Quant Careers Blog by Dominic

deMorgans Law

Wed, 22 Jul 2009 15:04:00 --0100

Over on Wilmott.com, we?re arguing about deMorgans law and whether it is asked about in quant interviews?.

Sadly, it is the case that people often get jobs without proving they know it, indeed most people who call themselves programmers don?t know it either. It?s described in wikipedia

Maybe you don?t know this law by name, but it is slightly scary that people write code without even doing very basic undergrad logic.

Genius Led By Donkeys

Sun, 31 May 2009 19:57:00 --0100

I find that this quote from my paper on Risk Adjusted Bonuses had appeared on quite a few sites. So if you're tool azy to read the whole thing: A clear factor in the recent calamities has been the lack of expertise at the very top levels of banks. Reviewing the publicly available lists of board members at many firms, I observe that most of them not only have never taken an active role in trading, analysis or risk management, but that today few would even be accepted as a trainee in a less prestigious organisation than they ran into the ground. In effect we had mediocre cavalry officers in charge of nuclear bombers. Fred Goodwin is the most egregious example of this, but he is far from unique. If anything, a bit more research shows it to be worse than that. We find people better equipped to work in the leisure industry than banking to be quite common. I doubt if more than 5% of the boards of banks before, during and after the crash could have understood any of the risk issues at any useful level, even if they had been interested, which they were not. Imagine if the people in charge of safety at an airline had never flown in a plane, or fixed one, or piloted, but instead were picked on their ability at golf and accountancy. Look at the set of ex-traders, risk managers or even quants on the boards of big banks. I almost failed to find them at all. The mystery is not why the banks failed, but how they survived so long.

Bonus Arcitecture

Sun, 10 May 2009 22:00:00 --0100

Bonus Architecture We start from a position that in the large complex entities that the regulators most want to incentivise, do not have coherent or even centrally understood processes for determining how people are awarded bonuses. This is not an intuitive position, but it does affect the effectiveness of any change to bonus allocation and gives insight into how to make these changes more efficient. Nearly all such firms are composed from mergers and acquisitions, and have inherited bonus systems that are not only difficult to change, but in order to keep the assimilated management on board, remuneration is often delegated. This also is transposed upon the standard ?silo? structure for most large banks where bonuses are allocated on the basis of asset class or market. This is to simplify the task of setting bonuses, since in a large firm there are not only a large number of workers, but there work is far more diverse than in most (if not all) other businesses of equivalent headcount. When large firms have substantial offices in multiple countries and this too adds to the complexity, and each firm has its list of idiosyncratic bonus factors, of which ?risk? is conspicuously absent. This leads to outcomes such as fixed income and commodities being in closely related bonus pools and management. Without getting drawn into the detail of either business it is clear that the risks in these areas do not correlate well, making risk based remuneration at this granularity difficult, and as we shall see later, possibly counter-productive. Such aggregation is the norm, and although the exact form varies, the practice does not, and represents what is believed to be an efficient allocation of management resources and internal political concerns. This intersects with the traditional organisation tree where each level of management delegates part of the bonus allocation to the level below. The patronage that this gives is earnestly sought by all managers, who pass as little information as possible to others. They must of course report exact allocations, but the process itself is more opaque the more levels one peers down through, and from a lower level is almost wholly impenetrable to see upward. There exist policies, set from the top with the support from compliance, legal and HR staff, but in conversation with managers who set bonuses these are barely even given lip service, much less seen as useful guidance. At non bonus setting level, they will be dimly aware that ?something political is happening? and money that is roughly related to their performance appears (or fails to appear) as a result of a process of which they are intentionally kept ignorant. For the avoidance of doubt, not only do some feel wronged, but others (confidentially) share with me that they have no idea why this bonus was so large. Before this current regulatory initiative, this was seen as an inevitable but relatively benign aspect of the management of financial firms. This is why I have adopted the term ?Bonus Architecture? as opposed to ?scheme? or ?policy?. The FSA, in common with other regulators wishes risk management to have an effective input into bonus allocation, and the most important precondition for this is that they have an adequate understanding of the process in their firms, beyond ?policy?. This is a daunting task given the extreme diversity of such firms, and it follows that to be effective this cannot be effected centrally. I recommend that and risk weighting that is applied to bonuses should involve risk managers specific to a given silo and asset class. This itself is not without risks, since risk managers are always in peril of being captured by their business units. This is not beyond solution as I shall suggest elsewhere. I do however suggest that attempting to deliver this in 2009 is not only overly ambitious, but possibly counter productive, something that deserves its own section.

