EP01 - What Quants Do

Understanding quantitative finance and how quants make money. Learn about statistical arbitrage, market making, signal processing, and how quantitative trading differs from gambling.

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Look at them, Kurumi. This is where all the smartest people go.

You mean the gamblers?

No! The Quants! The PhDs! They spend 8 years studying String Theory just to go to Wall Street to build better slot machines!

It's a tragedy. They could be curing cancer. They could be finding Dark Matter.

Instead, they are calculating the optimal way to steal grandma's pension. It's a waste of the human mind!

You are confusing the **Player** with the **Architect**.

Come with me.

This is not a casino. This is a **Signal Processing** lab.

What do you see?

Noise. Random lines. Degens gambling.

I see **Brownian Motion**.

Einstein used this math to describe pollen grains dancing in water.

Bachelier used it to describe stock options. The math is the same.

So? Just because the math is the same doesn't mean the *value* is the same.

Pollen exists in nature. Stock prices are just made-up numbers by greedy monkeys.

How do Astronomers find a new planet?

They look for a wobble in the star's light. A tiny signal in massive noise.

That is exactly what a Quant does.

We look for a "wobble" in the price of Ford relative to GM.

We use **Spectral Analysis**. We use **Kalman Filters**.

The market is screaming with noise (Fear, Greed, News).

A Quant builds a filter to hear the whisper of **Inefficiency**.

But why? To make money?

To restore **Equilibrium**.

If Ford stock is worth $10, and GM is worth $10, and they are identical companies...

But suddenly Ford jumps to $12 because of a rumor. The scale is broken.

The Quant sells Ford (Short) and buys GM (Long).

This pressure pushes Ford down and pulls GM up.

This is a **Pair Trade** that forces the prices back to reality.

So quants are... price police?

We are **Arbitrageurs**. We profit from public irrationality.

If the market is wrong, we profit by fixing it. If we didn't exist, prices would be wrong forever.

Right prices is subjective. Why does the market need to be "fixed"? Just let it stay "wrong". No one is getting hurt.

Suppose you need to sell or buy a company, you want a fair valuation.

Not to mention, if companies are unfairly undervalued, corporate raiders can do a **LBO** and buy it from owners who are running it well.

Inversely, if companies are unfairly overvalued, they can raise more capital from companies that actually need it. Known as **sucking up the oxygen**. They can also acquire their competitors with their own stock.

Okay, that sounds noble-ish. But what about the "Waste of Talent" part?

Jim Simons was a brilliant mathematician. He could have advanced geometry. Instead, he made a hedge fund.

Modeling a hydrogen atom is "easy." The atom doesn't change its behavior because it knows you're modeling it.

Modeling a Human Market is **Game Theory** on steroids. It is "Adversarial Physics."

The market fights back. It learns. It evolves.

To solve the Market is to solve the behavior of the entire human species.

Is that not a worthy challenge for a PhD?

It's certainly hard. But does it help anyone? It's just making rich people richer!

Let's turn off the Quants.

Where is the food?

I don't know when the truck is coming. So the price of this apple is $500. Take it or leave it.

This is a market without **Liquidity**.

Without HFTs and Market Makers, spreads widen. You want to sell your stock to retire? Good luck finding a buyer.

You want to buy foreign currency for a vacation? The fee is now 10%.

Quants are the plumbing. We grease the gears. We ensure that you can buy or sell anything, instantly, at a fair price.

So you're not gamblers. You're... utility workers?

Highly paid plumbers. Yes.

That, or professors who just want more money and can't get a tenure.

I'll entertain the idea that academia is so inefficient that the best and brightest are leaving to build slot machines.

Because its true.