In the international financial markets, successful trading strategies are devised by highly educated professionals with sophisticated math and computer skills known variously as financial engineers, computational finance professionals or, more familiarly in the shorthand of Wall Street, "quants."
These are the people who create the financial theories, computer models, valuation techniques and trading programs used by hedge funds, investment banks and other market participants to exploit opportunities that might be missed by average mortals.
By and large, this terrain is occupied by people with advanced degrees in disciplines such as physics, economics and computer science, or any of several mathematical specialties such as multivariate calculus, linear algebra, differential equations, probability theory and statistical inference. (If you're scratching your head wondering what those disciplines are about, then financial engineering is probably not the job for you.) Generally, these people also need to be familiar with programming languages including C++, the most widely used in the field.
The fathers of computational finance are considered to be the economists Myron Scholes, Fischer Black and Robert C. Merton. Scholes and Black are synonymous with options pricing theory, having developed the famous Black-Scholes equation. Their model provided the fundamental conceptual framework for valuing options, and has become the de facto standard in the world's financial markets for valuing those instruments, whether they're traded on an exchange or over the counter. Scholes was awarded the Nobel Prize in Economics along with Merton in 1997. (Black died in 1995.) Merton's work built upon the efforts of Black and Scholes. He's also credited with being the first person to start recruiting math and finance academics to work on Wall Street.
Successful candidates in financial engineering are extremely well-paid. Salaries start at six figures, and experienced professionals can command $250,000 per year or more in salary alone - augmented by a bonus that may exceed 100 percent of the "base" figure. They're all highly qualified, but many employers require them to pass a rigorous vetting process including the verification of references and, ideally, published research to point to.
One recruiter who specializes in the field tells of one candidate she placed with a high-profile New York hedge fund. The job offer was rescinded after one of his professors provided a less-than-glowing reference.
"This hedge fund actually went through the trouble of contacting the professor that supervised his dissertation, rather than the professors he listed as references - and that professor was located in Brazil," the recruiter said. The moral of the story: Make sure you have built strong relationships with your advisers and fellow researchers to go along with your good academic record.
The job market for qualified quants is very good. During a panel discussion sponsored by the International Association of Financial Engineers in April 2007, Alessia Falsarone, global investments analyst with Citigroup Global Wealth Management, said, "There is a very strong, and increasingly strong, demand for quant skills - period."
So if you thought all there was for mathematical brainiacs to do was sit around scribbling obtuse equations for other like-minded mathematical types, think again. They can also earn a lot of money on Wall Street.
Roles and Career Paths
If you become a quant, much of your time will be spent developing, programming and updating financial models. When just starting out, you may be required to work completely by yourself, spending long hours building models from scratch and coding for several hours straight.
Good communication skills are also helpful, however. A quantitative professional can be viewed by other members of a firm as a resource who can explain to laymen why and how their models work. Plus, after long hours programming complex models, you'll need to ask colleagues to review your efforts.
Quantitative analytics is one area where a candidate with a doctorate isn't considered to be overqualified, though such an advanced degree isn't always necessary. A master's degree in the appropriate discipline can also suffice. Falsarone, for example, holds a master's in financial mathematics from Stanford University. Peers who pursued doctorates, she said, did so to give themselves more time to settle on what they wanted to do rather than to land a better job.
Unlike with MBA candidates, the pedigree of your college isn't always viewed as a hiring advantage. It's more important to demonstrate you have the skills needed to succeed in the job.
Skills and Qualities
- Advanced degree in mathematics, statistics, physics, computer science, economics, or similar disciplines
- Ability to program complex financial models
- Good communication skills