The Money Formula

CHAPTER 6What Quants Do

“Largely, a waste of time and human potential. It has created jobs, whose value to society is suspect. Why is it that young, bright engineers end up staring at the screens, looking for patterns in asset prices when they could have far better served the society by solving some real problems?”

—Answers to the survey question: “How would you describe quantitative finance at a dinner party?” at wilmott.com

“One can predict the course of a comet more easily than one can predict the course of Citigroup's stock. The attractiveness, of course, is that you can make more money successfully predicting a stock than you can a comet.”

—James Simons

From the 1980s with the increase in trading in derivatives, through the 1990s with the increasing complexity of products, and then the 2000s with the creation of credit instruments and the shift to high-frequency electronic trading, quants have played an ever-more-important role in banking. The educational requirements for quants got tougher, and, as so often seems to happen, the commonsense requirements dwindled to near zero. Quants are the classical boffins, here outside of academia, who do the esoteric mathematics, write the computer code, quantify a bank or hedge fund's risk, and often design the algorithms that actually make the trades. As it has become cool to be a programming nerd, so it is cool to be a quant (the big salary helps). But will it ever be as cool as being a writer?

In this chapter, we're going to ...