Everyone Should Suffer

Sun, 10 May 2009 21:08:00 --0100

The FSA has asked whether this risk adjusted bonuses (RABs) should be restricted to the top tier of management. I am putting up my responses ahead of sending a document to the British regulators, the FSA. A clear factor in the recent calamities has been the lack of expertise at the very top levels of banks. Reviewing the publicly available lists of board members at many firms, I observe that most of them not only have never taken an active role in trading, analysis or risk management, but that today few would even be accepted as a trainee in a less prestigious organisation than they ran into the ground. In effect we had mediocre cavalry officers in charge of nuclear bombers. Fred Goodwin is the most egregious example of this, but he is far from unique. If RABs have a cut off anywhere near the top level of management then it will be difficult to engineer a bonus system to attract the right type and calibre of staff to lead firms. There will of course be no shortage of applications for roles that pay so well, but quantity is not our objective here. There is also the complex issue of promotion where a moderately senior executive may find a dramatic decrease in the quality of his earnings upon accepting greater responsibility. This can of course be trivially fixed, by increasing top level remuneration to compensate, and it is quite possible that this is an unintended consequence of such measures. There is thus an interesting trade off here. To be effective, RABs must represent a substantial reduction in wealth for poor risk decisions, and so risk-taking executives will require greater compensation for this risk. Few people currently support the notion that top executives should be paid more, and pushing up the staff costs of banks is not attractive, unless a very substantial benefit can be shown. There will inevitably be grey areas on who should be covered by these proposals, and the simplest approach is to apply it to everyone in management. Also a scheme by which everyone is to some extent being treated equally will tend to produce greater cohesion across complex firms, and in any complex financial entity the most important decisions with respect to risk taking are rarely taken at board level, and may be taken two or three levels lower.

The Fourth Thing I hate about your CV

Thu, 08 Jan 2009 11:07:00 --0100

Gaps. In the discussion area there has been an interesting increase in the rate of worried (and worrying) questions about the way banks look into your past. There seems to be a common idea that banks need your written permission to look into your past. That's simply untrue. I'm not a lawyer, but the idea simply does not survive any real scrutiny does it ? The law varies from place to place, but banks have a legal duty to check that you are a "fit and proper person" to handle serious amounts of money. Of course a lack of bad evidence does not mean you are honest and competent, but they have to at least show that they tried to find out. Often this is outsourced to firms like Kroll who get the business mostly becauase the banks has heard of them, and mostly because they do it cheap. I cannot promise that the background checking outfit will obey all laws, but I will say that their fees are simply too small to make organised law breaking worth the effort. Who are you Banks will often want to make sure that you are the named individual, and that you have the legal right to work for them in that country. There is no point going through the checks below and proving that "X worked at Y firm and studied at Z university", if they don't know you are X. University The whole point of the university examination system is to inform others of how well you have grasped a subject. Of course there are many universities and they often get really quite odd legal advice, so it is quite possible they will go through a phase of refusing to give it out on an effectively random basis. They also vary in how much detail they will give out. Headhunters are also supposed to check your background. I will say openly that it is easily the most pointless part of the recruitment process for me. The referee is chosen by the candidate, so is the person they think will say nice things, and will usually say you were a good person, even if they have just fired you because of your inability to work with them. Credit Checks Most large firms have a credit check done on you. It is cheap, and may catch some evidence of "suspicious" activity. Many newbies have incurred debts and students are known to have a rather relaxed attitude to paying bills, so minor glitches are rarely a problem. There is a reasonably good system for international credit checks as well. They are less relaxed about when the courts are involved, and you may need to settle debts. If you have an issue here, then as soon as you get an offer, you should tell your HH and then HR. It is much better to tell than be found out, so that you can put your own spin on it. Media Check Some background checkers search your name in various newspapers and other media. This is a highly noisy process since names are far from unique. Google on "Dominic Connor" and most of the first couple of page are me, but Star Trek is in there too... Previous Employers Most contracts of employment explicitly tell you not to ever give any form of reference ever. Banks have been sued for serious money for giving bad references and your employer does not want to be sued because you said nasty things about the idiot who used to work with you. HR departments typically give minimal references with dates of employment, possibly a job title. No permission from you is need for this check. Gaps Banks ask for explanations of gaps between jobs. They are an indication that leaving an employer was not your choice, and that needs to be covered. Typically they want an explanation of anything above 2 months or so. The most important thing to know ...is that HR is trained to get very interested if they think you have something you are trying to hide. Even before I became a HH, I had managed people and knew that a larger % of people have "interesting" sections of their career than you might think. Do not try to lie. Although the process is far from perfect, lying about when one job ended and the next begun is likely to cause serious pain, and most probably loss of the job after you've started, which creates another hole, of an even worse kind. Being fired for lying on your resume does not look good to future employers. Many things about your employment are on records such as tax, company directorships, shareholdings and of course court cases. Much of this is publicly acessible to some degree. In these troubled times, being fired is not such a badge of shame, and a large % of people have had various forms of involuntary career transition. Do not be tempted to hide things that go wrong. You don't need to use big fonts, or draw attention to it, but be prepared to honestly and carefully answer questions on this so that you present your case well. If you have a gap, even if it is not "suspicious", you do need to show that the time was not wasted. Study, read papers or textbooks, write some piece of software or something. The important thing to show is that you did not sit around watching daytime TV waiting for the phone to ring.

