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So what is the basic difference between a quant algo, model, NNs, and a black box?

(Last Updated On: September 17, 2010)

So what is the basic difference between a quant algo, model, NNs, and a black box?

I found this on Linked In. It basically describe the differences between all these confusing quant terms.
then an important clarification: I don’t do algos, I do predictive analytics or models. The two are not related, except in the minds of those who understand neither.

Algos are a human creation that are written by Quants based on concepts, ideas, theories, statistical studies or observations and employ advanced math.

Models are encapsulated knowledge automatically discovered by the modeling application and automatically turned into executable code. There is no human intervention once setup is completed and a data file plugged in.

A skilled person could read the code for a Algo based trading application and explain what is happening and why.

A model automatically generated by a machine driven analytics can be used by a human but not understood by them. They are “black boxes”

A NN creates a model. The distinction being that an algo has meaning to a human, while the connections, weights and activation factors between the nodes in an NN are not understandable or useful to humans.

That’s the fundamental strength of NN: they discover what is currently unknown and unknowable to human mathematicians while algos require human understanding to create. So the capacity of algos are limited by the capacity and ability of their human creators. NNs are only limited by the data given to them in training and the architecture of the dependant variables. The later are traditionally human designed and created but in more advanced work, they too are automatically machine generated.

Also, you can make an argument that most successfully traded strategies traded are “in the public domain” as people move from one shop to another and disseminate the strategies. Very few strategies are indeed kept secret.

In these cases the creator likely concluded that they could make more money selling their book than using their invention in the market. It’s a bit like in California Gold Rush of 1849 and finding a guy at the docks in San Francisco selling a map to the location of the best unclaimed gold deposits. Human nature and greed being what they are I suspect there were some doing the map selling and others doing the buying but only the map seller made any money on the deal.

NOTE I now post my TRADING ALERTS into my personal FACEBOOK ACCOUNT and TWITTER. Don't worry as I don't post stupid cat videos or what I eat!

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