The Coming Glut of Financial Engineers

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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?
 
For schools, Cornell and UCB seem to be pivoting hard towards DS. CMU replaced a chunk of the StoCal program w/ Data Science, and allows overloading.

A few folks from CMU have gone to DS roles at the usual suspects that I know of.

in that case, my interest in these programs goes up a bit. but i’d probably still go for a pure STEM field instead
 
Interesting read and funny how this article is relevant to this day. To any current and future readers of this post I'd like to share my 2 cents on this topic. A quick background about myself, I actually graduated from Baruch College with a BA in Economics and attempted to go down the MFE route that my school offered because A) it's dirt cheap approximately $25k if I recall correctly for an instate student such as myself, B) It's in the heart of midtown so it's in a prime area for networking with NYC's financial hub, all of the Bulge Bracket banks are a 20 block subway ride away, as opposed to Columbia's campus all the way up north in the 100s. C) Ranked 2nd in the US based on QuantNet itself, so it's an over all good program. I ended up taking Calc 1 and 2 after graduation to meet the prereqs for the program but stopped after 2 because I began working full time in Investment Banking/Corporate Finance and decided to work in M&A instead of S&T. I've left my position back in August because I became disenheartened with the work and am now back in school getting a BS degree in Mechanical Engineering with plans to continue on to graduate studies to specialize in a field of ME.

My observations based on my experience are so:
1. WALL STREET IS DRYING UP AND NO LONGER AS LUCRATIVE. Wall Street is no longer a lucrative career path, due to the advancements of technology and regulations choking out the banks. Pre-2008 Bankers, Lawyers, and Consultants were making incredible sums of cash, however after the crash it all ended and regulations have changed the bonus structure for bankers. Basically a bonus a Bank now gives is more in Stock than Cash, used in an effort to keep Managing Directors and Vice Presidents around for longer and to reduce the amount of rouge deals that were immoral and illegal. Also keep in mind, sure you may make 100-120k a year... but after taxes and it drops down to somewhere around 70-78k. You'll also probably be living in the city (assuming you'll be in NY) which idk if you've checked apartment rent prices but they're pretty expensive for a shoebox "one bedroom." Which will further decrease your savings. I've often seen so many young professionals in finance who can model DCFs and LBOs of complex corporations with ease, lack a basic understanding of personal finance.
2. LIMITATIONS. Quantitative Finance is a limiting field, and if you chose to get an MFE you will essentially be pigeon holed into the Finance world, so should you ever want to leave finance for say Artificial Intelligence research, best of luck as a MS/PhD Comp Sci candidate has higher chances of getting into that particular field.
3. DO NOT DO FINANCE FOR THE MONEY. I don't care what movies or books you've seen or read, Finance is not a party of a career. It's actually a field that involves long hours, mind numbing work, and at the higher levels, a lot of relationship management. (This is my bias coming out since I have experience in M&A which after all is still a relationship driven field and while tech has definitely impacted Corporate Finance, it will never be able to get rid of the core of M&A which is keeping constant communications going on between multiple parties for a live deal.) The people who truly succeed in this field are those who could care less about the money they make and care more about playing "the game." These are the guys and gals who will purposely reject an offer which could triple their all in comp simply because if they currently run their desk at their firm and the offer is for them to be a subordinate they'll reject it without a moments notice. These are people who want to win and don't care for a paycheck. My first director was like this and was a machine, reading 15 hours a day everyday on market news and updates.
4. INTERESTS AND PASSIONS. If you truly like quantitative analysis, computer programming, engineering or any other STEM discipline, I recommend studying those fields and getting graduate degrees in those. Especially for computer science. The reason being is because these degrees are actually much more versatile and I believe can last you a lot longer for your career than a MFE can. i.e. a Computer Scientist or Mathematician can go work in other interesting/demanding fields because the doors are open for people with those skill sets compared to "Quants."
5. INTERNATIONAL STUDENTS. American Universities are using you as a quick buck. So be incredibly weary and on guard for low tier universities promising you riches. I almost fell into this trap myself when I wanted to be an attorney, thankfully I was too dam cheap and stubborn and couldn't understand how $300,000 of law school tuition debt justifies you getting a job that will pay you only $60,000 a year if you don't get into a T14 school.
this link applies for Chinese students but still the overall message holds for all international students to let you know about how the programs really work.

