSim JWBK321-Chan September 24, 2008 13: 43 Printer: Yet to comeTo my parents Hung yip and Ching, and to BenPl: JYSim JWBK321-Chan September 24, 2008 13: 43 Printer: Yet to comePl: JYSim JWBK321-Chan September 24, 2008 13: 43 Printer: Yet to comeContentsPrefaceAcknowledgmentsCHAPTER 1 The Whats, Whos, and Whys of QuantitativeTradingWho Can Become a Quantitative Trader?The Business Case for Quantitative TradingScalability12455Demand on timeThe nonnecessity of MarketingThe Way ForwardchaPTEr2 Fishing for deasHow to Identify a Strategy That Suits You12Your Working hotYour Programming skills13Your trading CapitalYour goal16A Taste for Plausible Strategies and their PitfallsI7How does It Compare with a benchmark and How consistentAre Its returns?18How Deep and Long Is the draw21How Will Transaction Costs Affect the Strategy?22Does the data suffer from strship bias?24How Did the performance of the strategy change over the Years?24Pl: JYSim JWBK321-Chan September 24, 2008 13: 43 Printer: Yet to comevIICONTENTSDoes the strategy Suffer from Data- Snooping bias?Does the Strategy " Fly under the Radar"of InstitutionalMoney managers27Summa28CⅢ APTER3 BacktestingCommon Backtesting platforms3232MATLABTradeStation35High-End Backtesting Platforms35Finding and using Historical Databases36Are the Data Split and dividend Adjusted?36Are the data survivors hip bias free40Does Your Strategy Use High and Low data?Performance measurement43Common Backtesting pitfalls to Avoid50Look-Ahead bias5IData. Snooping Bias52Transaction costs60Strategy Refinement65Summary66CHAPTER 4 Selling Up Your Business6」Business Structure: Retail or Proprietary?69Choosing a Brokerage or Proprietary Trading FirmPhysical Infrastructure75Summary77CHAPTER 5 Execution Systems7What an Automated Trading System Can Do for You79Building a Semiautomated Trading SystemBIBuilding a Fully Automated Trading Syster84Minimizing Transaction Costs87