Morning Coffee: What banks' top quants say about their jobs today. SocGen-Unicredit merger could save billions

As banks become increasingly focused on the integration of data analysis and machine learning in their daily affairs, the concerns of their top quantitative minds should be the concerns of everyone in finance. The quants are shaping the future.

Today's top finance quants were out in force at the recent Quant Minds Festival in Portugal's Lisbon. They reflected on how their role is changing and the new challenges facing their profession. Saeed Amen, a former quant who developed systematic trading systems for Lehman Brothers and Nomura, was in attendance and has written a helpful summary. 

Firstly, Amen says being a quant is increasingly about machine learning. John Hull, a professor Derivatives and Risk Management at the Rotman School of Management at the University of Toronto who's known for his book on derivatives pricing, said his students are now learning about machine learning and its ability to infer relationships that are non-linear.

Emanuel Derman, the former Goldman Sachs and Salomon Brothers quant who's now a professor at Columbia University made a presentation on valuing derivatives using a replication approach (if you can't value an asset, replicate it with assets that can be valued), and said that derivatives modelling is changing as the focus moves towards modelling 'underliers' and market microstructure (how market structure and design effect market behaviour and the way in which products are exchanged). Market microstructure can be analyzed by machine learning and Rama Cont from Imperial College presented on this.

Some of the most interesting presentations in Lisbon, however, were from big name quants at work in banks today. Amen says Michael Steliaros, the Goldman Sachs quant who's hiring for the bank's quant execution team, presented on the theme of optimizing execution in the context of a large stock portfolio. Managing transaction costs were becoming ever more important, said Steliaros, adding that it's important to understand the correlations within a portfolio when executing trades. These correlations can impact risk at the level of a portfolio. Steliaros said they are typically higher at the end of a day.

Alongside Steliaros, Nick Baltas, head of systematic trading strategies at Goldman Sachs, spoke about  ARP (alternative risk premium strategies) and how they're impacted by crowding. Amen said Baltas suggested there are two main types of ARP: the first based on risk sharing/premia (for example carry) and second based on price anomalies/behaviourally driven (like trend). Risk sharing tends towards negative feedback loops; price anomalies tend towards positive feedback loops. Baltas said it's hard to measure “crowdedness” and that its impact tends to depend upon whether volumes are rising or falling.

Also present was Jan Novotny, an eFX quant at HSBC (who spoke on the use of KDB for machine learning) and Stefano Pasquale, head of liquidity research at Blackrock (who spoke on the use of machine learning to develop a framework for liquidity risk management). Welcome to the future.

Separately, although SocGen has disavowed its intention of merging with Unicredit and a merger of the two would likely be unfeasibly complex, a report in the Financial Times suggests a merger could make sense. Analysts at Kepler Chevreux have calculated that a UniCredit-SocGen deal could yield €2.7bn of cost savings, because of overlaps in the groups’ investment banking units, eastern European operations and in Germany, says the FT.  Jean-Pierre Mustier has reportedly been pushing it for months. Don't dismiss the concept too soon.

Meanwhile:

Goldman Sachs chairman: "We are hiring more in artificial intelligence, not just in Goldman Sachs but in general at all banks." (The Trade News)

Unicredit boss Jean-Pierre Mustier has a stuffed animal mascot called Elkette which is supposed to represent the bank's transformation and to foster belonging and inclusion. Lloyd Blankfein and Jamie Dimon have both cuddled it. (FiNews)

Mustier carried the can for the scandal involving Jérôme Kerviel, the rogue dealer. Without this, Mr Mustier might well be running SocGen today. (Financial Times) 

How to get ahead at Carlyle: "At the core of our culture is a demand that we push each other, that we perform, and that we respect each other." (Bloomberg) 

KPMG is cutting up to 400 jobs in South Africa. (Financial Times)

Credit Suisse hired a Deutsche Bank equity analyst in Australia. (AFR) 

Microsoft to ruin Github. (Financial Times)

Jerome Leleu, Morgan Stanley’s co-head of Asia Pacific equity capital markets, has died aged 41. (Bloomberg) 

Ex-Deutsche Bank analyst has been involved in a succession of scatological start-ups. (Dealbreaker) 

Ex-banker wants to warehouse uranium. (Telegraph) 

Mary Meeker's big internet trends report for 2018. (Recode) 

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