If anyone else would like to add on to my points for anything that I missed please do. I also welcome criticism as I do understand my position as a "Banker" and not a Trader/Developer/Quant/Mathematician doesn't make me an expert authority on this but more some just some kid who's giving an opinion no one ever asked for in the first place.

Hehe :) That is absolutely true even for Quants. But you know... the grass is always greener on the side. who knows what's better? there are too many ppl full of shit nowadays. it is hard to find out the truth :P
 

Ken Abbott

Managing Director
Interesting read and funny how this article is relevant to this day. To any current and future readers of this post I'd like to share my 2 cents on this topic. A quick background about myself, I actually graduated from Baruch College with a BA in Economics and attempted to go down the MFE route that my school offered because A) it's dirt cheap approximately $25k if I recall correctly for an instate student such as myself, B) It's in the heart of midtown so it's in a prime area for networking with NYC's financial hub, all of the Bulge Bracket banks are a 20 block subway ride away, as opposed to Columbia's campus all the way up north in the 100s. C) Ranked 2nd in the US based on QuantNet itself, so it's an over all good program. I ended up taking Calc 1 and 2 after graduation to meet the prereqs for the program but stopped after 2 because I began working full time in Investment Banking/Corporate Finance and decided to work in M&A instead of S&T. I've left my position back in August because I became disenheartened with the work and am now back in school getting a BS degree in Mechanical Engineering with plans to continue on to graduate studies to specialize in a field of ME.

My observations based on my experience are so:
1. WALL STREET IS DRYING UP AND NO LONGER AS LUCRATIVE. Wall Street is no longer a lucrative career path, due to the advancements of technology and regulations choking out the banks. Pre-2008 Bankers, Lawyers, and Consultants were making incredible sums of cash, however after the crash it all ended and regulations have changed the bonus structure for bankers. Basically a bonus a Bank now gives is more in Stock than Cash, used in an effort to keep Managing Directors and Vice Presidents around for longer and to reduce the amount of rouge deals that were immoral and illegal. Also keep in mind, sure you may make 100-120k a year... but after taxes and it drops down to somewhere around 70-78k. You'll also probably be living in the city (assuming you'll be in NY) which idk if you've checked apartment rent prices but they're pretty expensive for a shoebox "one bedroom." Which will further decrease your savings. I've often seen so many young professionals in finance who can model DCFs and LBOs of complex corporations with ease, lack a basic understanding of personal finance.
2. LIMITATIONS. Quantitative Finance is a limiting field, and if you chose to get an MFE you will essentially be pigeon holed into the Finance world, so should you ever want to leave finance for say Artificial Intelligence research, best of luck as a MS/PhD Comp Sci candidate has higher chances of getting into that particular field.
3. DO NOT DO FINANCE FOR THE MONEY. I don't care what movies or books you've seen or read, Finance is not a party of a career. It's actually a field that involves long hours, mind numbing work, and at the higher levels, a lot of relationship management. (This is my bias coming out since I have experience in M&A which after all is still a relationship driven field and while tech has definitely impacted Corporate Finance, it will never be able to get rid of the core of M&A which is keeping constant communications going on between multiple parties for a live deal.) The people who truly succeed in this field are those who could care less about the money they make and care more about playing "the game." These are the guys and gals who will purposely reject an offer which could triple their all in comp simply because if they currently run their desk at their firm and the offer is for them to be a subordinate they'll reject it without a moments notice. These are people who want to win and don't care for a paycheck. My first director was like this and was a machine, reading 15 hours a day everyday on market news and updates.
4. INTERESTS AND PASSIONS. If you truly like quantitative analysis, computer programming, engineering or any other STEM discipline, I recommend studying those fields and getting graduate degrees in those. Especially for computer science. The reason being is because these degrees are actually much more versatile and I believe can last you a lot longer for your career than a MFE can. i.e. a Computer Scientist or Mathematician can go work in other interesting/demanding fields because the doors are open for people with those skill sets compared to "Quants."
5. INTERNATIONAL STUDENTS. American Universities are using you as a quick buck. So be incredibly weary and on guard for low tier universities promising you riches. I almost fell into this trap myself when I wanted to be an attorney, thankfully I was too dam cheap and stubborn and couldn't understand how $300,000 of law school tuition debt justifies you getting a job that will pay you only $60,000 a year if you don't get into a T14 school.
this link applies for Chinese students but still the overall message holds for all international students to let you know about how the programs really work.

