| Martin Froehler, Quantiacs |
In late July, Steven Cohen announced he would be investing up to $250 million in an online platform for freelance quant traders called Quantopian. The investment comes from Greenwich, Connecticut-based Point72 Ventures, the venture capital arm of Cohen’s family office, Point72 Asset Management. Boston-based Quantopian launched five years ago and claims to have some 400,000 algorithms written by over 85,000 members from 180 countries.
Quantopian is one of the larger versions of these platforms, which have emerged in recent years to capture untested quantitative talent wherever it is — and there is real money behind them. Mountain View, California-based Quantiacs is a similar platform that launched last year, with venture dollars from New York venture capital firm Baha Holdings and Stanford University’s startup incubator StartX. Institutional investors too are backing traders on these platforms, and these institutions, as well as hedge fund managers, are also looking to these platforms to find new talent as well.
Both platforms say they are out to democratize the world of quantitative finance and make it more accessible to students, engineers and others who have an interest. Quantiacs markets itself as an “eBay for trading algorithms,” allowing potential investors to shop around and assemble their own portfolio of ideas and experiments. “What we’ve found is that there is much more interest and quantitative talent out there than may be obvious to quantitative firms or investors,” says Quantiacs CEO Martin Froehler.
But investors will need to be savvy about assessing these upstarts to see if they will generate alpha over the long-term. And market observers say regulators will likely raise questions about the source code powering the algorithms trading on these platforms.
Here’s how they work: Anyone with enough coding aptitude to put an algorithm together can submit and license their idea to run it on live data and net 10 percent of the profits. Platforms typically trade on live data from futures, FX and commodities markets like the CME. Once an algorithm is submitted, there’s an audition period where both the quant and the platform see how it works on real information. If all goes well, the algorithm is allowed to continue building a track record. Quants aren’t required to surrender their intellectual property; instead the platforms simply license the algorithm and take a cut of the profits for providing the trading data and infrastructure. For those looking to break into quantitative finance, the sites can serve as a real-time resume of sorts.
As a means of showcasing talent on the site, Quantiacs holds a quarterly competition among its top users and newcomers. The top three performers at the end of three months are given awards of $1 million in futures for first place; $750,000 in futures for second and $500,000 in futures for third.
Quantopian has set up a hedge fund made up of the platform’s best ideas, which will use money from Point72 Ventures to trade. In the case of Quantiacs, the firm’s principals are seeding star users with almost $4 million of their own money, alongside venture and other institutional investor dollars. Quantiacs recently opened to outside institutional investment, which it is limiting to $50 million for the first year and will then expand capacity as the platform begins to scale. Quantiacs is smaller than Quantopian, with approximately 3,000 users and 1,000 algorithms, but it has already attracted strong interest.
For investors, the sites give people the option of considering different facets of the quant universe without having to commit to a single fund with all of the lock-ups and due diligence that come with that. Still, adds founder of New York-based $670 million quant shop Quest Partners, Nigol Koulajian, being good at creating algorithms is only half the battle.
“Having quantitative skill isn’t enough. You can make someone a quant out of high school by teaching them things only PhD’s could do ten years ago, with the technology we have now,” he says. “You also have to have the qualitative factors that make you good at running a fund. Even if we were to recruit someone off of one of these platforms, those qualitative factors would have to be there.”
Firms like Quest are using the platforms to keep an eye on trends as well. “These platforms are important for us as they give us a sense of what ideas are popular or what strategies might be crowded,” says Quest’s president Prashant Kolluri. “They give us a chance to take the other side.”
On the regulatory side, it is unclear how bodies like the National Futures Association or the Commodity Futures Trading Commission will come to view these platforms. The CFTC has recently made a move to get a copy of all of the source code of traditional funds under its regulatory purview. The platforms themselves may be left out of the need to provide source code as long as they have technological guardrails in place to prevent market-moving events like runaway trades.
Beyond that, any questions about copying someone else’s ideas or using bad data are kept in check by the platform rules. Users can only build their strategies around the data provided by platform operators, and they have to pass a background check and vetting process if a platform wants to license their algorithm for use with real money. The license agreement effectively pushes any other regulatory reporting concerns onto the individual who created the strategy.
The arms-length relationship that the platform providers have with these freelance quants may also provide a critical buffer for investors like Point72. (This is critical, as Cohen’s previous firm, SAC Capital, pleaded guilty to insider trading charges in 2013 and was eventually converted to Point72.) If it turns out that someone makes it on to the platform using someone else’s ideas or inside information, investors can simply pull their money rather than face action from a regulator. Yet, while investors are protected, it is less clear how platform operators would be held responsible for gaps in their vetting process.
“We wouldn’t be surprised if regulators take a close look,” says Quest’s Kolluri. “Anytime you come to market with a new technology it can take awhile for regulators to fully sign off. But there is some aspect of ‘buyer beware’ to all of this as well. These platforms are great for exploring new ideas, but investors will also have to be savvy enough to understand what they’re backing and why.”