The myth of the risk free job

Wed, 07 Jan 2009 09:32:00 --0100

Apparently quant finance is dead, and we are all going to have to get real jobs, perhaps in manufacturing or dentistry, working at minimum wage whilst the global economy crashes around us. Some will starve. OK, it is at this point that I have to point out that actually I'm not as young and good looking as many people seem to think. This is not my first recession, or even 2nd or 3rd. One reson for the slightly hysterical tone on some media and various online discussions is that we have had one of the longest ever runs of economic growth. This has combined with quant work expanding as a proportion of overall banking, and so the idea of perpetual exponential growth has become an assumption when we all ought to know better given what we do for a living. The issue is not "how bad is it ?", but "how do I make better decisions about my future" ? As I say in the Guide, you can expect several major, non-discretionary changes in your career whatever choices you make. Do you think retail is a better place to be ? Really ? How about manufacturing ? That's truly a bad place to be. Many highly qualified engineers at their peak don't reach the pay that many quants get at entry level. And you will be treated like shit, and at the first chance they will outsource your job to Vietnam. Media ? I've done a stint there. Was fun. Appallingly badly paid, but fun. Job security there is really very poor, indeed a rather large % of journalists, editors, cameramen, etc are "freelance" because firms don't even pretend there is job security. Energy ? Lots of risks, there. It's a classical boom & bust industry, with the added bonus that the local government may put you in prison. Pay can be OK, but most of the decently paid stuff is highly specialist and "project based", ie when they finish the pipeline, there is no job for you at all. Law ? Lawyers are not immune from ups and downs in the economy, though like accountants some of them work in areas that are counter-cyclic. Contrary to what you may have read, big firms can and do make partners redundant. Accountancy ? In some ways, this is the field most like quant work. Indeed those whose maths are less strong, and who have a higher tolerance for boredom do indeed take this path and it can work out well. Accountancy has good grace of degradation, ie if it goes wrong, you can transfer your skills to another line of work or employer. But the accountancy firms are known to be very bloody minded about firing when the cash flow dries up. Alsothey are intensely political, on a scale I do not observe in any othrtr line of work. (The story about me having to use the "black people's entrance" at PWC is true, and yes the elevator did smell that bad). Defence ? Aside from the risks of being anywhere near fighting, defence contractors are pathetically dependant upon random acts of foreigners and political pork barrels. Even in a time of greater spending, the mix changes depending on the kind of fights your government expects to have. Many skills here are portable, but again many are not. You need to pick carefully, and the reality is that you may not be given much choice in what you work on. In house software development ? Not a bad career, but you have three big risk factors. The success of that firm, the growth in the kind of business that you come to learn, and the technologies you use. If one of those 3 go down, it can get very cold, very quickly. All s/w development jobs are gambles. I've been lucky with C/C++, but I was also a founder member of the VB User group, a skill that has declined from attracting a serious premium above other development tools, to being "legacy" in a few short years. That's a common pattern, indeed VB held out longer than many other things like PowerBuilder, OS/2, Sybase, Clipper, REXX and other buzzwords you may not even recognise. Java is not immune to this, and currently looks like having a scarily bad over-supply relative to demand before long. It can be great to be an expert in just in time stock control for retail, but as I say above retail ain't happy right now, and is well known to be highly cyclic, and what else exactly do you think those skills allow you to do if that area goes down ? As I have said before, and no doubt will say again until you listen is that the only thing that will get you through your career without the changes hurting you too badly is to currently keep your skills up to date. Discipline yourself to look up from the screen often enoguh that you can spot good new directions, or the comind collapse of your current one. Make sure some of your skills are portable. Every so often update your CV, even if you aren't looking for a job, because : a) you may be looking sooner than you think, and b) it helps you visualise how marketable you are.

