FINANCIAL DISASTERS DUE TO POOR QUALITY CONTROL:

We believe that many disasters in systematic finance can be clearly explained through the application of standard quality control methodologies.   In manufacturing, quality controls shut down systems before they run away and pose catastrophic risks to employees, neighbors, and customers, not to mention the bottom line.

Societe Generale (link to story)

A proper quality control system would have produced log files and charts showing the number of trades and change in notional value per day, per person and per account.  Such charts would have uncovered large increases in manual override trades and triggered out of control alerts.  Of course, the software security breach is whole other issue pertaining to software quality.

Amaranth Advisors (link to story)

A proper backtest of their strategy would have defined clear performance limits.  Graphing outputs of the strategy and its returns would clearly have shown violations of the backtested strategy.

Global Alpha Fund (link to story)

The Global Alpha Fund is a clear example of trading style rotation.  Had fund managers performed SPC on their indicators and the profitability of those indicators, they would have observed the returns for their key factors diminish or gone negative.  This should have triggered them to analyze into the continued usability of their key factors and/or shut down the fund.

Long Term Capital Management (link to story)

We believe LTCMs algorithms began deteriorating, producing less and less return with more and more variation.  Convinced that the underlying distributions were stable, instead of shutting down the machine they scaled it up, deploying it across markets to generate the higher returns.

TransAlta (link to story)

Had TransAlta followed EuSpRIG-style spreadsheet best practices, they could have saved themselves $24 million in power transmission hedging costs.

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