The future of quant work

[bigbadwolf]

I just want to elicit some informed reactions. My exceedingly humble opinion is that the current financial crisis is not some temporary blip but reflects a tectonic change in the financial world -- in short, we're entering a brave new world, uncharted, and not like anything we've known for the last several years. I predict (again very humbly) a sharp decrease in the demand for financially engineered products and a greater scepticism on the part of the lay public to quant assurances about the reliability of risk estimates and the worth of complex products. I don't wish to provoke the howls of the Boeotians but wonder what other people on this forum think.

Related to this musing, I wanted also to ask that since competition for quant jobs is already intense, how much further is it likely to intensfy given that 1) more schools are coming on on-stream and 2) there's likely to be a decreased number of openings available? At what point does the "expected value" of quant training become less than the cash outlay and the opportunity cost of lost time?

 

[Andy Nguyen]

I don't know where all the financial engineers are employed but at the top of my head, i would think of the rating agencies, SP, Moody, Fitch where we can see some change. Who would really trust the AAA ratings from those agencies anymore. They probably would not get away with their Excel/Matlab model to rate deals anymore. With the increased pressure for more transparent in how rating, risk is measured, I'm really not sure if it would call for more FE or less.

One field I can see an acute need for FE : algo trading (or any kind of trading for that matter).

I agree with the second point : as the number of MFE programs rapidly increases, we will reach a point where a number graduates will be unemployed no matter how much they pay. Or we have reached that point already ?

What this means is programs will have to work harder to place its students. Students will have to fight harder to get into a few top programs. By then, top programs wouldn't mean well known, Ivy programs, but those who have established a good reputation and network among recruiters, managers.

As if it hasn't happened, I think in the future, we will hear more stories about graduates from certain programs that are not able to find employment.

What we will try to do on Quantnet is to separate truth from myths among MFE programs and hope that the filter process itself will get rid of those who don't belong.

 

[bigbadwolf]

I agree with the second point : as the number of MFE programs rapidly increases, we will reach a point where a number graduates will be unemployed no matter how much they pay. Or we have reached that point already?

I think that point has been reached. But it's not in anyone's interest -- the industry or universities -- to point this out (industry doesn't care as long as it can choose the cream of the crop and universities like the fees).

The strength of (good) MFE training is its narrow technical focus and specialisation. But this also happens to be its weakness: unlike MBAs, MFEs can only be employed in a relatively narrow area having to do with sophisticated models and scientific computing.

I hasten to add that this is speculation on my part and perhaps we'd better wait for the dust to settle in the financial world. For some theoretical context, might I suggest (with great trepidation) this article in last year's Monthly Review?

 

[fshaikh]

looks like we are all going to starve

 

[Andy Nguyen]

looks like we are all going to starve

No. Some will starve.
The gist of the general agreement here is that those who thinking of doing MFE will have to think very hard before taking 60K loan. The students who are already doing MFE will have to work very hard for a job. The programs will have to work very hard to differentiate themselves, attract top students and place them.

I don't think it's a bad thing since competition is good for students. It will be harder for a brand new program to open up and demand 50K a year. There will always be demands for quantitative minds and the top students

 

[bigbadwolf]

looks like we are all going to starve

Ummm ... not sure about that. Some of the Ph.D.s will drift off to the post-doc jobs they came from or lesser-paying jobs in government (say). Some MFEs will drift towards MBA-type work. The financial engineering sector will look like what has happened to other sectors: a brief period of labor shortage followed rapidly by saturation, tons of new programs and outsourcing followed by embarassing glut. We've seen this already for MBA and IT work. FE will be another casualty. But the best MFEs will continue to find work (as Andy points out) Tighten your belt (on average).

 

[Vadim]

I just want to elicit some informed reactions. My exceedingly humble opinion is that the current financial crisis is not some temporary blip but reflects a tectonic change in the financial world -- in short, we're entering a brave new world, uncharted, and not like anything we've known for the last several years. I predict (again very humbly) a sharp decrease in the demand for financially engineered products and a greater scepticism on the part of the lay public to quant assurances about the reliability of risk estimates and the worth of complex products. I don't wish to provoke the howls of the Boeotians but wonder what other people on this forum think.

Related to this musing, I wanted also to ask that since competition for quant jobs is already intense, how much further is it likely to intensfy given that 1) more schools are coming on on-stream and 2) there's likely to be a decreased number of openings available? At what point does the "expected value" of quant training become less than the cash outlay and the opportunity cost of lost time?

