In the last few years, Quant has been a strong buzzword. It’s a field dedicated to making money using logic and mathematics, which is very attractive to engineers. Before diving, let’s understand what Quant is.
Traditionally folks used to take trades in the financial markets by calling their brokers and telling them which share to buy, and then the broker would roll their chair to the terminal and punch an order, taking an easy minute to buy the share, and an extra minute for their order to get filled (since someone has to be selling for someone to buy), making the whole process to take 120 seconds, and that’s excluding the strategic planning people did for buying the stock, so that might be an easy 5-6 minutes, ergo the entire process used to take 400 seconds or so. But things have rather changed in 2022, firms are doing all of this within 0.0000001 seconds (100 nanoseconds). This is known as High-Frequency-Trading (HFT).
Just have a moment to think about how exactly all of this happened, the technology which might have been used to develop such fast systems, and the strategies which are so smart to take decisions as fast as your brain.
Quant does not require for you to know about Finance, don’t worry about learning finance first.
Let’s explore different components in the field:
Let’s understand how exactly all of this work.
First, you need to understand how the stock market operates, if you want to buy a share of XYZ company which is currently priced at 100Rs, someone must be willing to sell you the share at the same price, that’s when a “trade” occurs.
You can’t sell if there’s no one willing to buy at your supplying price, and you can’t buy if no one is willing to sell at your demanded price. Hence the whole thing follows the supply and demand curve.
Now there are a lot of ways HFT & Quant firms make money, such as arbitrage, leveraging volatility skews but that’s way too complicated for the scope of this track so let’s explore the most important foundational concept of these firms, known as Market Making.
As the name suggests, these firms “make” the market, which means they provide liquidity (smooth flow of money). Ever wondered whenever you place a BUY order on zerodha, how exactly does it gets executed in less than a second? Does it mean someone else wanted to SELL you the underlying at that particular price? No, the person that you're most probably selling to is the market maker, the very fact that everyone’s orders are being executed within a snap is providing liquidity i.e. making the markets smooth and efficient. But the financial industry is hardly known for its goodwill so what exactly is it in for these firms? How are they benefiting by matching your order?
Keep in mind, BUYER WANTS TO BUY THINGS CHEAP and the SELLER WANTS TO SELL THINGS AT A HIGH PRICE
The above photo is of the bid-ask spread:
BID: You want to buy something so you’ll bid your offer, the higher you offer the better your chances are of getting it, just like during an auction. The highest bid is the best bid = 18,717.28/-
ASK: You want to sell something, so you’ll give your offer in the market, the cheaper you offer the better chances you have of selling it because the buyer does not want to buy the asset at an expensive price. The lowest ask is the best ask = 18727.15/-
Spread: Best Ask - Best Bid = 9.87/-