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INTELLIGENCE FOR THE ELECTRONIC MARKETS JUNE 2012
Which universities are producing the next generation of elite quants? Wall Street pros identify the top master’s programs in quantitative finance. p.12
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June 2012 12 The Education Of a Quant Quants are Wall Street’s hottest commodity. But earning a place among the Street’s elite takes hard work and good grades. We take a look at the education of the quant generation. The Top 10 Quant Schools of 2012 Who is shaping the minds of the next generation of quants? Advanced Trading goes inside the top quant schools in the United States.
10 ANATOMY OF 30 INDUSTRY VOICE A Real-World View A TRADING FLOOR Finding the Alpha in Compliance Jim Gatheral spent decades with some Liquidnet Launched as an alterna- Dodd-Frank is driving a trans - tive platform for large blocks of formation of the compliance of Wall Street’s biggest firms. Now he’s liquidity, Liquidnet has grown into function at hedge funds. educating the latest crop of quants. a full-service institutional broker- But NICE Actimize’s Stephen age. With a global institutional Anikewich says the increasing He and Dan Stefanica, director of trading network in 39 equity compliance burden doesn’t have Baruch College’s quant program, have markets, Liquidnet offers a full to hold your hedge fund down. some advice for aspiring quants. suite of algorithms as well as high- touch executions in U.S. and inter- national equities. The firm also offers value-added services, such as commission management.
26 TRADING TECH DIRECTORY Agency Brokerages In today’s increasingly fragmented and complex markets, partnering with the right execution provider is more critical than ever. Advanced Trading’s latest directory highlights the industry’s top agency brokerages and provides insight into the technology and services they offer, the markets they serve, and the quality of 10 12 the executions they provide.
ADVANCED TRADING • www.advancedtrading.com• June 2012 3 contents advancedtrading.com videos slideshows white papers news opinions
8 MARKET INTELLIGENCE Is It Time to Say Goodbye to Circuit Breakers? The SEC’s recently proposed ‘limit up, limit down’ provision could be a better long-term solution to erroneous trades and runaway markets.
DON’T BE AFRAID OF THE DARK 8 With equity volumes plummeting, the buy side increasingly is searching for liquidity in dark pools, stoking deep-seeded fears Hedge Fund Managers’ Worst about a lack of execution transparency in the opaque markets. Nightmare? Fears of a double- Advanced Trading’s May digital issue breaks down what every dip recession and intensifying buy-side trader needs to know to find value in the dark. pressure from investors for greater advancedtrading.com/digital-edition/may2012 transparency are keeping hedge fund managers awake at night.
33 STREET CRED DIGITAL ISSUE Breaking Down the JOBS Act Meet the Next-Generation Trader Navigating today’s complex markets requires The recently passed Jumpstart an entirely new set of skills, but many on Wall Street have struggled to adapt. Our Business Startups Act is about Here’s what it takes to survive on the modern buy-side trading desk. more than jobs, according to advancedtrading.com/digital-edition/april2012 contributing editor Larry Tabb, who says it could reshape the TRADING TECH DIRECTORY asset management landscape. TCA Providers Our exclusive directory of transaction cost analysis providers takes a closer look at some of the industry’s top TCA companies, including details on 34 AT THE CLOSE the benchmarks offered, the quality/timing of transaction data, and the types of Quants Are In Demand, But Who’s analysis and reporting provided. advancedtrading.com/TCA-providers Hiring? For now, competition on Wall Street for quants is fierce. But JOB BOARD at the rate schools are pumping Help Wanteds for Quants, Traders and Trading Tech Experts Looking for a new out new quants, notes editor-at- opportunity? Need to fill an open position? Check out Advanced Trading’s job board large Ivy Schmerken, the Street for listings exclusively for trading and trading technology experts, or post your job may be flooded with them soon. openings today. Free. advancedtrading.com/jobs 6 EDITOR’S LETTER Reader Advisory Board
Michel Debiche Peter Driscoll Bryan Kievit Tim Olsen Rob Shapiro Joan Stack Jason Valdez President and CEO Vice President, Head Trader Senior Vice President/ Global Head Trading Manager Head of Quantia Capital Senior Equity Trader Accipiter Capital Head Trader of Trading Ohio Public Employees Global Equity Trading Management Northern Trust Management ICM Asset Management Bloomberg Tradebook Retirement System Penserra Securities
