Trading Machines: Using SPC to Assess Performance of Financial Trading Systems

Abstract

Traditional quantitative methods used in finance, developed to control market risks accumulated by human traders, do not incorporate quality control. Finance is moving from manual to computer numerical control (CNC). The authors view trading systems that employ CNC as machines with variable outputs—outputs that can be inspected using statistical process control (SPC). Using a sample trading system, they find that quality metrics generate an investment signal contrary to that generated by the traditional metrics of finance. To manage trading machines, SPC can be used in conjunction with classical financial metrics to control risk in systematic trading and investment.

• automated trading
• quantitative finance
• quality control

Additional information

Notes on contributors

M. Zia Hassan

M. Zia Hassan is professor of management science and Dean Emeritus at the Stuart School of Business, Illinois Institute of Technology, where he teaches business policy and quality management. His research focuses on effective organizations and strategic and quality issues in organizations, and has been presented in numerous publications and at professional meetings. He has performed research on the design of quality systems that was funded by the Office of Naval Research, and he has published more than 30 papers. Hassan has served as a consultant to numerous American and international businesses and is an ASQ Fellow.

Andrew Kumiega

Andrew Kumiega has a spent more than 20 years automating processes including CNC machining, chemical manufacturing, confectionary, pharmaceutical manufacturing, and financial trading systems in industry as an industrial engineer. He has held various senior-level positions at financial institutions, including director of research at TD Waterhouse Securities Options, head of financial engineering at TFM Investments, and vice president of quantitative research at Calamos Asset Management. Currently, Kumiega is employed at a proprietary trading firm. He is an adjunct professor at the Illinois Institute of Technology. He is an ASQ member, a Certified Quality Engineer, a Certified Quality Auditor, and a Certified Software Quality Engineer.

Ben Van Vliet

Ben Van Vliet is a lecturer at Illinois Institute of Technology's Stuart School of Business (IIT), where he also serves as the associate director of the M.S. Finance program. At IIT he teaches courses in quantitative finance, C++ and .NET programming, and automated trading system design and development. He serves also as series editor of the Financial Markets Technology series for Elsevier/Academic Press. Van Vliet is the author of three books on trading/investment: Modeling Financial Markets with Robert Hendry (2003 McGraw Hill), Building Automated Trading Systems (2007 Academic Press), and Quality Money Management (2008 Academic Press) with Andrew Kumiega. He can be reached at [email protected].