A Quants Journal (Episode 0): Breaking Wall Street
About the Author
Robin Hood. To most of the world, this name generates the image of a noble avenger in green tights living in Sherwood Forest. And then there are those of us who must inevitably remember the infamous stories of 18-years-olds who made and lost fortunes using only their phones in their parents’ basement during the first lockdown and the subsequent stock market crash of March 2020.
Just like so many other bored and quarantined millennials who took it upon them to open a brokerage account with an app of their choice this spring, I now belong to the latter. And as so many of them, my not-so-sophisticated ideas did not exactly generate Warren-Buffet-like returns.
But - and here comes the reason why you should follow the series – I recently invested my time not only in fruitless trading, but I also taught myself a new language: Python. And mixing that with knowing a thing or two about machine learning, finance and a general understanding of the economy, you get my newest project: algorithmic trading. Reading this series will allow you to follow my progress down this rabbit hole, all my findings, ideas and failures.
Why do I think this is a good idea?
In 2013, the website www.willrobotstakemyjob.com predicted a 53% chance of the automation of the financial industry. Together we might find out how. The secret master plan (just between you and me) goes as follows:
1. Build a framework that allows me to experiment with various strategies. I know that are plenty tools/platforms out there, but I prefer to do as much from scratch as possible first.
2. Apply theoretical knowledge and share insights with the readership.
3. By try-and-error (and using BSOC´s swarm intelligence) improve the script step-by-step.
4. One day (hopefully) beat the market in terms of returns and/or Sharpe-Ratio.
Step 4 is especially ambitious and along with the title slightly preposterous. This becomes apparent when remembering that (large-cap) funds, generally speaking, are having a hard time to achieve the latter. The statistic below is sobering, even while being distorted by the survivorship bias (only funds are considered that have not been liquidated due to bad performance).
Keeping this in mind, an estimated 53% probability of replacement does not seem too excessive.
Anyways, the estimate brings me back to the introduction of this episode. That is because rumor had it, that Robin Hood was not the only social activist living in Sherwood Forrest. Another remarkable and fictional inhabitant was called Ned Ludd. This early advocate of economic degrowth allegedly smashed two stocking frames in 1779. Consequently, a secret and oath-based group of radical textile-workers, fearing replacement by machines, named itself after him: The Luddites (Maschinenstürmer).
Hopefully, this project leads to a better understanding of the financial markets, asset-management, decision-making and not to a group of furious investment bankers breaking my laptop.
Outlook (and Cliffhanger) for Episode 1
In the next episode, we will look at my first one hundred lines of code. We will see how it managed to outperform the market and later realize, why it is still not (yet) a serious threat to Wall Street. As a reader, please by strongly invited to share all your thoughts, ideas and criticism that might come up during this journey with me!
I would be excited to see you soon again for Episode 1 of A Quants Journal. Stay healthy,