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Volume 8, No. 2 EDITORIAL Editor-in-Chief Phil Albinus [email protected] Group Content Manager Les Kovach [email protected] Editor-at-Large Ivy Schmerken [email protected] Senior Editor Justin Grant [email protected] Online Editor Cara Latham [email protected] Stars In the Making Contributing Editor Larry Tabb [email protected] ART Tony Vecchione, Kristen Terrana, Igor Jovicic, Yujin Chang here do quants come from? For this month’s cover BigYellowTaxi.com story, I asked a mathematics professor if a story ADVERTISING SALES OFFICE 240 WEST 35TH ST., 8TH FLOOR I had heard years ago was true: After the fall of the NEW YORK, NY 10001 Berlin Wall, a number of former Soviet Navy scientists National Sales Director Ben Riggle 212.600.3171 [email protected] Northeast David Broffman 212.600.3118 [email protected] came to Wall Street and were scooped up by firms to West Matt Kingham 212.600.3084 [email protected] design trading formulas instead of battle scenarios. Southeast and Midwest James Lloyd 212.600.3375 [email protected] WThe professor and his business school administrator laughed. “If that were PRODUCTION Account Coordinator Amanda Waller [email protected] true,” the administrator said, “I’d be sitting next to a KGB agent instead of a Publishing Services Manager Ruth Duggan [email protected] mathematics professor from Scotland.” AUDIENCE DEVELOPMENT Laughs aside, my sources did offer their own theory behind the rise of Assistant Manager Adrienne Farquharson [email protected] quants on the Street. Some Wall Street firms tried to hire chess grandmasters For article Reprints and E-Prints, please contact: Wright’s Media Brian Kolb 877.652.5295 [email protected] in the hopes that the way they saw killer moves on the chessboard could be For List Rental, please contact: Specialists Marketing Services translated to the Big Board. It didn’t work out. Instead, the big move for Sarah Orlowicz 201.865.5800 ext. 2124 [email protected] quants on Wall Street, according to these academicians, came after the INFORMATIONWEEK FINANCIAL SERVICES Superconducting Super Collider project in Texas was killed in the early UBM TechWeb CEO Tony L. Uphoff [email protected] EVP, Sales, InformationWeek Business Technology Network 1990s. By 1993 the market was flooded with physicists and mathematicians Martha Schwartz [email protected] who were looking for work. When newly hired geeks told their former Editorial Director Greg MacSweeney [email protected] Group Content Manager Les Kovach [email protected] colleagues about the killing they were making on Wall Street, the invasion National Sales Director Ben Riggle [email protected] Webmaster Vitali Zhulkovsky [email protected] of short-sleeved shirts and pocket protectors soon Senior Director, Events Robyn Duda [email protected] followed. The rest, as they say, is history. Senior Event Manager Mitzi Trafton [email protected] Senior Event Manager Joseph Marks [email protected] Today, quants are Wall Street’s hottest commodity, Director, Program Management, Vertical Markets and competition for their services is fierce. To fill the Michelle Somers [email protected] Business Manager Joe Donnelly [email protected] quant pipeline, Wall Street’s top firms often turn to elite graduate programs from the nation’s top univer- UBM TECHWEB CEO Tony L. Uphoff sities. In this print edition of Advanced Trading, senior Chief Content Officer and Editor-in-Chief, TechWeb.com David Berlind editor Justin Grant looks at the education of the quant Chief Information Officer David Michael Chief Financial Officer John Dennehy generation (page 12), and we revisit our popular 2008 Chief Marketing Officer Scott Vaughan rankings of the nation’s best schools for quantitative EVP, InformationWeek Business Technology Network Ed Grossman EVP, Sales, InformationWeek Business Technology Network Martha Schwartz mathematics and financial engineering (page 16). We EVP, Group General Manager, UBM TechWeb Events Network Lenny Heymann assembled an expert team from across Wall Street — including a desk EVP, Sales, UBM TechWeb Events Network Marco Pardi EVP, UBM TechWeb Light Reading Communications Group Joseph Braue trader, a portfolio manager and an HR guru — to get a real-world view of EVP, UBM TechWeb Game Network Simon Carless the Top 10 Quant Schools. (The only unanimous selection? MIT, which EVP, Event Operations & Services