What ethics and values drive quantitative trading?

Algorithmic Trading is a topic that has been seen as mystified and closed of for the general public until very recently. A topic that has been implemented and covered by the higher echelons of professional trading and Finance. As this niche industry has started having a larger impact on the markets as a whole. Many turns head towards it and start asking questions behind the driving forces of this business model. What drives these smart people – PhDs, Computer Scientists and qualified financial professionals to exert themselves daily at this highly complex and intellectually labor-intensive field? What good does it really bring to employ algorithms, or ‘electronic bots’ as people say, to trade the markets and “make machines that make money out of money”? Well, you would be surprised by the opposite force of pure financial gains that really puts a stamp on the work of these individuals.

Starting off, the people behind the funds and companies that employe algorithmic trading has a distinct set of values and business ethics aligned with positive societal paradigms. It’s not only about creating the automated trading strategy on a daily basis. There is a high importance of appropriate representation of the company and its business in the face of the public and making sure value is brought to the market as a whole. There is a strong connection between the vision and values of these algorithmic trading funds that help them build a brand and acquire appropriate funding. After looking at what drives many of the top companies in this industry, five main values appear to be central to the industry and are incorporated into their culture:

  • Entrepreneurial – first and foremost, people working in this field are passionate and driven with the purpose of success and progress in mind. Thinking outside the box and being at the forefront of technology is crucial while curiosity is the main driver behind every individual in the firm.
  • Excellence – a culture of excellence and perfect execution is a main driving force in the performance and success of the business as high accuracy and organizational skills are a must. Working with large quantities of capital, complex mathematical models and programming language execution requires 110% precision.
  • Communication and Collaboration – teamwork is at the forefront of solving complex problems. Running quantitative strategies on a constantly changing markets would be a daily barrage of complex problems that would need to be solved and the only way to accomplish this is through collaboration and communication.
  • Integrity – acting with integrity at all times is of a paramount for any business or financial institution dealing with client’s money. Moreover, integrity defines the reputation you are going to build with your business and in Finance reputation is everything.
  • Transparency – this value often overlooks by the industry deemed to be secretive is going to come first in every conversation with your clients and investors.

Quantitative funds are often accused of not being transparent. In a quantitative fund. Transparency does not necessarily mean seeing positions every single day or putting the ins and outs of their trading strategies and code. Rather, a clear explanation of the trading edge, detailed research philosophy explained and what is their approach to the market and model generation, examples of models that have worked and even more important ones that have failed. Providing enough information to stakeholders and investors can bring reassurance and trust. At the end of the day, despite the main driver being technology quantitative trading is also about building trust between parties. Providing information can also determine whether the strategies and company policies are being followed as prescribed. Honorable mention to accountability is to be taken in as this is valued by any stakeholder in the business.

There is a lot of debate on the ethical aspects of algorithmic trading. Defenders list tighter, deeper markets & liquidity, price consistency, reliability and stability of emotionally and energy fatigue devout machines. On the other hand, there are major concerns with price manipulation, increased volatility, trading for trading’s sake, colocation, and rogue trading. Due to algorithmic trading, adverse selection on investors’ price quotes is increased. Earning the bid-ask spread for investors rather than paying for it is eliminated. High-frequency trading is thought to overload the market with speculation, and in doing so, increase its volatility. But whatever the objections, algorithmic trading is big business. No one really knows exactly how much money is being generated, but Larry Tabb of the Tabb Group estimates the take at $8 billion per year. Among high-frequency traders, speed might become the source of a socially wasteful arms race. This type of race has purely profit-taking pretexts and have a big negative social impact on the market as a whole.  High-frequency traders could improve the trading outcome for investors. They are good for securities trading to the extent that they are natural suppliers of price quotes. They also benefit trading if they are connected to multiple markets at the same time. They can transfer trade interest across markets as they become the natural counterparty to a trade in one market if they can offload a position in another market. (Merkveld, 2011)

As Durban (2011) mentions that the lines between legal versus illegal, compliant versus noncompliant, and good-for-firms versus good-for-investors seem forever razor thin. And gray. High-frequency strategies have to a large degree replaced the traditional roles of Specialist and market makers in providing liquidity to the marketplace this has brought both pros and cons to the market. Although, an interesting thing that Menkveld (2011) found that entrants’ markets benefit from the presence of high-frequency traders and high-frequency traders thrive on the competition between markets; there appears to be a symbiotic relationship between HFT and new market entry.

Having values at the basis of these companies culture and conformity to social ethics combined with a vision for their business can really set them apart from the rest on the market. Equal opportunity employers encouraging diversity, intellectual rigor, drive and aspirations for success and progress. Curious and entrepreneurial minds working alongside can propel the industry there is a solid vision and mission in support of societal needs. A meritocratic culture where best ideas win with the support of the latest technology rather than a hierarchical structure with manual micromanagement tasks and old technology. Most people think that the motivation behind trading and the creation of a trading business is solely motivated by financial gains. Although there is much more to this than just money. As Ernie Chan (Machine Trading, 2016) highlights that many of the highly educated and smart people looking to get into High Finance and Trading are motivated by the intellectual challenge of the job. Algorithmic trading offers a lifetime opportunity for creative research and lack of barriers to implementation, bureaucracy and minimal infrastructure.


  • Durbin, Michael. All About High-Frequency Trading, 1st Edition. McGraw-Hill, 2010. ISBN: 9780071743457
  • Ernest Chan. Machine Trading: Deploying Computer Algorithms to Conquer the Markets. Wiley Trading, 2016. ISBN-10:9781119219606
  • Electronic Trading and Market Structure. Albert Menkveld, 2011 Foresight

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