The third reason I hate your CV. Your religion.

Wed, 10 Dec 2008 15:03:00 --0100

Some people seem to think I care about their relationship with God. I don't, and nor do the people who might hire you. Your CV is a list of things for someone to hire you, so the world can be divided into a few overlapping sets.
1: People of a different, hostile religion. That is pretty much everyone, even if you belong to a relatively common sect.
2: People of a similar religion.
Those who care about religion often are quite specific in what they believe, and can have quite negative views about people who "aren't really like us".

3: The tiny set of people who share your exact views.
I've asked religious people about this, and they say they'd be quite offended if someone thought they would hire them because of a shared religion.
4: People who don't care.
You've just wasted space that could be used for something useful. Not only do P&D not care about your religion, but our contracts with large firms actually forbid us from telling them because they don't want to be sued. The logic being that you can't claim discrimination if the employer doesn't know.

The second reason I hate your CV ...........The "L" Word

Tue, 09 Dec 2008 18:18:00 --0100

You are a leader. I know this because your CV says so, and I know you would not lie to me. But do I believe you ? Do I care ? If your current job involves telling people what to do then that is leadership, and of a rare and precious kind. Leading and managing quants is like herding cats, and if you an do that you have earned my respect. But... If you are at entry level, I get worried, and occasionally entertained by claims of "leadership". It is clear that some careers advisers push this concept, and perhaps in some industries it looks good, but not in banking and certainly not to me. Some people have led men in battle, or at least in hazardous and unpleasant conditions. That's pretty rare in American and British quants, but in countries fuckwitted enough to still do conscription, it is a plausible way to have learned leadership. Although I'm some dumb ass pimp, decades ago I got some sort of education, and remember what it was like to be a student and try to get my classmates to cooperate in any task. But I have to say I apply a discount factor to "leadership" gained in university clubs. A bigger discount if the "L" word is actually used. Leadership in a summer or part time job is extremely hard to express without looking like you are bullshitting on a grand scale, and sadly most people fail at least partly on this, wasting space that could be used for something useful (and believable). Part of leadership is the ability to work without someone holding your hand, telling what to do and how to do it. This is a significant factor in why there is a premium for PhDs even when the stuff they study is entirely unrelated to investment banking. Up to Masters level you are mostly a taught person, and so I and your hiring manager are uncertain whether you can work on your own, but at the same time not too much on your own. Leadership in this context means being able to lead yourself, and maybe others will follow. If like me you've actually had leadership training, then you will know that you can take charge of a rabble sometimes merely by clearly expressing a reasonable course of action. The other problem with the L word is that without care you look as if you are arrogant. The idea that you will be "difficult to manage", or worse "arrogant", can hurt your cances of getting a job, and is expressed to me by managers as a reason they are reluctant to hire an otherwise good candidate.

Should you be doing this kind of work ?

