The days when quantitative research analysts were relegated to a couple of cubicles in the far corner of the research department are over.
Today, more and more hedge funds — and brokerage firms — are using quantitative research to select and trade financial products. According to a report by Celent Communications LLC, Boston, portfolio managers who run a combined $4 billion use quantitative trading strategies, which in turn account for 34% of U.S. equity volume by total shares traded.
In the report, authors Sang Lee and Josh Galper, both Celent analysts, estimate that by 2007, around $6 billion in assets under management will be run by managers using quantitative research and trading, and quantitative trading will reach 45% of all equity trades.
Octavio Marenzi, Celent chief executive officer, said the portfolio managers who employ quantitative research and trading techniques are typically active traders who, in extreme cases, "hold and unravel positions in seconds.
"Despite the fact that they account for a limited number of trades, they do a substantial amount of trading," he said, adding that the advent of electronic trading networks, decimalization and narrower spreads has driven the growth of quantitative-based trading.
In addition, cost savings and the availability of off-the-shelf quantitative research technology has helped the growth of quantitative research and trading, according to the report.
Still, the use of quantitative research and trading is expected to plateau because as more firms use this technique, it will become harder for firms to make profits using it, he said.
"What happens is that a particular trading strategy becomes so widespread that you no longer reap the profits," Mr. Marenzi said. "The more people get attracted to it, the lower the profit margins become."