For the last year, Quantopian has been a playground for quantitative stock traders. Today it’s about to become a place of business.
Since launch, users have been using the company’s platform to write custom algorithms to paper trade against live stock market data and backtest against historical data, all with the hopes of gaining a theoretical edge on the market. Under the Boston-based company’s new open beta program, investors can now for the first time put real money to work.
For the last four months, 150 private beta users have put $5 million to work, resulting in more than $100 million in trading volume across the platform in May. This number could quickly skyrocket as Quantopian opens the gates to its more than 20,000 community members. Across the beta period, better than 70 percent of investors were profitable, according to CEO John Fawcett.
Now that the system has been stress tested, with more than 2,000 live algorithm trading-days now completed the company is ready to open the floodgates – slowly, via a throttled on-boarding process – and to see what the broader community is capable of. The goal is to prove that everyday investors can use data to test investment strategies, conquer emotional biases, and, ultimately, beat the market.
Quantopian targets both amateur and professional quants, including mathematicians and engineers working outside Wall Street, as well as individuals employed by hedge funds and investment banks.
Users can choose to write their own algorithms (using the Python coding language), or use those written and shared by the company or other community members. The platform then allows these traders to test their investment theses against 12 years of historical market data and also to upload external data sets for further analysis. During the beta period, the company has made a number of changes based on user feedback, including adding support for the IEX exchange (made famous by Flash Boys), real time collaboration, trading guards, and other trading features.
Looking ahead, Fawcett will be looking to see Quantopian’s total assets directed algorithmically (ADA) and daily trading volumes increase. But more importantly, he’ll look to see volatility stabilize and returns generated across the platform.
“The most important question is, is our community generating profitable strategies – are we finding Alpha?” he says. “We want to prove to Wall Street that we can attract talented quants and then give them the tools to beat the markets.”
Quantopian isn’t for everyone and is taking a decidedly different approach than most of its startup financial services peers. Companies like Wealthfront, Betterment, Personal Capital, Motif, and SigFig are all looking to simplify and de-risk personal investing. Quantopian, on the other hand, is looking to help the smartest and most quantitative among us direct their intellectual horsepower toward beating the market.
It’s a bold strategy that flies in the face of some conventional wisdom in fin-tech circles. But the companies already convinced 20,000 people of the platform’s potential merit. It also raised $8.8 million to date from notable investors, including Khosla Ventures and Spark Capital.
Down the line, the goal is to help non-quants piggyback on the success of the platform’s biggest stars by making algorithms available for sale, or allowing community members to manage assets on behalf of other account holders. This will be optional for both the algorithm developer and the account holder, but it’s another way that Quantopian can deliver financial leverage to non-quants, while putting cash in the pockets of its best traders.
It’s still the earliest of days for Quantopian, but the company already reached a major milestone by successfully navigating a month of $100 million in trading volume. It’s really hard to overstate how significant that is from a technology and user adoption perspective. Next, Fawcett will be looking to hit the $100 million ADA threshold, which at the same level of trading activity would mean $2 billion in monthly trading volume. At that stage, the company would be a real player on Wall Street.
Whether the company can convince main street investors to trust a computer – powered by a black box algorithm written by a stranger – remains another matter. My bet is that investor reactions to Quantopian will be extremely binary. They’ll either be very intrigued or very highly fearful. The question is, how big is the intrigued crowd and how much investable assets will the be willing to put to work.
We’re about to find out.
[Image via Imgarcade]