Tue, 09 Dec 2008 17:56:00 --0100

Quanting is not the only career option if you are good with maths and computers. A good process outline is to change variables through a range and see how sensitive your conclusion is to them. If you haven't done at least half of these, of something like them, then the chances that you've made a bad decision are worryingly high. Quant careers can be very lucrative and interesting, but not for everyone, and you need to evaluate your chances of actually enjoying it This is not an exhaustive list of course, you have personal preferences and you've made assumptions, and as we have seen for the last year assumptions can really go badly wrong. Questions
For instance if quanting paid the same as teaching, would you prefer that ? If you knew for a fact that at 40, you'd have to leave this line of work ? If you believed you'd only ever work in small unknown firms ? That is I believe now a much more probable event. If the ratio of maths to IT was 1:50 ? What value could you cope with as a long term position ? You'd have to work in some shit place like Birmingham or Frankfurt ? Are you flexible on location ? What if you maximum pay was known to you in advance, and was (say) 200K ? Would you work for a year free to get into quant finance ?

The first thing I hate about your CV.

Mon, 08 Dec 2008 19:54:00 --0100

You did a PhD didn't you? You spent 4 or 5 years solving unreasonably difficult mathematical conundrums, wrote your own operating system to control a particle accelerator of a fundamentally new and more powerful type using a household fridge to cool the new high temperature superconductor material you extracted from minerals they you won in single combat in a cage fight with an 8 feet high alien. Not only did you use it to discover the higgs Boson, but you keep one as a pet and you've not only house trained the Higgs Boson, but made it play dead and fetch your newspaper. Did you? Did you really? Or did you work in Starbucks, and perform outstanding work in customer relations and hygiene management? How would I know? A stupidly high % of the CVs waste stupidly large %'s of the space on dross like summer jobs. It is actually quite common for a description of something like the complexity of the local bar's stock control system to take up more space than your PhD. About 10% of the PhD CVs I get don't describe the PhD as far as bothering to tell me the title. OK,I am just a fat ignorant old pimp, so my ability to evaluate just exactly how ground breaking your research might be is finite. But I've got to sell you to some bank, hedge fund, software house, consultancy, prop shop or insurance outfit. So imagine how the conversation is going to run: Client: "Hey Dominic, got any good newbies?" Dominic: "Yes, like this guy, he's got a PhD" Client: "In what?" Dominic: "Physics" Client: "What sort of Physics?" Dominic: "Really hard physics, you know tough ones, big physics, miles long, really hard, you know like physics" Client: "Solid state?" Dominic "Could be, this is a smart guy, I'd expect really solid work" Client: "Can he program?" Dominic: "Of course, all kids learn to program these days, don't they? Did I mention he has a PhD in physics?" Guess how likely you are to get the job? Guess how much I am going to get paid for all this? Mention your summer jobs if you must, but make sure that you describe your PhD enough that we can see how you would be useful in finance.

Sharia Finance

Mon, 27 Oct 2008 11:49:00 --0100

Revisiting Shari?a financial instruments. A round-table discussion with Richard Thomas (Gatehouse Bank), Humphrey Percy (BLME), Mohammed Amin (PwC) and Siti Faridah Abdul Jabbar (National University of Malaysia). To be held on Monday, November 3, 2008, at Watermen?s Hall, 18 St-Mary-at-Hill, London, EC3R 8EF,

from 12:30-2:15pm.

Globally, Islamic finance continues to grow at 15-20% a year ? but even before the current financial turmoil, it was facing serious growing pains. And it certainly cannot expect to be exempt from the upheavals throughout the financial services sector.

Can Islamic finance survive a global contraction of credit with its principles intact? Will it suffer more or less from the strains that global finance finds itself under? Was it, after all, just a bull-market phenomenon? Or is there a real, underlying demand that will support the sector and help it devise new products for new markets?

These are big issues, and we are delighted to be able to revisit the Islamic financial space that we looked at last April. This time, our key speakers include senior figures from two major Shari?a compliant players in the London market, as well as two leading Islamic authorities:

- Richard Thomas is chairman of Gatehouse Bank, which received its UK banking license last April ? becoming the fifth Islamic bank authorised to operate in the UK. Before joining Gatehouse, Richard was head of Islamic financial services at Arab Banking Corporation in London.

- Humphrey Percy is CEO of Bank of London and the Middle East, a Shari?a compliant wholesale bank that he joined in 2006. Previously he was with BZW and West LB, where he managed start-up businesses, before setting up his own venture in 2002.

