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Wall Street as a Quantitative Workplace
02/10/05FE Club Talk
Alex KuznetsovBarclays Capital
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What will happen todayThe goal:
explain what people with quantitative skills actually do on Wall Streetdescribe different types of employersdescribe different job roles available
Outline/scope:what Wall Street consists of – industry structureinternal organization and technology:
of a broker-dealerof other players
technology areas you will interact withbusiness side/technology sidethings to look at in a job offer
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What is Wall StreetOur working definition:
firms where an FE graduate can find interesting workgenerally, financial services companies involved with trading of securities and other assets
What is NOT Wall Street:real estate most securities issuers:
corporations, governments/agencies, municipalitiesretail banking
In the US:total employment in financial industry: ~5 milliontotal employment on Wall Street: ~250 thousandof which technology: ~70 thousand
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The two sides of Wall Street
Buy-side:asset managers/investors (real money)speculators (fast money)
Sell-side:Large “investment banks”
active in both primary and secondary marketsact as brokers and/or dealers for buy-side firms
Middle:intermediaries:
interdealer brokersexchangesservice providers
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Picture the flows
US Treasury Fannie Mae GeneralMotors
Goldman Merrill Lehman
GarbanCBOT
Blackrock PIMCO CALPERS DE Shaw Bank ofEngland Boeing
Issuers
Sell-side
Buy - side
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Inside a broker-dealerbetween 5,000 and 25,000 people overallsplit into divisionswhere would you end up, most likely?
trading, risk management, or technology
Top management
Legal/Compliance Risk ManagementTechnologyRevenue-producing
Investment Banking Equities
Asset management Fixed Income
Retail/prime brokerage
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Inside a trading division
between 500 and 5000 people overallsplit into business lines and further subdivided into individualtrading desks by product areaseach desk is 5-25 traders plus assistants etcthere is also sales organization that works across product areas
Fixed Income Division
Rates CreditFX
Mortgages Munis Treasuries Swaps IR Derivatives Structured Products
Sales force
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What people do in sales/tradingA salesperson’s day:
call each of your accountssolicit trades:
if a customer wants to trade, pass the request to the appropriate trading deskget sales credits if you bring in a trade
performance: total sales creditsA trader’s day:
respond to customer inquiriesquote pricesexecute trades
performance: total PnL (profit and loss)manage risk and PnL of your booksprovide closing prices for your securities
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Front, middle, and backFront office: writes trade tickets
all customer-facing activities:sales/tradingresearch
Back office: turns them into moneytrade processing
trade recordsreconciliationsettlementofficial risk and PnL reports
Middle office:the plumbing between front and back
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Where do we belong in this picture?
Trading and risk management activities are quantitatively and technologically intensiveReview technology needs of:
trading risk managementsalesback office
Discuss how these needs are met:technology organizationbusiness/technology interface
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What traders need
Pricing:for everything they trade:
what is it worth:right now (given current market data)at closing time (given closing prices)
Valuation modelsgenericdesk-specific
Market dataDisplay and analysis tools
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What else traders needRisk and PnL
PnL (profit and loss):currentend-of-day
risk exposures to things that can change:active prices (futures, on-the-runs, swap rates)volatilities
What it takes:Valuation modelsRisk models (taking deltas of valuation models)Display and analysis toolsTrade management/position management
Relative value/proprietary trading models
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What salespeople needTrade ideas to convince customers to trade with us:
often require quantitative arguments and analysisResearch reports to keep customers happy:
relative value reportsclosing pricesmarket commentary
Historical data access and analysis toolsAccess to firm’s technology for their clients:
web-based analyticshistorical data tools
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What risk managers needAccess to positions across the firm
trade databasesposition management
Valuation toolsRisk models:
different from desk-level modelsVaRScenario analysis toolsCredit risk models
Software that runs the models and generates reportsBack office has similar needs:
today’s snapshot of positions/cash flowssettlement and clearing systems
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History of Wall Street technologyHow these technology needs are met
Talk about large dealer firms firstothers are usually subsets of that
The three levels:individual business/desk leveldivisional level:
integrates needs common to businesses in the divisionaligned with but does not belong to the businesses
firm-wide level:back officerisk managementinfrastructure
Need some historical perspective
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Wall Street technology: 1975
desk level:nothing
division level:nothing
firm-wide level:mainframes for back office tasks
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Wall Street technology: 1985desk level:
desk quants/programmers
division level:nothing
firm-wide level:mainframes for back office tasksworkstation networksdatabase technology
Desk quants Programmers
back office systemsnetworksdatabases
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Wall Street technology: 1990
desk level:quants remainprogrammers move to divisional level
division level:technology groups serving specific businessesresearch departments
firm-wide level:modern payments systemsdatabasesnetworksmarket databirth of RISK MANAGEMENT
databasesnetworksmarket data
software development
quasi-academicresearch
IT
Desk quantsProgrammers
Risk mgmt
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Wall Street technology: 1997
desk level:quants remainbut administratively begin to report to divisional level
division level:(technology groups serving specific businesses)++“core” technology(research departments)--
firm-wide level:electronic tradingenterprise management
databasesnetworksmarket datae-trading infrastructure
front-officesoftware development
core analytics
quasi-academicresearch
Desk quants
Risk mgmt
IT
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Wall Street technology: 2005
desk level:pure quants increasingly rarealmost all desk needs are met by division-level IT/research
division level:research departments mostly absorbed by ITquant/programmer line blurred again
firm-wide level:many divisional tasks migrate to firm-wide ITsuch as core analytics
databasesnetworksmarket datae-commercesoftware developmentANALYTICS
software development
research
Desk quants?
