Good Will Hunting

Wall Street trading is no longer about financiers boiling businesses down to their operating fundamentals. Today, it’s quants (quantitative analysts) who rule the stock markets by developing sophisticated trading algorithms to extract value amid the near-endless trading activity. These individuals, often working at hedge funds, rely on an information advantage and massive computing power to outmaneuver less sophisticated investors.

Quantopian, a Boston-based algorithmic trading platform startup, aims to close this information advantage gap and give individual quants – like engineers, developers, mathematicians, and data scientists in other industries – the tools necessary to compete against Wall Street. Today, the company is announcing $6.7 million in Series A financing from Khosla Ventures and existing investor Spark Capital to fuel its growth toward this goal. It also announced the addition of former Thomson Reuters exec Jessica Stauth as VP of quant strategy.

Since launching in beta in April 2013, Quantopian has crossed the 10,000 user mark and recently debuted live trading. Users of the platform can create and implement custom trading algorithms, while accessing a decade’s worth of historical trading data for backtesting. Users can also import any external dataset for use in algorithm development.

The unique thing about Quantopian, from a venture investment perspective, is that it is targeting a rather small niche market. To use the platform successfully, one has to be somewhat sophisticated in a mathematics and programming capacity, and also have both the inclination and the resources to trade stocks and other more exotic asset classes. This is not an “everyone who can fog a mirror” problem.

“We were initially attracted to the company because of this niche community,” says Spark partner Andrew Parker, who led Quantopian’s seed round before founder John “Fawce” Fawcett and his team had even built a prototype. Parker went on to point out that Bloomberg has roughly 350,000 subscribers and is a multi-billion dollar company, saying, “We felt like they can build lots of value without having to reach all the people in the world.”

Quantopian aspires to be to quants what StackOverflow and GitHub have become to the equally niche (but growing) developer community. That is, the company hopes to develop a highly engaged and collaborative community that shares resources and best practices around algorithmic trading.

One way the company has attracted this type of user is by giving away access to otherwise unavailable or extremely expensive granular historical trading data. “We want to rely on the data exhaust created by experts engaging around the topic to keep the community active and growing,” Parker says.

Parker believes that Quantopian is tapping into a generational shift where young, technically savvy individuals expect their platforms to be customizable.

“Things that don’t support this type of functionality seem time-warped out of the 1990s,” he says. “People ask themselves, ‘Why can’t I just write a script to rebalance my portfolio quarterly instead of having to do so manually?’ We want to enable everything from this type of basic functionality to more advanced stats-based trading.”

“Systematic and automated investing is where the entire financial industry is heading, and the quants in our community are at the front of the wave,” says Fawcett in a statement today. “Our community today is learning and using the tools that every investor will soon want.”

Quantopian has now raised a total of $8.8 million to date, but has yet to monetize its product. Nonetheless, there are no shortage of opportunities to do so when Fawce and his team decide that the time is right. The question they will have to grapple with is how to do so without detracting from the user experience.

One viable avenue would be to introduce a pro version of the product with additional features or access. Another path could be to follow in the footsteps of Motif, a thematic investment platform that sells access to its trading strategies and plans to eventually create a marketplace where consumers can create and sell their own custom motifs to one another. Finally, the most complicated, but potentially most lucrative option would be for the company to become a licensed broker dealer and take a commission on the trading activity that flows through its platform.

“We believe the company can achieve its goals without becoming a regulated entity, but wouldn’t shy away from that if it ends up looking like the best path forward,” Khosla’s Ben Ling says.

The company and its investors are taking a wait and see attitude to monetization, instead focusing on growing and strengthening its community of users and delivering a compelling user experience, according to Ling. “The best way to monetize is always to align user incentives with monetization,” he says, offering the example of licensing third party data sources.

“I’m a big believer in open platforms,” says Ling, who himself is a former platform executive at both Facebook and YouTube. “The thing that excites me is that Quantopian is making a whole new class of investing possible for a whole new class of investors.”

Longer term, the company’s challenge will be to make this category of investing accessible to an increasingly large audience. One possibility for doing so would be to create a simplified drag and drop interface for creating trading algorithms. Another is to create a simplified interface based on standardized algorithms, but with dynamic variables that the end user can modify to fit their investment thesis. For example, an algorithm could create a weighted basket of commodities, but the investor might choose to alter the weighting slightly based on a unique insight or hunch about the market.

Technology is at its best when it makes the complicated or inaccessible, simple and more widely accessible. Quantopian is striving to do exactly this for algorithmic trading. It’s an ambitious goal with a number of legitimate hurdles that must be overcome, not the least of which is the limited size of its target audience. But Fawce and his team have proven themselves capable of delivering a compelling experience to early users and have obtained the support of elite investors and industry executives.

If the company is right, one day soon, much of the world will be trading algorithmically. Now that would be disruption on a massive scale.

[Image via Good Will Hunting]

  1. Quantopian
    Crowd-sourced quantitative hedge fund
    Follow on AngelList

    Quantopian is a crowd-sourced hedge fund.

    Quantopian provides a platform for you to build, test, and execute trading algorithms. Live trading algorithms can become part of our crowd-sourced hedge fund where top quant talent is matched with outside investor capital.

    Our mission is to attract the world’s algorithmic and financial talent, including talent that hasn’t yet had the opportunity to be a quant. We want to bring this talent together, provide them with the tools that they require, and help them build a community.

    Using Quantopian's tools, you don't have to worry about infrastructure and data quality problems. Let us deal with all that while you focus on building, testing, refining, and trading your investment ideas.

    1. Benjamin Ling
      Board Member