Quant Finance Glossary
Decode the jargon. Definitions for the most common terms you'll hear in interviews and on the trading floor.
Adverse Selection
The tendency for trades to be executed at prices unfavorable to the liquidity provider. This happens when the counterparty has better information about the asset's future price movement than the market maker.
Alpha
A measure of the active return on an investment, the performance of that investment compared to a suitable market index. It is widely used to represent the value that a portfolio manager adds to or subtracts from a fund's return.
Arbitrage
The practice of taking advantage of a price difference between two or more markets. A person who engages in arbitrage is called an arbitrageur.
Beta
A measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole.
Bid-Ask Spread
The difference between the highest price that a buyer is willing to pay for an asset (the bid) and the lowest price that a seller is willing to accept (the ask).
Delta
The ratio that compares the change in the price of an asset, usually a marketable security, to the corresponding change in the price of its derivative.
Delta Neutral
A portfolio strategy consisting of multiple positions with offsetting positive and negative deltas so that the overall delta of the assets in question totals zero.
Gamma
The rate of change for an option's delta based on a single-point move in the underlying asset's price. Gamma is important because it corrects for the convexity of value.
High-Frequency Trading (HFT)
A method of trading that uses powerful computer programs to transact a large number of orders in percentages of a second.
Kelly Criterion
A formula used to determine the optimal theoretical size for a bet. It is valid when the expected returns are known and is used to maximize the long-term growth rate of capital.
Latency
The time delay between a request for data or a trade execution and the completion of that request. In HFT, latency is measured in microseconds or nanoseconds.
Liquidity
The efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.
Market Maker
A firm or individual who actively quotes two-sided markets in a security, providing bids and offers (asks) along with the market size of each.
Order Book
An electronic list of buy and sell orders for a specific security or financial instrument, organized by price level.
Sharpe Ratio
A ratio to measure risk-adjusted performance. It is calculated by subtracting the risk-free rate from the return of the portfolio and dividing the result by the standard deviation of the portfolio's excess return.
Theta
A measure of the rate of decline in the value of an option due to the passage of time. Also known as time decay.
Volatility
A statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security.
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