The menu of instruments

The four families

Almost everything a quant trader will touch in this curriculum is one of four kinds of instrument. They differ in who issues them, what they promise, and how their prices move.

1. Equities (stocks)

A share of equity is a claim on the residual value of a company after debt holders are paid. Buy a share of AAPL and you own a sliver of Apple — its assets, earnings, and future. Returns come from price appreciation and dividends.

• Where they trade: centralized exchanges (NYSE, NASDAQ, LSE, etc.). Highly transparent order books.
• Who trades: retail investors, mutual funds, pensions, hedge funds, market makers — everyone.
• Why quants care: liquid, well-documented historically, the most studied asset class. Most retail quant strategies start here.

2. Debt (bonds)

A bond is a contractual promise: the issuer (a government or corporation) borrows money and promises to pay it back with interest. The price of an existing bond moves inversely to interest rates — rates up, bond price down.

• Where they trade: mostly OTC for sovereigns and corporates. Some retail-accessible bond ETFs trade on exchanges.
• Who trades: primarily institutions — central banks, pension funds, insurance companies, hedge funds.
• Why quants care: the bond market is far larger than equities by dollar volume. Pricing is mathematically rich (yield curves, duration, convexity). But the data and access are harder than equities for retail.

3. Futures

A futures contract is an agreement to buy or sell a fixed quantity of an underlying asset at a fixed price on a fixed future date. They're standardized and exchange-traded. You can long or short with equal ease — selling futures doesn't require borrowing the underlying first.

• Where they trade: centralized derivatives exchanges (CME, ICE, Eurex).
• Who trades: hedgers (commodity producers, asset managers laying off duration), speculators (CTAs, macro funds), arbitrageurs.
• Why quants care: clean leverage (5–20x typical), no borrow constraints, deep liquidity in major contracts (ES, NQ, ZN, CL), narrow bid-ask spreads. Where many systematic strategies actually run.

4. Options

An option is the right — but not the obligation — to buy (call) or sell (put) an underlying at a fixed strike price by a fixed expiry. The buyer pays a premium for that right; the seller earns the premium but takes on the obligation.

• Where they trade: centralized options exchanges (CBOE, NASDAQ ISE, etc.) for listed names; OTC for exotic structures.
• Who trades: market makers, vol funds, dealers, retail (increasingly), corporate hedgers.
• Why quants care: options expose new risk dimensions (volatility, time decay, skew) that don't exist in linear instruments. Their pricing is the gateway to stochastic calculus and the math we'll build up to later.

What we'll actually trade in this curriculum

For learning purposes:

• Equities (specifically liquid US large-caps and ETFs): for backtesting and paper trading. Free historical data via yfinance, real-time via Alpaca paper.
• Futures: referenced for theory; actual access usually requires a higher bar (margin accounts, broker approvals).
• Options: later — once we've built up the math.
• Bonds: mostly conceptual unless you trade rates specifically.

You can get very far with just equities + ETFs. Many institutional quants do.

Why "the menu" matters

The instrument type defines:

1. Liquidity profile. A small-cap stock's bid-ask is 50× wider than SPY's. This eats backtest returns alive when not modeled.
2. Leverage. Futures give you 10×+ exposure per dollar of margin. Equities give you 2× max on retail brokers. Options have implicit leverage that varies wildly.
3. Risk shape. Bonds have duration risk (interest rates). Options have gamma/vega (volatility curvature). Equities are simpler — but factor exposures are still real.
4. Tax treatment. US futures (Section 1256) get blended 60/40 long-term/short-term capital gains regardless of holding period. Equities don't. This matters more than people think.

Choosing the wrong instrument for your strategy is one of the most common retail mistakes — running a mean-reversion strategy on a small-cap with 5 bps daily edge and 50 bps round-trip cost is a slow path to losing money.

Predict before the next lesson

In B1-01 we said most retail traders lose because they misidentify their role. Tomorrow we'll cover how prices actually form (bid-ask, order types, the order book). Before then:

• For a stock like AAPL, where do you think the quoted price comes from? Is there a single "price" at any instant, or are there multiple at once?
• Who's typically on the other side when you click "buy" at the market price?

Note your guesses. We'll test them tomorrow.