The Coming Glut of Financial Engineers


In the last ten years, the number of graduate programs in quant finance has exploded, as has the number of MFE grads with an eye on top jobs at big-name firms. A decade ago there were seven graduate level quant programs in the United States; today there are close to a hundred – each cranking out anywhere from twenty to a hundred graduates a year. Just as their students see a MFE degree as a surefire ticket to wealth, universities are trying to cash in on the bonanza of eager (if somewhat naïeve) future quants by offering multiple programs in the field. It’s a great moneymaker for the schools, but are the expectations fueled by these degree factories realistic? Can the finance industry absorb the coming glut of MFEs?

Financial trading has transformed over the past 30 years. In the early ‘80s, the people drawn to trading had a passion for markets, but few had the academic pedigree that’s a prerequisite today. Many had only a high school education, but the markets were straightforward enough that a basic understanding of option theory and CAPM sufficed. When derivatives markets exploded in size, both in terms of equity trading and footloose liquid capital, complexity increased by an order of magnitude. Traders with a technical background who had been there from the start were able to capture “monopoly profits” since a failure to understand the technical nuances of the business was a barrier to entry for many prospective quants. Academics and engineers were in short supply, and therefore were hot commodities.

Today, however, the situation looks much different. Where advanced training in quantitative finance was once the exception, there is a growing army with advanced credentials. Black-Scholes and Ito’s Lemma used to be hallmarks of an expert in quant finance; now they’re part of the MBA curriculum and even some undergraduate math programs. Interest rate derivatives and the Gaussian copula for credit and mortgage derivatives were similarly standardized.

As their numbers and sophistication grow, so does the gap between MFE students’ expectations and reality. While the majority of MFE students dream of becoming traders or big-time portfolio managers, the dismal truth is that there simply aren’t enough of those jobs to go around. Right or wrong, most people get those positions by working their way up through the ranks, starting out in jobs that are much less attractive to someone with an advanced degree intent on being the next big trading success story.

Not only are there are more than enough people with first-rate credentials, number of positions in trading, quant finance, and portfolio management is likely to shrink. Firms questioning the worth of their strategic trading platforms have increasingly chosen to spin off entire businesses. These trading jobs likely won’t go away, but will require less infrastructure and support staff – especially once regulators implement new rules tightening firms’ belts on compensation.

This means many MFEs will end up in fields like Audit, Risk, Finance, or Operations. While they may be less trendy, the jobs are important, engaging, and less likely to get hit in a recession. Firms will need more supporting staff to meet the requirements of new regulations, and the skills for these jobs are applicable outside of Wall Street, in areas like accounting, database management, and process management. They aren’t badly paid, but neither are they a route to fast, easy wealth and an early retirement. Success comes the old-fashioned way: hard work over the course of years, perhaps decades.
It’s all the more important, then, that prospective quants make sure they have the right motives. While there’s nothing wrong with wanting to make money, it’s not the way to choose a career, especially not when the chances of easy success are slim. Few things are worse than doing a job one hates – even fewer when one has to resign oneself to doing that job for many years. Those considering finance should stop to assess their real motives. Are they reading the financial press regularly? When they go online, are they frequenting trading and market blogs? Are they keeping up with the academic press, not because they have to, but because of a genuine passion for finance? If they aren’t among the lucky few to make it big, would they be happy dedicating their lives to finance? If not, that choice doesn’t bode well.

Our picture of the future of the financial industry is growing clearer, and it’s obvious that major changes are already in progress. A growing army of MFE’s will face limited and likely shrinking opportunities in trading and quant development, which will produce ever-larger numbers of MFEs chasing formerly snubbed spots in Audit, Risk, Finance and Operations. Schools need to be more candid about the prospects for students once they graduate, but students need to take a more critical view of whether they truly belong in finance, and if so whether they are in a program that will give them the skills to stand out in a growing crowd. While there will always be demand for highly talented MFEs, the run-of-the-mill candidate will likely find himself outcompeted and out of work, or doing jobs that used to require no more than a BS or BA degree. Nonetheless, graduate programs will continue to crank out MFEs. The question is, where are they going to go?
No decrease in demand, just a greater increase in supply, some of it of dubious quality.
@zygmunt asked about prop trading and some exotic area and you replied "no decrease in demand". Did you refer to prop trading specifically or just hiring in finance in general?
Aren't banks winding down their prop trading operations?
It's not only in finance. My statistics degree still isn't landing any real hits. To me, it seems that the market is efficient when it comes to degrees. If everyone can get them, then they're not valuable anymore, and employers can just move the goal posts. Everyone has MFEs? Demand PhDs. PhDs? Demand 2-3 years experience after that.

And so on and so forth. So long as it's an employer's market, that's the sad truth of things.
I mean let's be real please, if you want to talk about mfe's losing jobs you have to realise that they are still much higher in pecking order than single degree graduates. If you had to choose are you going to take the guy with an economics or finance degree vs the guy who has the ability to combine mathematics with the financial world and is also apt to programming....four year degree just is not what it used to be and everyone is catching on.
What is more pessimistic is,We Chinese students major in finance are worrying that China may abandon market economy and return to 30 years ago. 
When I see to this idea on the article "people get those positions by working their way up through the ranks, starting out in jobs that are much less attractive to someone with an advanced degree".

I believe if I have a good job which pays 15k in India (India is less expensive so that is the normal pay) in the very same profile where in USA it pays 70k, I should consider myself lucky and learn how IB work?

Or moving out asap to USA should be the better idea?

When I see the kind of profiles and knowledge some of these jobs require I can guess that they come to India not because of parity/arbitrage but because sometime these banks cannot get the requisite talent in USA. I dont know how it works.

Seniors please comment.
When I see the kind of profiles and knowledge some of these jobs require I can guess that they come to India not because of parity/arbitrage but because sometime these banks cannot get the requisite talent in USA. I dont know how it works.

It always comes down to one thing: MONEY. That's how it works.
I was just browsing and came across this post again. Could anyone comment on how relevant it still is? I am sure the glut of financial engineering students has now become a deluge. How has the market shifted and who are the top banks and trading firms hiring now? Is it only those students from the top 10 US programs in computational finance (like CMU) and MFE (like Columbia)?
I think it's a bit different. The employer doesn't care for the degree per se. E.g., he is not going to demand a Ph.D. unless he is sure that a Ph.D. - level employee will add more value to the company. Therefore, the logic "I'll get this degree, and the job is guaranteed" goes only so far.

Agree with you Nikkei, it would be a sight when a non-MFE hiring manager interviews an MFE candidate. A non-PhD is a boss of PhDs.
Wait...What does MFE acronym stand for? Ah...Mass Financial Experiments!

Don't invest your money in those business schools because they are not Ltd/Pty companies and never listed on the exchange and MFE degrees ain't your share certificates.
Hello guys, myself Rahul from Mumbai, India. I am 24 years old, a Mechanical Engineer by profession. Talking about my profile its a bit worse. I took 7 years to finish my 4 year Mechanical Engineering course due to arrears in between. I had completely lost interest after joining it. Now I am really interest in working with the Finance Sector (of course Financial Trader is the ultimate aim) But have no much exposure to Finance world. What are my chances of landing up in a good university for Masters in Financial Engineering so that I get a good job and have the dream of working on the Wall Street. I know I have done mistakes in my past but I really do not wish to do any such casualness further. I really want to revive my career now and od something good now. Please guide me guys. Thank You in Advance.