If anyone else would like to add on to my points for anything that I missed please do. I also welcome criticism as I do understand my position as a "Banker" and not a Trader/Developer/Quant/Mathematician doesn't make me an expert authority on this but more some just some kid who's giving an opinion no one ever asked for in the first place.
Thanks for your reply here.
Yeah. I think you nailed it. I agree with everything you said. I recently retired to teach (at Baruch and several other places). I had a great career, but it took its toll in terms of stress and work/life balance. I loved what I did and I did well, but I fear some people think it's a gateway to easy riches, which it certainly is not.

If only I could have monetized that foresight...
 
Thanks for your reply here.
Yeah. I think you nailed it. I agree with everything you said. I recently retired to teach (at Baruch and several other places). I had a great career, but it took its toll in terms of stress and work/life balance. I loved what I did and I did well, but I fear some people think it's a gateway to easy riches, which it certainly is not.

If only I could have monetized that foresight...
Absolutely. Thanks for the reply. Btw I watched your lecture at MIT. Man you're hilarious! Would love to have more professors like you who can bring humor into the advanced level STEM concepts. Also I think more people should watch your lectures because it gives a true picture/window as to what an MFE program is really like and what a career as a quant will really be like which is math and statistics. If people find themselves bored listening to your lecture about just the very basics and surface of quantitative finance well that should be a red flag that the career path is not for them.

And if only we could monetize hindsight...
 
Hehe :) That is absolutely true even for Quants. But you know... the grass is always greener on the side. who knows what's better? there are too many ppl full of shit nowadays. it is hard to find out the truth :P
Very true. Whats better for you is what you determine to be better for you, which unfortunately requires taking some risk in trying new things out and possible getting burned, but also fortunately helps you learn and grow!
 

Daniel Duffy

C++ author, trainer
Why are they doing this? My guess:

A Law of Software 'Gravity' is that maintainability (costs) takes the upper hand as a software product evolves and mature.s It can be an asset or a liability.

 
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Daniel Duffy

C++ author, trainer
In the history of computing the ISO/ANSI languages (such as Fortran, Cobol, C) are the ones that survive.
Add C++ to the list.
 
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Interestingly, I think this year might be the best recruitment years for most MFE programs. CMU already placed 3 Citadel QT internships, 1 Two Sigma QR internship, DRW etc. for this current season, Columbia/Princeton already has several IMC/Citadel full time placements, etc, Baruch placement stats are also at an all time high I believe. Never seen so many buy side placements before. I know quite a few funds/ prop trading firms with crazy good performances the past few covid years that have been hiring a lot with crazy bonuses + new grad offers (seen offers ranging from 375 to 625k new grad TC this season which is also I think a NG all time high). TLDR i think the new grad/internship job market is currently looking really good for MFEs surprisingly
 
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Interestingly, I think this year might be the best recruitment years for most MFE programs. CMU already placed 3 Citadel QT internships, 1 Two Sigma QR internship, DRW etc. for this current season, Columbia/Princeton already has several IMC/Citadel full time placements, etc, Baruch placement stats are also at an all time high I believe. Never seen so many buy side placements before. I know quite a few funds/ prop trading firms with crazy good performances the past few covid years that have been hiring a lot with crazy bonuses + new grad offers (seen offers ranging from 375 to 625k new grad TC this season which is also I think a NG all time high). TLDR i think the new grad/internship job market is currently looking really good for MFEs surprisingly
Gonna get tougher again in the next years I think. Many trading firms did extremely well in the last three years and have deep pockets to hire. Even some bigger ones (e.g. IMC) are expanding at rates that won't come with corresponding increases in p&l even in the medium term, which means average compensation will drop. Some smaller ones (e.g. Maven) don't have the same scalability in their stack and most profits come from a few desks. I think we're up for a bit of a consolidation in the coming years with profitability generally decreasing.
 
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