Lori Silva SVP, People and Culture Beth Rivera interestingly didn’t make our list in 2008.) VP, Editorial Director, InformationWeek Business Technology Network Fritz Nelson Also in this issue, editor-at-large Ivy Schmerken takes us onto the Liquidnet VP, Audience Marketing Dan Melore trading floor in our “Anatomy of a Trading Floor” photo feature (page 10). VP, Brand and Product Development, InformationWeek Business Technology Network John Ecke It’s rare to get an inside look at a top Wall Street firm (and potential com- VP, Performance Marketing and Analytics Thomas Smith petitor)’s technology, and Ivy has managed to get Advanced Trading access VP, InformationWeek Reports Art Wittman UNITED BUSINESS MEDIA LLC to dozens of firms’ trading floors, including Bloomberg, Bank of New York SVP, Strategic Development and Business Administration Pat Nohilly and ITG. To view these and other floors, as well as additional photos of SVP, Manufacturing Marie Myers Liquidnet’s floor, visit advancedtrading.com/photos/trading-floors. Trading technology certainly has changed in the past few decades. Today, whether they are military strategists from former Soviet states or young mathematical wizards from the top U.S. quant programs, the men and women who create the formulas are the real stars on Wall Street. And there’s no telling how high they can rise.
Phil Albinus, Editor-in-Chief @PhilAlbinus
6 June 2012 • www.advancedtrading.com• ADVANCED TRADING “ When you have Wall Street in your blood, you don’t shy away from the big challenges. That’s why we’re here.”
Joe Anastasio, Capco Partner
Capco.com/JoeAnastasio or call 212.284.8600 market intelligence
The SEC’s forthcoming ‘limit up, limit down’ provision could be a better way of dealing with erroneous trades and runaway markets. By Kerry Massaro Bowbliss Ending Circuit Breakers?
he SEC’s recently proposed changes to the single-stock circuit breakers it enact- ed in 2010 have stirred up the debate over their pros and cons. Instituted in reaction to the 2010 Flash Crash, when the Dow Jones Industrial Average plunged about 1,000 points, the circuit breakers current- ly halt trading in a single stock when circumstances indicate the possibility of another crash. But some market participants have questioned Twhether circuit breakers are the best solution. Two years later, the debate continues, and the SEC has proposed adding a “limit up, limit down” provision to the circuit breakers. “Circuit breakers are Mike Corrao, managing director at Knight Capital triggered frequently, and in most cases they are false positives,” notes John Americas, points out that the circuit breaker rule has Comerford, global head of trading research at Instinet. When a circuit breaker to be continually extended; the “limit up, limit down” is triggered, the effect on the buy and sell sides is minimal, he says. provision could be a permanent replacement. “The But, “If you are managing your risk in a short time horizon, it does create ‘limit up, limit down’ provision is quite complicated risk,” Comerford adds. If a trader does not know when a trade might be broken and if it is approved, the industry would likely need and he hedges that position, Comerford explains, the trader will take on unin- six to eight months for implementation,” he says. tended exposures. Still, “Most traditional traders don’t care if they can’t trade “The single-stock circuit breaker has served the in a stock for five minutes, although it is an annoyance,” he notes. industry well,” Corrao adds. Trading mistakes are Triggering of circuit breakers exacerbates other market structure issues, made, and circuit breakers offer a helpful stopgap according to Comerford; the “limit up, limit down” proposal, he says, could when an erroneous trade has been entered, he says. solve the issue that the circuit breakers were designed to fix. The provision, “The fact that the circuit breakers are a backstop is which was on the SEC’s agenda for the end of May, would prevent trades in a good thing, but not something firms should be listed equity securities from occurring outside of a specified price band. relying on as a method for meeting requirements under the Market Access Rule,” he says. According to reports, the circuit breakers have been deployed 110 times in the past year. Corrao says the Explaining ‘Limit Up, Limit Down’ scenario in which this happens the most is when an The proposed “limit up, limit down” mechanism would prevent trades order outsizes the displayed liquidity. Removing all in listed equity securities from occurring outside of a specified