The virtue of simplicity: On machine learning models in algorithmic trading

Abstract

Machine learning models are becoming increasingly prevalent in algorithmic trading and investment management. The spread of machine learning in finance challenges existing practices of modelling and model use and creates a demand for practical solutions for how to manage the complexity pertaining to these techniques. Drawing on interviews with quants applying machine learning techniques to financial problems, the article examines how these people manage model complexity in the process of devising machine learning-powered trading algorithms. The analysis shows that machine learning quants use Ockham’s razor – things should not be multiplied without necessity – as a heuristic tool to prevent excess model complexity and secure a certain level of human control and interpretability in the modelling process. I argue that understanding the way quants handle the complexity of learning models is a key to grasping the transformation of the human’s role in contemporary data and model-driven finance. The study contributes to social studies of finance research on the human–model interplay by exploring it in the context of machine learning model use.