The Son of Finance of the Great Age

  Chapter 392 Quantitative Trading and High Frequency Trading

  Zhong Shi only stayed in the mainland for a week before returning to Hong Kong. After all, there are still a lot of things waiting for him to deal with.

  Due to the liquidation of Peregrine, some of their departments were directly empty, and the bond traders in the fixed income department were the first to bear the brunt. Strictly speaking, they can be regarded as the chief culprit of Peregrine's bankruptcy this time. Due to the strategic mistakes in Indonesian bonds and the sharp shrinkage of fixed investment, Peregrine has come to where it is today.

   But in all fairness, this strategic mistake is completely contrary to their original intention. The deterioration of the general environment made them fall into the quagmire and there was nothing they could do. They originally wanted to buy some cheap bonds and sell them when the prices rose. Who would not want the bond prices to fall day by day due to the continuous deterioration of the Indonesian rupiah, and eventually they could not clean up. .

   But the group of elites in the industry is indeed amazing. Before the currency storm broke out, their annual transaction volume had reached about 100 billion Hong Kong dollars, and they were an important force in the bond market in Southeast Asia. And in 1996, the number of days they lost money in a year was only 12 days, which is enough to show the professionalism of this team.

  Bond trading is actually similar to stock trading. They are all buying low and selling high, or selling high and buying low (interest rate futures). The difference may be that the face value of the bond is huge, and the amount of a transaction may exceed one million or even hundreds of millions. Among the heavyweights like HSBC Holdings, which plays a pivotal role in the Hong Kong stock market, the first-hand transaction is only about 40,000 Hong Kong dollars.

  Because of the huge amount of face value, the calculation of each basis point is particularly important. Generally speaking, in terms of stocks, a 1% increase or decrease is nothing, at most it is a loss of 1 Hong Kong dollar or a share of 0.01 gain. But for bonds, this negligible 1% is enough to cause an uproar, because it may mean a fluctuation of 10,000 to 1 million Hong Kong dollars.

  Furthermore, because the interest rate of bonds is linked to many interest rates including the benchmark interest rate, traders are required to have a professional understanding of macroeconomics and accurate judgments.

  As we all know, macroeconomics is related to the entire national economic operation system and can radiate to various industries in the country or region. And the following subdivision into a certain industry or a certain company is the category of microeconomics, specifically, it is the basis for the pricing of a certain stock or a certain sector.

  In addition to the necessary cultivation in macroeconomics, bond traders must also have an almost intuitive sensitivity to numbers, as well as a strong ability to resist pressure and a stable psychological quality. After all, not everyone can be calm and calm in the face of fluctuations in income of hundreds of thousands or millions of Hong Kong dollars. Under this kind of work intensity, the elites who have not burst their blood vessels and have excellent performance are naturally one in a million.

  Now, Zhong Shi has to strive for excellence and select those who can meet his requirements among these people. He previously estimated that the ratio was about two to three out of ten, but in actual operation, this ratio was far lower than expected, even less than one out of ten.

   There is no other reason, Zhong Shi's requirements are too harsh.

Hong Kong’s economic downturn, coupled with the impact of the financial crisis, has caused major financial companies and institutions to lay off employees one after another. Therefore, the employment relationship in the financial market has suddenly changed from a shortage of supply to an excess of supply and demand, which also makes Zhongshi’s recruitment easier. .

   Through headhunting companies, Tianyu Fund easily found hundreds of former bond traders. After preliminary screening, the final list was determined to be around 120 people.

  The next step is the interview process.

   "Calculation of long-term treasury bond income, 30-year term, zero-coupon bond, 3% coupon rate per year, give me an accurate quotation."

  Zhong Shi did not raise the stone, and said to a trader who came in. Basically, the topic of the transaction was written by him himself, and this is just a part of the interview.

   "This is simple, about 1 divided by 1.03 to the 30th power." The interviewee was taken aback for a moment, and then blurted out, but his expression was a little unnatural, probably thinking in his heart, is such a simple question an interview?

   "..."

Zhong Shi sighed and shook his head slightly, this is the number one, why is everyone thinking of me to give him the answer, "No, what I need is not a calculation method, but an accurate answer, you understand ?"

