There are a few possible routes to establishing a monopoly in quant trading. Here’s one that seems to work really well. It’s kind of hard to explain, so bear with me. Many trading signals reliably predict prices, but not strongly enough to overcome transaction costs (i.e. exchange fees, clearing fees, liquidity costs, etc.). A stock can moves up or down $.01 in the next period, your trading signals predicts the right direction 60% of the time, and transaction costs average $.0025. Unfortunately after costs, you’ll end up losing $.0005 per trade, so it’s not a viable strategy.
But let’s say you’ve got three uncorrelated trading signals just like it. If you wait until all three point in the same direction, now there’s a 94% of the stock moving in your favor. You easily clear the transaction cost threshold and neatly make $.0063 per trade. When you gather together multiple uncorrelated signals, the whole becomes worth much more than the sum of the parts.
This is basically how a company like Renaissance Technologies operates. It has hundreds of people working in silo’d groups. Each group contributes to the overall fund’s strategy, but are largely unaware of what the others are doing. Alone any single group would probably not have a viable standalone strategy. That’s a big deterrent to people leaving, starting from scratch is really hard. And there’s only a few other major companies in Renaissance’s league, where they’re already strong enough to make money off of marginal signals. It’s a chicken-and-egg problem. To become viable in the space you need to accumulate a whole bunch of signals, but to attract a critical mass of talent with signals you need to already have a viable strategy running.
That one was “from the comments.“