Quant Firms & How They Trade: Market-neutral Way of Trading

 

Trading is a risky business and it is no easy feat predicting how things will go as time passes. For this reason, you have multiple sources offering intel on gauging possible entries and TP levels to help you figure out where to go. This is known as discretionary trading. This means that you are responsible for your technical setup and eventually making a decision. So how do quant firms trade?


Let’s outline:

- The Zero Delta Type of Trading

- Quantitative Strategies of Trading

- Making Profits by Using the Trading Approaches

The Zero Delta Type of Trading

This type of trading is highly dependent on the direction of the market which means that it is also directional. These directions are separated into two sides: the positive and negative deltas.

 

Deltas are essentially the metrics that are the relation between the market and a portfolio. If you have a positive delta it means you’re long and a negative one would mean the opposite.

 

A positive delta also means that the market is up and that you are making money. A negative delta means that the market is down and that you are losing money. However, there is a phenomenon called a market-neutral strategy which occurs when the delta is at zero.

 

This stagnant position is such that the outcome stays as it was meant to be. This includes the possible profits that could be made. As such, this way of trading can be utilized to make the most out of this situation if it presents itself.

 

Quantitative Strategies of Trading

This version of conventional trading is the best way to use the zero delta phenomenon. The indicators in quantitative trading come not as traditional clues, but rather as tangible opportunities from different markets. A variety of inefficiencies are brought in as well as discrepancies which help inform the trader.

 

A way of looking at things is when it comes to arbitrage. Arbitraging between opposing exchanges usually is of no consequence because it is in its nature, a zero delta strategy. The price will likely stay the same or as predicted irrespective of what the future holds.

 

Arbitraging can be quite difficult and a hoard of capital has to be waiting in the wings for the various exchanges. At least that is the case for traditional trading strategies.

 

A market-neutral strategy won’t need nearly the same funding. The funding of such an endeavor will remain fairly consistent whether you are long on one exchange and short on another. Basis trading is a version of the market-neutral strategy that can be called the cheapest capital-wise. It also benefits from price point differences between the future and the spot.

 

The focus of this type of funding is fixed quarterly futures as opposed to perpetual which don’t have a fixed expiration date. Bullish markets can even lead to trades that are much higher than the assets involved. This creates a difference in price between the future and the spot and we call it a premium.

 

The contracts of futures will then converge, forming the underlying asset’s price on the expiration date. This in turn drops the premium as the expiry approaches and eventually, it vanishes at the point of settlement. Interestingly, a bearish situation can even result in the premium becoming negative before the expiry.

 

Making Profits by Using the Trading Approaches

Profits can be made from this, even in the event of a flash crash. Any cryptocurrency that can be used as collateral in the exchange of futures as well as having quarterly contracts is eligible for this type of trading. If your crypto, such as Bitcoin or Ethereum meets these conditions, you can then look for the one possessing the higher premium.

 

Quant firms are probably the best known for using these strategies, with Basis trading seeming to be a favorite. Understanding how this trading works will also help with derivative markets. Because basis trading facilitates how future prices are kept within reach of the underlying asset, futures aren’t able to shoot up beyond the spot. 

 

A bullish environment is the best place to encounter such an opening. As such, it is not wise to put all your eggs in that basket since capital invested in a market-neutral strategy is risky enough. That said, having extra capital that can make you some market-neutral income has never been a bad thing. Acquiring this income is only best if basis trading is involved.

 

Final Thoughts

Basis trading requires you to buy some Bitcoin to be opened. As quant firms' biggest weapon, it will allow you to remain market-neutral despite having traded to some degree beforehand. Basis trading has a major risk and it concerns how the exchange can negatively impact it, but the same can be said for holding stablecoins on an exchange.

 

If you're lucky enough to encounter a bearish situation, the profits made will appear not only sooner but with leveraged positions. Positions that can then be liquidated for further profits.

 

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