Risk mgmt
IT
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Beyond dealer banks: 2005
Buy-side/Asset managers:Blackrock, PIMCO, Fidelityhave fairly large technology organizationsfocus on risk managementtrading but no sales – portfolio managers instead
relative to dealers:ADD:
portfolio analysis, relative value modelsREMOVE:
sales technology, market-making technology, structured products etc
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Beyond dealer banks: 2005
Hedge funds:over 5000 in the US/9000 worldwide2 – 200 people in eachusually farm out back office technology functionsfocus on prop trading/relative value modelingprobably the only place where pure quants or quant/traders still flourish
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Beyond dealer banks: 2005
Brokers/exchanges:Garban/ICAP, Tullett, CBOT, CME…much smaller technologyfocused on pricing and e-trading infrastructureoften have sophisticated pricing/analytics needsno risk and no risk/position management
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Beyond dealer banks: 2005Financial software industry:
Software companies proper:Analytics:
TechHackers, NumeriX, … Back office/Risk management:
Summit, Sunguard, BARRAService providers:
Bloomberg, Reuters, Thomson, …Focus on “generalizable” things:
financial analyticsrisk management modelstrade capture and settlement
Compete with tech organizations of big banks
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Working in a technology groupA typical set-up:
a business unit (trading desk)has several technical groups doing different projects for themeach would be 5-15 people – a mix of quants and developers, senior/junior
What you will do all day:develop your piece of the overall puzzleresolve issues with your group’s systemsinteract with others
Who you will interact with:your colleagues within the groupthe businessstandard infrastructure groups
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Technology environmentQuestions you will face on a daily basisPresent everywhere and done differently everywhere:
Instrument data:static: what’s the coupon on that bond?historical: what’s the closing price for IBM on ???
Trade data:how do I see a list of trades done in that book?how do I stuff my new derivative into the firm’s booking system?
Analytics:which library has this model?how do I get it changed so it does this?
Market data:how can I see what’s the market doing right now?
Software development and support:where do we put our code?how do we build, test, and deploy our systems?what do we do when they break?
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Business side and technology sideWhich side are you on?
paid by a business unit:business side
paid by a technology unit: technology side
Business side:you tell technology what to doyour life is buy low, sell high
Technology side:interesting, challenging workoften more bureaucratic
Power structure:business used to dominate unquestionablynow it’s not so simple
trading/sales
analysts hired by the
desksquant/traders
traditionaldesk quants sales research
front office technology groups
Firmwide IT
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Interacting with the business side
Do ALL YOU CAN to understand:market conventions, drivers, terminology/slanghow your business unit makes moneywhat is its role in the company
Your usefulness is measured by your ability:to understand business needsto offer workable solutionsto get them done within existing tech structure
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In conclusionWhen trying to find your place in this industry:
draw your net wider:are big banks still the best workplaces?
probably still the best in terms of learning opportunitieslook at financial software industrylook at smaller players on the buy-side
When evaluating job offers, make sure you understand:your place on the market organization diagram
what is the business model of your employer?your place on the internal organization diagram
desk-level, divisional or firmwideMain goal:
try to get close to business/technology interface