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An Overview of Quantitative Research and Trading

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2003/09/22

Abstract

Celent estimates that quantitative research techniques now control over US$4 trillion in assets, and that model-driven trading now comprises 34% of US equity volume by total shares traded.

The last ten years have seen an increasing number of investment management and brokerage firms using quantitative techniques to select and trade financial products. This increase is due to a variety of factors, including revenue opportunities, the availability of off-the-shelf technology, and the popularization of empirical investment analysis on Wall Street.

In a new report, "An Overview of Quantitative Research and Trading," Celent analyzes the trend of investment managers and brokerage firms to use quantitative techniques to select and trade financial products.

The rise of model-driven trading is a steady undercurrent in today's equity market environment. Suggestions of this growth can be seen from ECN trading in NYSE-Listed securities, new quantitative subcategories for NYSE-reported program trades, and an increase in off-the-shelf technologies for model-driven trading. Celent estimates that 34% of all trading in US equities is now purely model-driven, including trades made intra-day or over a longer time horizon. Celent expects this number to increase slightly over the next few years before hitting a point of equilibrium near 45%.

The last few years have seen an explosion of interest in technologies that assist with quantitative trading. Databases, order management systems and order routing tools are the three areas covered in this report. Celent believes that many firms are considering or already have outsourced their development of databases and quantitative order management systems. Our projections of IT spending show the entire database and quantitative OMS market growing slightly over the next three years, with greater spending migrating towards vendors and away from in-house development.

"Quantitative research and trading is a popular trend, though one that is grounded in solid investment theory" comments Sang Lee, co-author of the report. Regardless of the rationale, Celent expects the growth of quantitative research and trading techniques to continue through the next three years.

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