Quants, Strategic Speculation, and Financial Market Quality

We study the effects of quantitative equity investing, an increasingly popular investment style, on financial market quality. Within a noisy REE model of strategic speculation with two informed market participants, we define discretionary investing as fully strategic trading and quantitative investing as partially or fully myopic via its reliance on a backtested trading strategy. Growth in quantitative investing is modeled as both the introduction of and the greater backtest adherence by an informed speculator. The introduction of an additional speculator generally benefits financial market quality. The effect of greater backtest adherence depends on whether it leads to more or less aggressive trading than discretion, the former improving, while the latter worsening market quality. Quants trading against discretionary investors with lower (greater) information precision are more (less) likely to have a positive effect on market quality.