Career Center Career ArticlesON BECOMING A QUANT
MARK JOSHI
What does a quant do?
A quant designs and implements mathematical models for the pricing of derivatives, assessment of risk, or predicting market movements.
What sorts of quants are there?
(1) Front office/desk quant
(2) Model validating quant
(3) Research quant
(4) Quant developer
(5) Statistical arbitrage quant
(6) Capital quant
A desk quant implements pricing models directly used by traders. Main plusses close to the money and opportunities to move into trading. Minuses can be stressful and depending on the outfit may not involve much research.
A model validation quant independently implements pricing models in order to check that front office models are correct. Plusses more relaxed, less stressful. Minusses model validation teams can be uninspired and far from the money.
Research quant tries to invent new pricing approaches and sometimes carries out blue-sky research. Plusses it’s interesting and you learn a lot more. Minusses sometimes hard to justify your existence.
Quant developer – a glorified programmer but well-paid and easier to find a job. This sort of job can vary a lot. It could be coding scripts quickly all the time, or working on a large system debugging someone else’s code.
Statistical arbitrage quant, works on finding patterns in data to suggest automated trades. The techniques are quite different from those in derivatives pricing. This sort of job is most commonly found in hedge funds. The return on this type of position is highly volatile! A capital quant works on modelling the bank’s credit exposures and capital requirements. This is less sexy than derivatives pricing but is becoming more and more important with the advent of the Basel II banking accord. You can expect decent (but not great) pay, less stress and more sensible hours. There is currently a drive to mathematically model the chance of operational losses through fraud etc, with mixed
degrees of success. People do banking for the money, and you tend to get paid more the closer you are to where the money is being made. This translates into a sort of snobbery where those close to the money look down on those who aren’t. As a general rule, moving closer to the money is
easy, moving towards it is hard.
3. Areas of derivatives
• FX
• Equities
• Fixed income
• Credit derivatives
• Commodities
• Hybrids
FX is short for foreign exchange. Contracts tend to be short-dated with high volume and simple specifications. Emphasis is therefore on speed and smile modelling. Equities means options on stocks and indices. Techniques tend to be PDE based with the local vol model being popular. A typical contract is a note paying some function of the stock price path. Not a particularly big market.
Fixed income means interest rate derivatives. This is probably the biggest area by value. The maths is more complex because the underlying is multi-dimensional. Martingale techniques are used a lot. It’s well paid.
Credit derivatives are derivatives that pay-off according to the defaults of corporate entities. This is currently a big growth area with lots of demand translating into very high pay. It displays some bubble-like characteristics, however.
Commodities, this is also a big growth area with the general rally in commodity prices in recent years. Hybrids are derivatives that pay off according to behaviours in more than one market – this is typically interest rates plus something else. The main advantage of working on such products is ability to learn multiple areas. These are also very trendy currently.
