An alpha generation platform is a technology used in

algorithmic trading Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading attempts to leverage the speed and computational resources of ...

to develop quantitative financial models, or trading strategies, that generate consistent

alpha Alpha (uppercase , lowercase ; grc, ἄλφα, ''álpha'', or ell, άλφα, álfa) is the first letter of the Greek alphabet. In the system of Greek numerals, it has a value of one. Alpha is derived from the Phoenician letter aleph , whic ...

, or absolute

returns Return may refer to: In business, economics, and finance * Return on investment (ROI), the financial gain after an expense. * Rate of return, the financial term for the profit or loss derived from an investment * Tax return, a blank document or t ...

. The process of alpha generation refers to generating excess returns. Alpha generation platforms are tools used by hedge funds, banks, CTAs and other financial institutions to help develop and test quantitative trading strategies. Alpha generation platforms support quants in the creation of efficient and productive quantitative trading strategies. Traditionally, quants have used tools such as

MATLAB MATLAB (an abbreviation of "MATrix LABoratory") is a proprietary multi-paradigm programming language and numeric computing environment developed by MathWorks. MATLAB allows matrix manipulations, plotting of functions and data, implementation ...

, R,

C++ C++ (pronounced "C plus plus") is a high-level general-purpose programming language created by Danish computer scientist Bjarne Stroustrup as an extension of the C programming language, or "C with Classes". The language has expanded significan ...

and other computer programming languages to create complex trading strategies that help them perform

high-frequency trading High-frequency trading (HFT) is a type of algorithmic financial trading characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools. While there is no ...

. However, as market data volumes increase and more traders create financial models that deal with multi-asset class data,

news sentiment In trading strategy, news analysis refers to the measurement of the various qualitative and quantitative attributes of textual (unstructured data) news stories. Some of these attributes are: sentiment, relevance, and novelty. Expressing news stor ...

data and more, quants must spend a large amount of time programming models, debugging code, and integrating multiple market data sources. This is why some firms have begun adding alpha generation platforms to their quant infrastructures. These platforms are often seen as a complement to traditional quantitative tools as they can help quantitative analysts process huge volumes of market data. With many of these platforms, users can write out models in English, program models using the platform's supported computer languages, or import strategies written in MATLAB, C++, R and other languages. Alpha generation platforms also often include data integration and storage capabilities through built-in database solutions that capture, standardize and store massive volumes of financial tick data.

Methodology

Alpha generation platforms are used to locate excess return in the

capital market A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers t ...

. They enable the development of mathematical and statistical models that help determine whether or not a specific

investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...

may be profitable. In some quant-driven

funds Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses ...

, these models make the final decision on whether to buy or sell an investment. These systems cannot be fully trusted and require qualified quantitative analysts to try to prevent massive drawdowns. The dangers of relying upon a ''platform'' were illustrated in a 2007 paper by

Andrew Lo Andrew Wen-Chuan Lo () (born 1960) is the Charles E. and Susan T. Harris Professor of Finance at the MIT Sloan School of Management. Lo is the author of many academic articles in finance and financial economics. He founded AlphaSimplex Group in 1 ...

. The average quantitative strategy may take from 10 weeks to seven months to develop, code, test and launch. It is important to note that alpha generation platforms differ from low latency

systems. Alpha generation platforms focus solely on

quantitative investment Quantitative analysis is the use of mathematical and statistical methods in finance and investment management. Those working in the field are quantitative analysts (quants). Quants tend to specialize in specific areas which may include derivative s ...

research rather than the rapid trading of investments. While some of these platforms do allow analysts to take their strategies to market, others focus solely on the research and development of these highly complex mathematical and statistical models.

References

{{reflist, 2 Financial markets Stock market Financial software