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Do you have a lot of capital for trading as well as expenditure on infrastructure and operation? In general, I would not recommend quantitative trading for an account with less than $50,000 capital. Let's say the dividing line between a high- versus low-capital account is $100,000. Capital availability affects many choices; the first is what financial instruments you should trade and what strategies you should apply to them. The second is whether you should open a retail brokerage account or a proprietary trading account (more on this in Chapter 4 on setting up your business). For now, I will consider instrument and strategy choices with capital constraint in mind.

With a low-capital account, we need to find strategies that can utilize the maximum leverage available. (Of course, getting a higher leverage is beneficial only if you have a consistently profitable strategy.) Trading futures, currencies, and options can offer you higher leverage than stocks; intraday positions allow a Regulation T leverage of 4, while interday (overnight) positions allow only a leverage of 2, requiring double the amount of capital for a portfolio of the same size. Finally, capital (or leverage) availability determines whether you should focus on directional trades (long or short only) or dollar-neutral trades (hedged or pair trades). A dollar-neutral portfolio (meaning the market value of the long positions equals the market value of the short positions) or market-neutral portfolio (meaning the beta of the portfolio with respect to a market index is close to zero, where beta measures the ratio between the expected returns of the portfolio and the expected returns of the market index) require twice the capital or leverage of a long- or short-only portfolio. So even though a hedged position is less risky than an unhedged position, the returns generated are correspondingly smaller and may not meet your personal requirements. For certain brokers (such as Interactive Brokers), they offer a portfolio margin, which depends on the estimated risk of your portfolio. For example, if your portfolio holds only long positions of risky small-cap stocks, they may require minimum 50 percent overnight margin (equivalent to a maximum leverage of 2). But if your portfolio holds a dollar-neutral portfolio of large-cap stocks, they may require only 20 percent or less of overnight margin. To sign up for portfolio margin, your broker may require that your account's net asset value (NAV) meets a minimum, often about $100K. But for that $100K of cash, you may be able to hold a portfolio that consists of $250K of long stock positions, and $250K of short stock positions.

Capital availability also imposes a number of indirect constraints. It affects how much you can spend on various infrastructure, data, and software. For example, if you have low trading capital, your online brokerage will not be likely to supply you with real-time market data for too many stocks, so you can't really have a strategy that requires real-time market data over a large universe of stocks. (You can, of course, subscribe to a third-party market data vendor, but then the extra cost may not be justifiable if your trading capital is low.) Similarly, clean historical stock data with high frequency costs more than historical daily stock data, so a high-frequency stock-trading strategy may not be feasible with small capital expenditure. For historical stock data, there is another quality that may be even more important than their frequencies: whether the data are free of survivorship bias. I will define survivorship bias in the following section. Here, we just need to know that historical stock data without survivorship bias are much more expensive than those that have such a bias. Yet if your data have survivorship bias, the backtest result can be unreliable.

The same consideration applies to news—whether you can afford a high-coverage, real-time news source such as Bloomberg determines whether a news-driven strategy is a viable one. Same for fundamental (i.e., companies' financial) data—whether you can afford a good historical database with fundamental data on companies determines whether you can build a strategy that relies on such data.

Table 2.2 lists how capital (whether for trading or expenditure) constraint can influence your many choices.

This table is, of course, not a set of hard-and-fast rules, just some issues to consider. For example, if you have low capital but opened an account at a proprietary trading firm, then you will be free of many of the considerations above (though not expenditure on infrastructure). I started my life as an independent quantitative trader with $100,000 at a retail brokerage account (I chose Interactive Brokers), and I traded only directional, intraday stock strategies at first. But when I developed a strategy that sometimes requires much more leverage in order to be profitable, I signed up as a member of a proprietary trading firm as well. (Yes, you can have both, or more, accounts simultaneously. In fact, there are good reasons to do so if only for the sake of comparing their execution speeds and access to liquidity. See “Choosing a Brokerage or Proprietary Trading Firm” in Chapter 4.)

Despite my frequent admonitions here and elsewhere to beware of historical data with survivorship bias, when I first started I downloaded only the split-and-dividend-adjusted Yahoo! Finance data using a now defunct program. But now you have easy and free access to that via many third-party APIs (more on the different databases and tools in Chapter 3). This database is not survivorship bias–free—but I was still using it for most of my backtesting for more than two years! In fact, a trader I know, who traded a million-dollar account, typically used such biased data for his backtesting, and yet his strategies were still profitable. How could this be possible? Probably because these were intraday strategies. So, you see, as long as you are aware of the limitations of your tools and data, you can cut many corners and still succeed. (There are now affordable survivorship-bias-free stock databases such as Sharadar, so I recommend you pay a small fee to use them.)

TABLE 2.2 How Capital Availability Affects Your Many Choices

Low Capital	High Capital
Proprietary trading firm's membership	Retail brokerage account
Futures, currencies, options	Everything, including stocks
Intraday	Both intra- and interday (overnight)
Directional	Directional or market neutral
Small stock universe for intraday trading	Large stock universe for intraday trading
Daily historical data with survivorship bias	High-frequency historical data, survivorship bias–free
Low-coverage or delayed news source	High-coverage, real-time news source
No historical news database	Survivorship bias–free historical news database
No historical fundamental data on stocks	Survivorship bias–free historical fundamental data on stocks

Though futures afford you high leverage, some futures contracts have such a large size that it would still be impossible for a small account to trade. For instance, though the E-mini S&P 500 future (ES) on the Chicago Mercantile Exchange has a margin requirement of only $12,000, it has a market value of about $167,500, and a 10 percent or larger daily move will wipe out your account that holds only the minimum margin cash. In case you think that a 10 percent or larger move for the S&P 500 index is extremely rare, check out how many times it happened from February to April 2020. Instead, you can trade the micro E-mini contracts (MES), which has only one-tenth of the margin requirement and market value of the regular E-mini.