price available liquidity often pushes trading through the cir- band, which would be set at percentage levels above and below the cuit breaker level, forcing a halt in the stock’s trading. average price of the security over the immediately preceding five- Corrao adds that even if “limit up, limit down” is minute period. For stocks currently subject to the circuit breaker pilot, put into place, there are other situations in which the percentage would be 5 percent, and for those not subject to the trading halts could be helpful. For example, he pilot, the percentage would be 10 percent. says, companies should not be permitted to The percentage bands would be doubled during the opening and announce intra-day earnings without a mandatory closing periods, and broader price bands would apply to stocks priced halt in trading 10 minutes before the announce- below $1. To accommodate more fundamental price moves, there ment. Retail investors would be better served, would be a five-minute trading pause if trading is unable to occur Corrao insists, if trading is halted prior to a news within the price band for more than 15 seconds. Source: SEC.gov announcement rather than as a result of the news via the circuit breakers, he suggests. ■
8 June 2012 • www.advancedtrading.com• ADVANCED TRADING Fears of a double-dip recession in the U.S. are among the nightmares that are keeping hedge fund managers up at night. By Phil Albinus Hedge Fund Managers Are Skittish About 2012 Outlook
espite some positive signs — investors pumped $16 billion into hedge funds in the first three months of “Greater con- the year, according to Hedge Fund Research — port- centrations of D folio managers don’t expect smooth sailing for the second half of 2012. Roughly 48 percent of the hedge fund man- women in the agers surveyed by Rothstein Kass, a solution provider to the alternative investment community, foresee a difficult year for industry will the sector, with nearly 40 percent of respondents expressing bring needed concern that the U.S. could enter a “double-dip” recession. Meanwhile, says Howard Altman, co-CEO of Rothstein Kass perspective.” and principal in charge of the firm’s financial services group, —Kelly Easterling, the industry continues to benefit from institutional asset flows. Rothstein Kass “In the months following the global economic meltdown, many observers predicted doom for the hedge fund industry, surprising. “The market hasn’t picked up steam in any way or with some anticipating that a more aggressive regulatory agenda fashion, and the impact of the recent regulation remains to be and challenging market conditions would lead to significant seen,” he explains. “In a lot of ways we are in a stall position.” attrition,” Altman said in a release. “This year, our research shows an industry that continues to benefit from institutional The Push for Transparency asset flows and efforts to enhance transparency. At the same New waves of regulation continue to vie for the attention of asset time, managers are cognizant of the challenges that lie ahead managers, and more than half of the participants in the Rothstein as legislative efforts move from theoretical to reality.” Kass survey indicated concern about the scope and frequency of According to the Rothstein Kass study, which surveyed 400 reporting requirements. More than 40 percent said they are con- hedge fund managers representing 771 hedge fund vehicles, cerned about the staffing and resources that will be needed to “Hedge fund managers continue to find opportunity, as slightly comply with enhanced reporting requirements. Approximately more than 66 percent of respondents indicated that they plan 30 percent of funds with less than $100 million in AUM have reg- to raise assets by 25 percent or more this year. Nearly one- istered with the SEC, according to Rothstein Kass. third of hedge fund managers do not plan to use leverage in Nonetheless, hedge fund managers recognize the growing need 2012, while over half intend to use less than 2:1 leverage this to provide improved transparency, and nearly one-third of the year.” More than 70 percent of survey participants reported managers polled believe that investor due diligence will take six assets under management (AUM) of less than $500 million, months or more to complete. “For many institutional investors, with the remainder reporting AUM greater than $500 million. operational and reporting capabilities are as important as invest- Mike Kurzrok, analyst and director of equities at Woodbine ment performance,” says Rothstein Kass’s Altman. “With