  The face of the person on the opposite side turned extremely pale, never expecting that the other party would ask for such a result. But after seeing Zhong Shi's hesitant expression, he took the paper and pen beside him and began to calculate quickly without saying a word.

  1.03 to the 30th power is not difficult to say, and it is definitely not easy to say simple. Anyone who has studied advanced mathematics knows that it is easier to use Taylor's formula to deduce in this case. After more than ten minutes, at the end of three full sheets of paper, the other party finally calculated a rough result, "If I bid, the price should be between 0.412 and 0.433."

"How big is the probability of 0.422?" Zhong Shi remained calm, noncommittal to the answer he gave, and continued to ask another question. This question is based on the answer given by the other party, and this question is a normal one. Probability distribution problems.

   It turned out that the other party was in a hurry again, and after calculating for a long time, he scratched his head and said: "0.12, this probability is not small, but I always feel that something is wrong, it should be the result of the previous calculation. There is a problem."

Regardless of the other party's unusually ugly face, Zhong Shi said to himself: "Okay, your time is up. Hurry up and go to the next link. But what I tell you is that even your smallest quotation is higher than the real price Much higher."

   Naturally, the interviewer's face flushed red immediately. He didn't leave the meeting room immediately, but instead stared into Zhong Shi's eyes. After looking straight for a while, he mustered up his courage and asked: "Sir, I want to ask, what is the significance of this kind of interview? If we If calculations are required, calculators and computers will naturally do it for you, don’t you think this interview method is too backward?”

   "You? Question my methods?"

Zhong Shi was taken aback for a moment, thinking that he had never seen such a bold trader before. After hearing the interview questions, all the traders who entered before had their faces ashen, and walked out dejectedly after hasty calculations. This trader actually questioned the inappropriateness of the interview method, but I have to say that he has a bit of courage.

   Not only is he courageous, but this trader also has other advantages. At least his calculation result is the closest to the correct answer among the crowd, 0.41199.

"Perhaps you think there is something wrong with my method, but what I want to say is that this is just a test of your basic academic accomplishment, and has little to do with the theme of this recruitment. And you should also be clear that I want to recruit this time It’s people with skills in mathematics, computers and probability, that is, the quant team, and the traders are just a gimmick. Can you understand this explanation?”

  Although he was slightly dissatisfied, Zhong Shi still patiently explained.

   "Quantitative team?" The other party frowned and moved his lips a few times, as if thinking about something. I just thought about it for a long time, and finally said unwillingly, "Isn't that something that only Wall Street can do? If so, I have nothing to say. But just relying on these few math problems, I want to build a quantitative team, right? A little idiotic dream?"

"I don't need your advice on what I do!" Zhong Shi smiled angrily, and looked down at the other party's resume, "Jian Zilin Jeff, graduated from Princeton with a double bachelor's degree in computer science and physics. Since you have objections , then I will come up with a truly quantitative question, and see if you can answer it."

   "Okay!" Jian Zilin snorted coldly, without the slightest timidity in his expression, "You can just come here, as long as it's not such a mentally handicapped problem that even a child can know how to solve, just go ahead."

"Stanley Hong Kong Financial 50 Index, design an arbitrage program for me, as long as there is an arbitrage opportunity, it will be automatically executed, and frequently bought and sold." Zhong Shi is naturally prepared, and he will be ready when he opens his mouth The topic was reported.

   What I want to explain here is that in addition to the Hang Seng Index, which is generally known to everyone, there are other types of indexes in the Hong Kong financial market. The Stanley Hong Kong Financial 50 Index mentioned by Zhong Shi is actually an open fund, compiled by Stanley Hong Kong Company, which takes the stock prices of 50 representative financial companies listed in Hong Kong in a certain year as the index. After the base, an index that specifically reflects the market conditions of the financial sector is launched to the market.

  Different from ordinary stock trading, the trading of this index must conform to the share proportion compiled by Stanley, that is to say, the trading of a share must include a corresponding number of stocks of 50 financial companies according to the proportion at the time of compilation.

   "This?" Jian Zilin, who was eager to try, was immediately stunned. He had never heard of this so-called arbitrage method, so he naturally had no way of doing it. "This can also be arbitrage. Are you trying to deceive me?"

