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Interview with Tim Grant

Posted by alifinmath on February 21, 2008

Here is an interview with a UBS MD. Before I paste some excerpts let me reiterate some of my pet convictions: the world of financial engineering and risk management, of proliferating financial products of unfathomable complexity, is changing beyond recognition. The employment opportunities will be more limited and the competition ever fiercer among solid candidates from established programs. Risk “management” and financial “engineering” will probably not vanish but there will be a keener sense among the lay public of how much quackery and witch-doctory there is behind a lot of the numbers. And now some excerpts:

I think that there is generally a misunderstanding as to what a “quant” actually does and I think it harks back to the 80s and 90s and the age of the “rocket scientist.” The impressive characters were invariably PhDs who were transferring their experience in applied physical sciences or mathematics into the finance area. They tended to be segregated for the most part from the traditional sales and trading roles and there’s some notion that they’d be hunched in front of a computer in a dark corner of the bank putting together intricate and intractable models to support the trading desk.

The idea that a quant might actually speak to a client was almost laughable. Though obviously a caricature that image was rooted in reality. This issue now is that this particular reality no longer applies. The so called “quants” have come out of the dark rooms and are now running trading desks and managing and growing huge businesses and those sorts of quants actually don’t exist to the same extent that they did. I’m not saying we don’t need highly qualified and gifted PhDs to build our models or in any way implying that our universe has become less quantitative. What I’m saying is that people think that banks need lots of quants in the old-school framework and are labouring under the mistaken assumption that there is a significantly increased need for those people when there isn’t. But also they assume that completing an MFE somehow qualifies you for that role when it doesn’t. If you speak to prominent quants in our industry, some of whom have gone back into academia, they will all tell you that the landscape for quants has changed dramatically and it’s not like it used to be (almost always relayed with a nostalgic tone!)

To be a true “quant” in our business you still need to be highly academically literate and probably have a PhD (and be up against the stiffest competition ever), so what exactly is left for our MFE graduates? This brings me to my second theme regarding the roles that exist in sales and trading in today’s reality (and I mean sales and trading specifically over investment banking/corporate finance).

The times have changed. Just look across the range of complex assets that now trade on our trading floors. The level of financial engineering/modelling that has fueled the growth in trading volumes and the widespread use of derivatives across not only the institutional but also retail investment communities is incredible. Certainly simple building blocks of more complex instruments (e.g. interest rate swaps and credit default swaps) are now massively commoditised and this trend continues as the natural cycle of product evolution in financial markets we’ve seen for decades continues apace. The buy side investment community has had to become more comfortable with financial engineering in order to understand their more complex investments. In any given situation there are now a number of different ways to express the same view across different markets and that theme is becoming more prevalent – Black and Scholes/Merton recognized in the 70s that credit and equities are somehow fundamentally related and now we’re really starting to see capital structure arbitrage move from being the preserve of specialist hedge funds to being a strategy for large established institutional players. So basically everything is becoming more complex with more variables and more intellectual bandwidth over and above the traditional sales and trading skillset is required to get the job done. Also investment banks in particular are much larger and more labyrinthine institutions than they were even 10 years ago such that the qualities of leadership and entrepreneurialism are more highly prized in terms of being able to drive and grow businesses.

Note also that the traditional role silos of trader, salesperson, researcher and quant are no longer clear cut. There are a myriad of roles on the modern trading floor that blur the boundaries and that combine some or all of those individual elements. Salespeople need to be more quantitative than before as they need to be able to understand and sell the complex securities created by structuring desks (and in this day and age of regulatory and public scrutiny that need has only increased in its importance). Traders need to be able to think and act like salespeople. Structurers are often equal parts marketers. The true professional should be able to do anything well and be outstanding at their specialism.

If you were asked to design a curriculum for MS program in Financial Engineering which core courses would you pick?

Well I think they need more practical application experience. Turning up to the interview knowing how to derive Black-Scholes from first principles won’t actually help you as much as having priced and mock traded options strategies with the model you’ve implemented.

I don’t have an argument with any of this. Elsewhere, Grant asserts that the need for quantitatively-oriented traders and salespeople will increase but I don’t buy that argument for reasons I’ve already explained elsewhere: engineered financial products have consequences no-one can anticipate and as scholars and practitioners are starting to realise, the idea of managing and controlling risk has turned out to be hubris: indeed, the very opposite has occurred, with the financial world becoming ever more volatile because of financial engineering. Furthermore, as people are learning to their cost, the magical fantasy world of finance is related ultimately to the real world of real people living their humdrum lives. These real people, with their stagnant wages and inability to service debt, have been causing the collapse of big chunks of the financial house of cards. But these are my opinions.

Grant makes points I heartily endorse: application-oriented coursework is primary. Learning utterly irrelevant material on measure theory is useless: this is not what prospective employers are looking for. Furthermore, even if it is relevant, it should have been taught to an adequate level: just a passing intro to, say, portfolio theory or Monte Carlo simulation will not do the trick. Grant is also correct in pointing out (for those who don’t already know the obvious) that MFEs are not generally being hired for pure quant jobs but rather for sales and assistant trader positions, where in addition to quant skills, prospective employers are looking for certain traits of character: enterprise, a flair for calculated gambles, resilience under pressure, and independence of thought and judgment.

4 Responses to “Interview with Tim Grant”

  1. Chris Prouty said

    And this is supposed to be bad news? The traders and salespeople are the ones who have all the fun, make all the headlines, and fill their garages with cars from Italy. If MFE programs are the breeding ground for tomorrow’s traders, I am proud to be a part of their education.

  2. alifinmath said

    Oh, I agree. I didn’t say it’s bad news. It’s that students are often not being told *what* to expect, and what they should be aiming for — by instructors who have *no* real-world experience or savvy and wouldn’t even know how to play blackjack or poker.

    I vividly remember one fellow asking what the f**k use sigma-algebras were and the instructor saying that, well…er… papers on finance used sigma-algebras. Bollocks. It’s mostly not needed and even if it needs to be covered, do it in passing.

    Who wants to be a pure quant anyway? That’s not where the real money has been.

  3. Quantnet said

    Hi Ali,
    Glad to see the interview here. Are you a member on Quantnet ?

  4. alifinmath said

    Yes. My nom de plume is “bigbadwolf.”

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