com- Associates, says hedge fund managers’ skittishness is hardly petition for capital intense and due diligence processes expanded, the imperative for all funds — especially emerging managers — to ‘act institutional’ in all respects has never been greater.” Battle of the Sexes? Separately, the survey found that women are taking a larger The percentages of women- and minority-owned firms role in forming hedge funds. “Women are finding increased oppor- in the hedge fund industry remain low, at 5.8 percent and tunity at emerging hedge funds,” says Kelly Easterling, principal 10.3 percent, respectively, according to Rothstein Kass. in charge of Rothstein Kass’s Walnut Creek, Calif., office. “We’re Hedge funds that have launched in the past three years, seeing growing interest from entrepreneurial women seeking to however, are three times more likely to report women launch hedge funds, as well as growing consensus that greater and minority ownership stakes of 50 percent or more. concentrations of women in the industry will bring needed per- spective as the sector continues its evolution.” ■
ADVANCED TRADING • www.advancedtrading.com• June 2012 9 anatomy of a trading floor
Reported by Ivy Schmerken
Featuring: Liquidnet
aunched in 2001 as an alternative platform for fund managers to negotiate large blocks of natural liquidity directly and anonymously, Liquidnet has grown into a full-service institutional brokerage provid- ing executions in U.S. and international equities. Today, Liquidnet operates a global Linstitutional trading network in 39 equity markets across five continents, with offices in London, Toronto, Tokyo, Hong Kong, Sydney and Singapore. Following its 2007 acquisition of Miletus Trading, Liquidnet offers a full suite of algorithms, and has expanded its range of Industry veteran John Kelly (above) was appointed value-added services to include data analytics as well COO of Liquidnet in January 2012. Kelly oversees all revenue-producing businesses globally. He reports as commission management. As the next step in its directly to CEO Seth Merrin. “Now he can focus on the evolution, the company is looking to match corporate strategic vision for Liquidnet,” Kelly says of Merrin, “while issuers with buy-side liquidity. I can focus on the revenue businesses globally.”
10 June 2012 • www.advancedtrading.com• ADVANCED TRADING Photography by Stephen Aviano Brian Foley (right), a relationship manager on Liquidnet’s New York trading desk, previously managed Liquidnet’s Japan office. Foley uses Sales Dashboard (middle screen), a proprietary tool, to support buy-side members using the firm’s front-end. He relies on Bloomberg (far right screen) to monitor Liquidnet’s prints in specific stocks. After watching 200,000 shares print on the Bloomberg screen, Foley says, “If the buy side has to go out into the market, the print sizes start to get pretty tiny and it becomes hard for them to figure out where to go to trade this.”
Liquidnet has 39 total U.S. sales and trading profession- als, including 19 relationship managers (RMs) who assist buy-side institutions with their strategies and cross-sell all products. Twelve RMs are based on the New York trading floor (left), including two who focus on international equities. There are seven RMs based outside of New York: three in Boston, one in Chicago and three on the West Coast.
Mike Capelli (far left) heads Liquidnet’s quantitative trading, sales and services, which include a suite of six algorithms and trade cost analysis (TCA) products. While monitoring the markets via Bloomberg, Capelli uses an internal system for monitoring the health of the company’s algorithms. “We want to make sure the strategies are behaving properly,” he says.
Lugene Forte (near left) is Liquidnet’s head of U.S. equities. “Every one of our strategies interacts with that pool of natural buy-side liquidity while it’s participating in the market,” she notes.
Liquidnet’s New York trading floor houses a sales and trading desk to assist members with high-touch trades and program trading and to help corporate issuers with share buy-backs. There are 12 traders on the desk — two in new sales, four in algorithmic sales, three in sales analytics, and three in operations. Mike Lazar (right) is head of Liquidnet’s U.S. Sales team. “We don’t care what they trade — we just facilitate and help our members take advantage of our natural liquidity in the smartest way possible,” he says. “These algorithms interact directly with the buy-side liquidity pool, actionable broker flow, the external markets or a combination of all three flows.”
