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What are validation jobs in banks?

I've worked as a quant in finance for over two decades, on both sides of the Atlantic. And I can smell the rot setting in. 

In the past decade, banks' use of quants has changed. Ten years ago, when we were still building structured products, quants in banks needed deep knowledge of mathematical techniques to do the job. Today it's much less groundbreaking - quants have been dumbed down.

If you speak to the average quant in finance today, he or she will be working on model validation relating to the fundamental review of the trading book. Their role is to put a seal of approval on the numbers - no more, no less. Most quants are no more than a hygiene function. 

Nor will things improve with the spread of machine learning. People say that artificial intelligence will herald a new era of quant power. But machine learning is little more than linear algebra and you don't need a quant to do that. 

This comes as a shock to a lot of young people entering the industry, as does the persistently low pay of the more traditional quant's unfortunate sidekick - the quant developer (quant dev). Quant developers don't have structuring ideas and don't know finance like actual quants, but they know how to code the models. Quants and quant developers work together, but while quants can still get bonuses that are 100% of salaries, quant developers are on a fraction of their pay. Never go down the quant dev route. 

I can't see things getting better. The trend is still for banks to move away from structured products and towards simpler products that require less capital. As this happens, the demand for really good quants will go down. Excellent people, will still be needed, but in smaller quantities.

The rest will be stuck doing low-end quant validation jobs. And for these, you won't really need a PhD. Who needs stochastic calculus now?

Nor are things likely to improve in the long term. The real threat to the quant is the trader of tomorrow. In future, traders will think differently. Traders themselves will be more quantitative and will know how to code in Python. However, traders won't want to spend their time coding in Python and so this will become the task of a new sort of quant-quant developer hybrid. There will be less maths, and more programming, and less pay.

Joshua Gibbons is a pseudonym 

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AUTHORJoshua Gibbons Insider Comment
  • Jo
    1 March 2019

    What the hell is a quant anyways? Maybe the model and analysis was flawed starting with the definitions?

  • Er
    Eric Weigel
    28 February 2019

    Just to be clear the article pertains to sell-side quants. My view is that the need for financial engineering on the sell-side has diminished due to asset owners and the buy-side waking up to the fact that most of these products are not needed for their purposes. On the buy-side my view is that the demand should keep on growing. There is still a long way to go as many of the models employed are fairly unchanged from pre-crash days and new modeling approaches are needed. Also, the need for having people that can discern market conditions is if nothing heightened. I don't see the future as bleak as portrayed in this article but my view pertains primarily to the buy side.

  • St
    Stefano R
    25 February 2019

    "quants can still get bonuses that are 100% of salaries". Is this still the case nowadays?

  • Aj
    Ajay K
    23 February 2019

    Quant finance is full of bubbles now. One example is central risk book. Totally a hype.none of bank’s central risk book make money. It is a cost center not a revenue center

  • Mi
    Mike S.
    22 February 2019

    Good article! The negative trend is on both the jobs and the salaries as a large number of banks built quant teams in countries where salaries are much lower than in NY/London/HK.

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