This article was originally published in Financial Times
This summer, many systematic, algorithm-powered trading strategies suffered an abrupt and mysterious pummeling that was somewhat reminiscent of the infamous “quant quake” of 2007.
It wasn’t nearly as violent as in 2007 — it was more an unpleasant quiver than an earthquake — but it was enough to fray nerves in some corners of the quantitative hedge fund industry.
The reversal might have been started by a “garbage rally” in heavily shorted stocks, but some think that it might have been exacerbated by one of the biggest new trends in quant investing: the growing overlap between market-making trading firms such as Citadel Securities, Hudson River Trading or Jane Street, and big hedge funds such as DE Shaw, Millennium, Point 72 or Qube Research & Technologies.
Some in the industry are sceptical that this increasing overlap was a factor in the July “quant quiver”, pointing out that the strategies that were the worst hit were mostly longer-term ones, rather the those using quicker signals, where competition is becoming more ferocious. Nonetheless, both proprietary trading firms and hedge funds concede that two industries — that for years virtually operated in separate worlds — are now starting to come together.