Dan Wolff (right) is head of sales analytics. Wolff’s team shows buy-side participants where they are missing liquidity because of certain usage patterns. Wolff relies on Bloomberg (far right screen) for market data and volume trends in stocks along with internal reporting tools to help capture data on how clients are trading with Liquidnet relative to the overall market. He uses the Cognos (middle screen) business intelligence system as a reporting tool for post-trade analysis of trends and trading activity. advancedtrading.com To view more than two dozen photos of Liquidnet’s New York trading floor, visit: advancedtrading.com/photos/Liquidnet
ADVANCED TRADING • www.advancedtrading.com• June 2012 11 cover story
@JPaulGrant Quantitative analysis is the fastest growing area on Wall Street. Advanced Trading explores why quants are in such high demand, what the next generation of quants is learning, and how the buy side is putting them to work.
early four years have passed since the peak of the global financial crisis, but many banks are still in rough shape, and it remains as difficult as ever to find a job on Wall Street. Since 2008 a wave of consolidation on the sell side, along with the specter of intensifying regulations, have combined to help reduce the number of trading jobs available at investment banks. But even as those opportunities shrink, industry sources write algorithms that minimize transaction costs is more say demand on the buy side for the brightest mathematical valuable than ever on the buy side. minds the academic world has to offer is stronger than ever. And buy-side firms are willing to pay top dollar for stu- As a result, students who are pursuing advanced degrees in dents with these skills. The average first-year salary for subjects such as financial engineering or computational graduates of the University of California at Berkeley’s Haas finance have a leg up in the Wall Street job market. School of Business M.F.E program was $158,273 in 2011, “The job market is not as golden as it was four or five according to the school’s website. Even interns from the years ago, but I do think people with the quantitative tal- program earned, on average, nearly $8,000 a month. ents that students in financial engineering programs bring have an edge compared to people from other disciplines,” Making the Grade says Petter Kolm, the director of New York University’s But these programs are not easy to get into. Columbia master in financial mathematics program. “There’s con- University received well over 1,000 applicants to its Master tinued demand for quants. Not everyone is getting a job in of Science in Financial Engineering program this year, but this environment, but students out of the top programs the school accepted only 110. A typical class has around 70 are. We’re close to a 100 percent placement rate each year,” or 75 students, according to the director of Columbia’s quant he adds of the NYU quant program. program, Emmanuel Derman, who is also the co-head of Most of these graduates are venturing off into jobs at risk management at the hedge fund Prisma Capital Partners. traditional asset management firms, hedge funds and pro- The standards for the University of Chicago’s financial prietary trading operations, university sources say. As com- mathematics program are slightly less daunting, but the panies’ long-term health increasingly is tied to the strength program hardly qualifies as a “safe school” — it traditionally of their technology, a quant’s ability to build forecasting has admitted around 33 percent to 40 percent of applicants, models that can predict where the market’s going or to notes William DeRonne, the executive director of the uni-
ADVANCED TRADING • www.advancedtrading.com• June 2012 13 cover story
With nearly three decades of experience cants and students selected for admission to on Wall Street, Emmanuel Derman, now direc- Columbia’s financial engineering program has tor of Columbia’s Master of Science in soared. “The quant world has always been a for- Financial Engineering program, has seen a eigner’s world to an extent,” Derman argues. lot in his career. But one thing he hasn’t seen “Americans by and large don’t want to sit down much of — both in his time at Columbia and and program and solve the financial equations.” during his 17 years at Goldman Sachs — is —J.G. American-born quants. Derman recalls that most of his colleagues during his time at Goldman Sachs were from other countries. And judging by the paltry num- ber of U.S. applicants to Columbia’s financial engineering program this year, Derman says, he doesn’t see the trend changing in the near term. Noting that the Columbia quant program received more than 1,000 applicants this year, he says, “The American-born, American-educat- ed [applicants] are under 20 percent, some- times much lower.” He adds, “For better or for worse, it’s always been pre- dominantly foreign students.” On the other hand, Derman says, over the past year the number of Chinese appli-
