Inside the Black Box: The Simple Truth About Quantitative Trading

11.1. TRADING IS AN ART, NOT A SCIENCE

The markets are largely driven by humans' responses to the information they receive. Not all this information is understandable systematically. Furthermore, the process by which different people interpret the same piece of information is not systematic. If the CEO of a company is fired, is that good news or bad news? One trader might argue that it shows instability at the highest levels of office and is therefore terrible news. Another might say that the CEO deserved to have been fired, it was a situation well handled by the board of directors, and the company is far better off now. Neither can be proven right ex ante. So, critics of quant trading claim, how can anyone believe that you can really model the markets? Their critique is that markets are ultimately driven by humans, and human behavior can't be modeled.

This criticism of quant trading is rather backward, reminiscent of the persecution of scientists such as Galileo and Copernicus for proposing ideas that challenged human authority. Humans have successfully automated and systematized many processes that used to be done by hand, from manufacturing automobiles and flying planes to making markets in stocks. Yes, of course there is still room for humans to make or do various products or services by hand, but when commerce is the main objective, we typically see that the efficiency and consistency of automated processes outweigh the benefit and cachet of doing things manually.

The idea ...