Bigbadwolf, you raised a very interesting issue. I agree with number of the points.
I think the current crisis is something that has never happened before and the financial industry definitely is not going to be the same anymore, entering into a new era. The changes will be in the job market and character of jobs too. Currently, for example there is a big number of quants who is looking for a job.

 

[vishal kashyap]

What about JOBS @ other places

hi every one

Its seems its bad time for FE.But what about jobs outside USA ( London and Asia).
I see lot many jobs posted on wilmott and other quant job sites every day.

 

[Andy Nguyen]

The market is global. A downturn in the US will affect other regions. It's a nice alternate to find jobs outside of NYC.
The online jobs on Wilmott and other boards, mostly are bogus
Are online quant job ads BOGUS ? - QuantNetwork - Financial Engineering Forum

 

[bigbadwolf]

hi every one

Its seems its bad time for FE.But what about jobs outside USA ( London and Asia).

Andy's already replied. Let me just elaborate: finance is global and it's not just that what happens in the US affects financial employment in other countries but also that the days of unfettered global financial capitalism are probably drawing to a close (albeit we don't what the contours of the new status quo will be anymore than we knew what would happen in the dying days of the US gold standard and Bretton Woods in the early '70s). Quant work has been a concave increasing function of increasingly unfettered financial markets: regulation of the industry and control of what products are marketed will mean a body blow to quant work. And this at a time when the competition for jobs is already intense (since so many MFEs are now being churned out). There will be a time imminently -- if it hasn't already been reached -- when pursuing an MFE will be a "sucker bet" analogous to buying a state lottery ticket (which has an "expected value" of maybe 30-40 cents on each dollar).

 

[charlesdwright]

finance and markets are wedded to quantitative methods, always have been. what has changed over time are the tools employed to do the analysis, transactions, and accounting.

things go in an out of vogue on Wall Street. Even useful things get a bad rap for a while and when the dust settles the Street resumes doing what it does best: innovating and making markets.

In 1985 nobody understood junk bonds. By 1991, after Drexel made them the biggest thing on the Street and then got taken down, people blamed everything from the recession to the S&L Crisis to cancer on Junk Bonds.

Soon thereafter, dotcoms became the next big thing and Junk Bonds continued to trade, out of the spotlight.

After a speculative frenzy, what determines what lasts is its value to the marketplace. Modern, global finance goes nowhere without quantitative methods.

If some ill-advised quantitative methods brought this on, some wiser ones will sort it out. It seems the markets need smart, wise, and honest quants now more than ever.

 

[bigbadwolf]

Modern, global finance goes nowhere without quantitative methods.

If some ill-advised quantitative methods brought this on, some wiser ones will sort it out. It seems the markets need smart, wise, and honest quants now more than ever.

But what if modern global finance doesn't survive -- at least in its present unfettered incarnation? You bring up relatively recent history. Go back a bit further to the "gay '90s" (1890s) and "roaring '20s": in both cases the excesses of unfettered capitalism led to a populist backlash of regulation and control. The present age of global finance only goes back about a quarter century or so, and it's unlikely to survive its current contradictions. The present crisis is not some blip but reflects deep-seated structural problems: the increasing polarisation between rich and poor, and the paradoxical dependence of the rich on the spending habits of the poor even at the cost of sinking ever-deeper in the mire of debt (which is what subprime is really all about). Unfettered markets, in a nutshell, have brought about their own crisis. The next administration -- once this egregious, corrupt and incompetent one gets the boot -- will have to address this contradiction, which is rooted to some extent in lack of control and oversight. Just about any response I can imagine will result in restraint and regulation. Quants will still be needed, but with the demand for complex products and for financial innovation at a low ebb, much fewer will be needed. Quants, their enginered products, and their abstruse calculations are going to face greater scepticism and critical scrutiny. An age has probably come to an end. And here is a piece in the NYT that suggests this new scepticism:

But, who knows what those mortgages are really worth? According to Bear Stearns’s annual report, $29 billion of them were valued using computer models “derived from” or “supported by” some kind of observable market data. The value of the remaining $17 billion is an estimate based on “internally developed models or methodologies utilizing significant inputs that are generally less readily observable.”

In other words, your guess is as good as mine.

Please note: I'm not saying I'm "correct"; I'm merely presenting one line of argument which may or may not be plausible. My comments and arguments are intended to elicit responses and counterarguments and to encourage discussion -- not to quell them.

