Inside the black box: a simple guide to quantitative and high-frequency trading

337 Pages·2013·30.52 MB·English

by  Rishi K. Narang

Additional Praise for Inside the Black Box
“Rishi presents a thorough overview of quant trading in an easy-to-read
format, free of much of the hype and hysteria that has recently surrounded
computerized trading. The book clearly categorizes the different types of
strategies, explaining in plain English the basic ideas behind how and when
they work. Most importantly, it dispels the popular notion that all quants
are the same, exposing the diversity of the types of skills and thinking that
are involved in quant trading and related disciplines. An excellent read for
anyone who wants to understand what the field is all about.”
—Shakil Ahmed, PhD, Global Head of Market Making, Citi Equities
“To look at the man, you would never know that Rishi could write so clear-
ly and effectively about something as complex as quantitative trading and
investment. But he does and does it brilliantly. And, even if you already own
the first edition, you should buy this one, too. The new material on high
speed trading is worth the price of admission, and you will have a chance,
especially in Chapter 16, to see Rishi at his incisive and high spirited best. If
you don’t laugh out loud, you have no soul.”
—Galen Burghardt, Director of Research, Newedge
“Quant managers will find their meetings with investors to be smoother if
the investors have read this book.  And even more so if the manager him or
herself has read and understood it.”
—David DeMers, Portfolio Manager, SAC Capital Advisors, LP
“In this second edition of Inside the Black Box Rishi highlights role of quant
trading in recent financial crises with clear language and without using any
complex equations. In chapter 11 he addresses common quant myths. He
leads us effortlessly through the quant trading processes and makes it very
easy to comprehend, as he himself is a quant trader.”
—Pankaj N. Patel, Global Head of Quantitative Equity Research,
Credit Suisse

Inside the
Black Box
Founded 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 market-
ing print and electronic products and services for our customers’ profes-
sional and personal knowledge and understanding.
The Wiley Finance series contains books written specifically for finance
and investment professionals as well as sophisticated individual investors
and their financial advisors. Book topics range from portfolio management
to e-commerce, risk management, financial engineering, valuation and fi-
nancial instrument analysis, as well as much more.
For a list of available titles, visit our Web site at www.WileyFinance.com.
Inside the
Black Box
A Simple Guide to Quantitative
and High-Frequency Trading
Second Edition
RISHI K NARANG
John Wiley & Sons, Inc.
Cover image: © Istock Photo/Maddrat.
Cover design: Paul McCarthy.
Copyright © 2013 by Rishi K Narang. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
First edition published by John Wiley & Sons, Inc. in 2009.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted
in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or
otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright
Act, without either the prior written permission of the Publisher, or authorization through
payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood
Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.
copyright.com. Requests to the Publisher for permission should be addressed to the Permissions
Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone],
fax [phone], or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts
in preparing this book, they make no representations or warranties with respect to the accuracy
or completeness of the contents of this book and specifically disclaim any implied warranties of
merchantability or fitness for a particular purpose. No warranty may be created or extended by
sales representatives or written sales materials. The advice and strategies contained herein may not
be suitable for your situation. You should consult with a professional where appropriate. Neither
the publisher nor author shall be liable for any loss of profit or any other commercial damages,
including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please
contact our Customer Care Department within the United States at [phone], outside the
United States at [phone] or fax [phone].
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some
material included with standard print versions of this book may not be included in e-books or
in print-on-demand. If this book refers to media such as a CD or DVD that is not included in
the version you purchased, you may download this material at http://booksupport.wiley.com.
For more information about Wiley products, visit www.wiley.com.
Library of Congress Cataloging-in-Publication Data:
Narang, Rishi K, 1974-
Inside the black box : a simple guide to quantitative
and high-frequency trading/Rishi K. Narang. — Second edition.
pages cm. — (Wiley finance series)
Includes bibliographical references and index.
ISBN 978-1-118-36241-9 (cloth); ISBN 978-1-118-42059-1 (ebk);
ISBN 978-1-118-58797-3 (ebk); ISBN 978-1-118-41699-0 (ebk)
1. Portfolio management—Mathematical models. 2. Investment analysis—
Mathematical models. 3. Stocks—Mathematical models. I. Title.
HG4529.5.N37 2013
332.64’2—dc23
2012047248
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
This edition is dedicated to my son, Solomon K Narang,
whose unbridled curiosity I hope will be with him always.