Back in the heyday of the trading floor the evolution of trading was simple. Someone came down to the floor as a runner. That person immediately fell in love with the markets and knew what he wanted to do. Perhaps that person had an affinity for math or charting. That person would follow the markets closely, observe tendencies as the markets moved and soak up all the knowledge of the various traders, managers, brokers and support personnel.
There was a well of knowledge all around them in various strategies and methods. That person did not decide to be fundamental or technical or a quant, they learned all there was to learn and attached themselves to a theory that seemed to make sense. There were an abundance of mentors willing to share their knowledge.
It doesn’t matter if someone set out to be a fundamental grain trader and ended up a technical bond trader, because what they started with was a passion for the market and a desire and willingness to learn whatever they could in order to be part of the markets.
Some would go on to trade in the pits, hedge for commercial interests, trade upstairs and eventually manage money. This always has been a tough transition because the skills it takes to become a strong disciplined trader are not necessarily the same skills it takes to run a successful trading business. As we point out in “Finding the next top traders” (page 16), many a good trader has been tripped up by not having the proper infrastructure. While that has always been true, 20 years ago it was probably a lot easier to move from a successful individual trader to an emerging manager.
For years, the idea of emerging managers having to understand how to run a business has been a staple at managed futures conferences: Having the right back office, disaster recovery procedures and legal and compliance staffs. Yet even more than 20 years ago, many successful money management businesses were launched with a single manager who discovered an edge and had the strong work ethic to turn that edge into a money-management business. However, most were long-term managers that could chart their positions on an Excel spreadsheet. Today, even if you are not a high frequency trader, you need to know what those high frequency traders are doing and be able to compete with them.
And you not only need to compete with them, but also be able to constantly keep up with the new technology. When the personal computer became widely available in the late 1970s and early 1980s, systematic traders flourished and were on the cutting edge of algorithmic trading just because they could backtest end-of-day data and create long-term trend-following algorithms. That cutting edge technology that allowed systematic trading entrepreneurs to create managed money empires now would be considered the Stone Age. Today it is a full-time job for an experienced quant just to keep up with the technology, let alone discover a trading edge. It also is close to a full-time job to meet the compliance requirements.
Even in that bygone era, many talented traders were tripped up by the lack of a proper business infrastructure. But if it is possible to be a great trader and a poor money manager due to a lack of the proper infrastructure, it also is possible to have a thriving investment business with all the proper institutional bells and whistles yet have a mediocre trading strategy. Put a crackerjack marketing team together with a professional staff and you could probably raise a great deal of money for a mediocre strategy.
What we have found with the various emerging trader platforms and seeder programs is the concept that it would be best to split the two disciplines. Let traders trade, work on strategies, perfect their craft and offer them the infrastructure and tools to move to the next level if their skills warrant it. That way the cream can rise and great traders will be put in a place where they can succeed; and professional trading operations with weak strategies will not be able to hang around just because they have the look of a professional business.