Zhong Shi smiled, "Why not arbitrage? Although this index reflects the market of the entire financial sector, due to the large number of stocks included and the different weight ratios of each, in my opinion, there is a lot of room for arbitrage .”

"To put it simply, in this index, HSBC Holdings has a 50% share, and other stocks also have a 50% share. Then when HSBC rises by 10% and other stocks fall by 10% in total, the index is unchanged. And if the other stocks collectively fall less than 10%, the index will change."

"These are only roughly dividing the index into two parts. In fact, there are as many as 50 changing parts of the index, which makes it possible for arbitrage. If at a certain moment, the change of a stock or several stocks directly If it affects the value of the entire portfolio, then you can arbitrage by quickly buying or selling index shares, which is a simple principle.”

In fact, this arbitrage method exploits the difference in reaction time between the market and index funds, and this difference is almost fleeting, so programmed transactions are required, and the human brain simply reacts not come.

"Great! It's really too clever!" Jian Zilin is indeed a smart person, but he just got it right a little bit, "In this way, you can make steady profits just by seizing the moment when the market pulls back. This is definitely a profitable business." There is no second way."

"There are many similar methods, and there are many indexes in the market. If the business grows bigger in the future, it will even affect the entire Hang Seng Index." After a little thought, Jian Zilin drew inferences from one instance and pointed out more possible arbitrage places. "No wonder you have special requirements for talents in mathematics, computers and probability. It turns out that these things can come in handy here."

   At this time, Jian Zilin was convinced.

"There are others, you haven't even heard of them!" Zhong Shi snorted coldly, and said disdainfully, "Do you know about optical cables? Do you know that there is something faster than optical cables? Is it frequency trading? These are all based on mathematics, computers, physics and probability.”

   "High-frequency trading?" Jian Zilin's mouth twitched rapidly, "What is this?"

Regarding high-frequency trading, it appeared after 2000, around 2005, the initial high-frequency trading began to appear, and then it became more and more severe, and finally it was finally taken seriously by people after causing several near-stock market crashes . When institutions began to understand high-frequency trading, they really realized how important time is to the matching of transactions.

  Human blinking time is about 100 milliseconds, while high-frequency trading takes place between 2 milliseconds and 4 milliseconds, and funds with technological advantages are even less, and can even increase this number to the range of nanoseconds.

  In this kind of trading that is much faster than others in the market, high-frequency trading is divided into three types. The first is to use advance trading, that is, after ascertaining the trading information of investors, to push up the price before investors place an order, and make a profit from it; the second is rebate arbitrage, which creates false liquidity to defraud the exchange pair. Rebates from market makers; the third type is slow market arbitrage, where different exchanges respond differently to prices, and arbitrage back and forth between exchanges.

   Of course, all three methods are legal.

  Zhong Shi naturally wouldn't say these things to Jian Zilin, because at the moment, these things are too appalling. However, it seems that this Mr. Jian Zilin did not have a strong interest in the so-called high-frequency trading. Instead, he wrote lines of permutations and combinations on paper. He wrote quickly, and soon mathematical formulas emerged from his pen.

  Zhong Shi took a cursory glance and found that it was exactly what he had just said. Jian Zilin was able to react in such a short period of time. It seems that the other party's academic skills are very profound. Thinking of this, Zhong Shi naturally loves talents, "Okay, let's solve these problems carefully after you join the job. The interview is over here, congratulations, we will work together in the future."

   "Wait, let me list all the combinations first." Jian Zilin was so immersed that he just subconsciously replied to Zhong Shi, but then realized, "What, I was admitted?"

   PS: The example of quantitative trading is written based on the incident pointed out by Everbright Oolong. I don’t remember if I have told the book friends before. The principle of Everbright's quantitative model is as stated in the book, but the main reason for Everbright's oolong point is that the capital valve is not well controlled, and then stock index futures are used for hedging, forming a typical insider trading. It's just that high-frequency trading is really complicated, and a few types are enough. This chapter is a bit complicated and not story-like, so just read it at will~ By the way, thanks to book friends Jiangnan Liu Feiyan and Southern Autumn for voting for the monthly ticket!

  (end of this chapter)