 

[Andy Nguyen]

Please note: I'm not saying I'm "correct"; I'm merely presenting one line of argument which may or may not be plausible. My comments and arguments are intended to elicit responses and counterarguments and to encourage discussion -- not to quell them.

Just a side note that I like this train of thought very much. It's very very hard to keep a thread going, let alone one that elicits thoughtful responses (I should know, I have tried and failed many times).
We have many members with different background so discussions that balancing between interesting, must answer and thought-provoking is the ultimate goal.
You are doing a fine job at that, bigbadwolf.

 

[bigbadwolf]

At the risk of going off-topic, it's not just poor employment prospects for financial engineers that are at stake. It's that both the USA and Britain have been increasingly relying on financialisation to prop up their domestic economies. This USA is not the country of fifty years ago: it has an eviscerated manufacturing sector, and it is crucially dependent of financial inflows to fund its current account and fiscal deficits (to the tune of roughly $2bn a day). Financialisation has been like a continual dose of steroids to keep an ailing and sick man on his feet. Tale away the financial steroids and everything collapses. What we have right now is not just some cyclical correction to irrational exuberance. Keep in mind that the way out of the 1992 recession probably depended on an artificial boom. That speculative boom (IT, dot-com, etc.) came to an end in 2001 but there was a smooth transition to another one -- real-estate. But now the hand has been played out and I don't see another on the horizon. Thinking policy-makers must not be sleeping well these days. So it's not just poor quants who are up the proverbial creek, but the economy as a whole. I personally find the prospects dismal and deeply depressing. But perhaps I'm too much of a pessimist and should be taking some anti-depressants.

 

[cofibreak]

I found this article that might be related to the thread.

As Citigroup Increases Its High-Skilled Headcount in India, Will Others Follow?

The above link leads to a membership-based site. For those who are not signed up, here is a link to what appears to be the actual article. Some Wharton member could confirm.

Academic Perspectives by FS Outsourcing

 

[bigbadwolf]

... Some Wharton member could confirm.

It's the same article. In fact, I think someone posted this article on Quantnet a few months ago (myself maybe?). In the present climate, at least all back-office analytic jobs will drift to lower-cost centres: give me a choice between paying an NYC-based quant $200,000 annually and an Indian-based quant $40,000 and I know who I'll choose. East Asian and South Asian financial hubs will increase in size and importance -- at the expense of London and NYC. The financial industry itself will remain in the throes of ongoing transformation. This modern world of ours: a very uncertain place. It forces quants and wannabe quants to adopt a get-rich-quick mentality as no-one knows what things will look like a few years down the road.

 

[cofibreak]

I think this is a positive development in a larger sense.
Less lop-sided and more uniform global development of the financial and other markets will, at the minimum, only open up new opportunities.

The resultant complexity will really need truly excellent quants, and at least for the near term, industries will look for them here in NYC and London.

If they can only find them in India or China, those in NYC and London will need to wake up and do something to retain their position.

 

[bigbadwolf]

If they can only find them in India or China, those in NYC and London will need to wake up and do something to retain their position.

It's not just that financial work will drift overseas: that's but one component. It's also that as Asian economies enter the heavyweight league, the game itself will change. The current financial markets reflect an attempt by a declining hegemon (the USA) to preserve its power and dominance. If you look at earlier imperial powers -- Holland and the UK -- you can see them following the same trajectory in their time. This, incidentally, is why the City of London (the square mile) is a financial powerhouse, while scarcely a stone's throw away -- Bethnal Green, Stepney Green, and Hackney -- you can see immense poverty and intractable social problems. But to return to the point, once the US is cut down to size ('tis but a question of time), global financial markets will themselves change beyond recognition, and not just move elsewhere.

I don't see NYC retaining its position anymore than, say, Detroit can be the automotive capital of the world. There's no logical reason for it to remain a global financial hub (indeed this is precisely why it's already eclipsed in cross-border finance by London); it will remain a hub for domestic finance. Once the dollar loses its de facto reserve currency status -- which is being whittled away day by day -- NYC will lose its privileged status. The international influx of talent into NYC will slowly cease as NYC becomes less attractive and other emerging hubs more so (e.g., in opportunities for promotion, and quality of life).

What I haven't yet seen is the emergence of financial engineering programs in East Asia and South Asia. Perhaps someone can correct me on this score.