The Difference Between a Pricing Model and a Trading Model

This morning on the brand new quant finance reddit, a user asked about the difference between a pricing model and a quant trading model. I realized that this is a question that often arises due to indiscriminate use of the world "model." And it becomes even murkier because pricing models can often play a part in quant trading models, in the sense that they are used to manage risks and potentially perform relative value analysis.

My comment and a link to the whole thread can be found here:

http://www.reddit.com/r/quantfinance/comments/d58sc/whats_the_difference_between_a_pricing_model_and/c0xnsli

I used to be rather unenthusiastic about pricing models; I wanted to learn the closely guarded secrets of the quant trading world, some kind of hidden spellbook of trading and mathematics that would teach me how to become a billionaire. But as I've learned more, and the wide world of finance has humbled me plenty, I've found that the two are more intertwined than I had thought. If nothing else, learning about pricing models helps you to think critically about the behavior of investors and markets.

Furthermore, risk, which is obviously quite related to pricing models, is fundamental to any good trading operation. In a comment (here) this morning I related a story about a meeting with a trader the other day. A few of his positions were missing their proprietary duration measures, a key interest rate risk statistic, and he remarked: "Without my risk, I'm flying blind." While quant models are extremely valuable if they can predict fundamental market occurrences like interest rate movements or stock market movements, they are worth nothing if you can't evaluate how these changes will affect your portfolio. And in that sense, risk and trading are inextricably connected.