- Mohammed Amin leads PwC?s Islamic finance practice in the UK. He is also a member of the HM Treasury?s Islamic Finance Experts Group, and writes his own Islamic finance blog. He is a member of the Muslim Power 100 ? a list of the hundred most influential Muslims in the UK.

- Siti Faridah Abdul Jabbar is a Cambridge trained lawyer, teaches at the faculty of economies and business at the National University of Malaysia. She has published extensively on Islamic financial law and regulation.

If you or a colleague (we are always keen to bring new people on board) would like to join us, would you please let us know as soon as possible by emailing nicole@csfi.org.uk or by ringing 020 7493 0173. As usual, refreshments will be provided.

Quant Jobs in the Future, Part One :: Diffusion

Wed, 15 Oct 2008 09:40:00 --0100

One trend that was clear before all this started to go wrong was that quant skills were diffusing into the rest of the business. At one stage long ago, there were a few quants, often working as individuals attached to a single business unit. Traders rarely, if ever had even the most basic quant skills, many did not even have a degree of any kind, let alone a PhD in maths or physics. A small number had MBAs but that was more often coincidence than a requirement to do the job. Risk was mostly run by accountants who not only had no understanding of derivatives, but based their credit limits on conversations at golf clubs. That's not an exaggeration, and it was still happening more recently than you might think. The head of fund management at one well known asset manager has a degree in English. And yes, before you ask, their performance has not exactly been stellar. Now it is very difficult to start a career in trading, fund management or risk without at least core quant skills, and many roles in software development, operations will test you on quant skills before they let you start. Some areas that you might think of as wholly non-quant now have significant penetration like sales and even the accountancy functions. Although relationships are a key driver in sales, the best margin products have also been the most complex, and there has been a growth in the sophistication of advisers who help the buy side make less terrible decisions. This means some sales staff have more than a shallow understanding of their products. In the current climate, quant techniques are now required in some parts of compliance, which to me is the signal that all parts of finance have finally become within the reach of quant career. This is of course a positive view. Of course I am not saying when overall finance employment will hit the current level agaqin, but I am clear that for quants the decline will be less sharp because of the greater % of jobs that will require your skills. Of course these positions will have a very different mix of types of work than the classic Derman quant, and will require a wider mix of skills. This will be difficult for some of you, and more than a little disappointing. The sharp divide between quant and non-quant job will continue to erode, which will mean greater flexibility in the sort of work you can do, but at the price that you may end up doing more work that you neither enjoy nor excel at.

Quant Event with Peter Carr of Bloomberg, London

Mon, 13 Oct 2008 14:09:00 --0100

As promised, here is another event where you will both learn stuff and get to network. Peter is a very high end quant, so his talks can be very technical and rewarding. FOOD FOR THOUGHT WITH PETER CARR - What does option price mean? 8.30am Registration and Breakfeast 9am Introduction and overview on new Bloomberg coverage in Equity Derivatives * Variance swaps monitoring, mark to market and pricing * Local volatility pricing of exotic options * Volatility trade ideas made easy through new GV, real time volatility. 9.30am What does option price mean? OMON: On the Information Content of Option Prices It is well known that the market price of a standard option reflects the risk-neutral mean of its path-independent payoff. It is less well known that this same option price also reflects the risk-neutral mean of various path-dependent payoffs. We give several examples of such payoffs which together suggest that OMON conveys much more information than one might initially expect. Speakers - Peter Carr, Head of Quantitative Research, Bloomberg To register: conferences@bloomberg.net or 44-20-7330-7500 Location: BLOOMBERG OFFICE, CITYGATE HOUSE 39-45 FINSBURY SQUARE, London.

The Economist Comment on the Credit Crisis

Tue, 07 Oct 2008 11:25:00 --0100

I found this comment on The Economist particularly incisive here

Dates for your diary

Mon, 06 Oct 2008 14:55:00 --0100

As promised in "When it hits the Fan, Job hunting in interesting times", I will be promoting various events that both increase your knowledge, and provide oportunities for networking. Tuesday 6th October

Managing International Financial Instability

Evening details for the LSE event here, and I will be attending. The CSFI is also running a lunchtime round table, with details here