versity’s financial mathematics department. An average who is also the chief investment strategist at wealth class, he adds, usually has between 75 and 80 students. management firm MDE Group. “If somebody says to Columbia’s Derman says prospective students go me I want to do program trading, statistical arbitrage through an intense weeding out process to make it or high-frequency trading, I’d say, ‘Yes, a master’s in into Columbia’s financial engineering program. The quantitative finance is for you.’ But unless they want gauntlet includes essay writing, exams and interviews. to do this kind of program trading, an M.B.A. is better “It’s easy to find people with very good grades, but for a broader skill set.” we’ve also got to figure out if they’ve got the skills to successfully work in this area,” Derman explains. The Quant School Curriculum “The most difficult thing is, we have a lot of people The students who do manage to clear the acceptance who have been working for five or six years who hurdle and find their way into one of the nation’s top come back for more education. It’s difficult if they’ve financial engineering programs aren’t learning how lost their quantitative skills, so that’s the first thing to do their fathers’ stock trading. Instead, they’re we look for, because everything starts fast, and they studying at the finance world’s answer to Hogwarts, won’t be able to keep up.” learning the sort of financial wizardry that would Before a potential student commits the time, ener- make a layman’s head spin. gy and money to pursuing a quant-oriented degree, Columbia’s program lasts a full academic year, and Rutgers Business School professor John Longo says, the first semester is intense, the university’s Derman he warns them that this sort of education opens up says. Right from the beginning Columbia’s M.F.E. stu- far less job opportunities in the long run than an dents learn everything from data analysis to Monte M.B.A. “From a career perspective the M.B.A. pro- Carlo simulations (a problem-solving technique to help vides you with a much broader skill set,” says Longo, calculate the likelihood of certain outcomes) to the
14 June 2012 • www.advancedtrading.com • ADVANCED TRADING stochastic process, which is designed to provide a teams where the goal often is to try to outperform deeper understanding of probability and the role it the market, but also to limit benchmark risk or track- plays in where the market is heading, along with the ing errors to a certain percentage. reasons behind market fluctuations. “A lot of quants also end up in the fixed-income Once students make it through the first portion of area, even convertible bonds,” Longo contends. “In the program, the requirements become much more the hedge fund space, if it’s a quant shop like James elective and students venture into areas in which they Simons’ firm Renaissance, they prefer people with have the most interest, Derman explains. “In the begin- strong quant skills, and they primarily hire a lot of ning they do core stuff, which is corporate economics people with Ph.D.s in math or physics.” and applications programming, because more and Buy-firms also turn to quants for their abilities to more, what’s important for getting jobs is being able analyze massive amounts of market data, identify any to program in an efficient way,” he says. “The pro- market inefficiencies they can find and then build gramming is so important because so much of trading models to make money on those inefficiencies, says is now taking place through computer programs.” Anthony Dostellio, a recruiter at the executive search New York University’s program, in which students firm Objective Paradigm. “From an analysis standpoint, pursue a Master of Science of Mathematics in Finance (M.S.M.F.), takes a track that’s similar to Columbia’s. After finishing core courses that are designed to beef up their calculus, statistics and programming abilities, NYU students can take electives, such as algorithmic trading in quantitative strategy. Courses also are avail- $158,273: The average first-year able in subjects such as mortgage-backed securities, energy derivatives and statistical arbitrage strategies. salary for graduates of NYU’s Kolm concedes that it can be hard to distin- the University of guish the top quant programs from each other, since they all have gotten down to a science what the cours- California at es should look like and what employers are looking for. But in addition to the complex subject matter, he Berkeley’s Haas notes, these schools all teach students how to get a job after they graduate. School of Business “We spend a lot of time at NYU teaching these young people — many of whom have never worked before M.F.E program — job searching skills, from resume writing to net- working,” Kolm says. “We teach them how to master in 2011. the interviews as well — the quantitative interviews.”
Putting Quants to Work Once they’ve completed their respective quant programs, students are ready to hit the Street, and they’re examining statistical data and either developing they typically have choices, ranging from algorithmic or helping to develop algorithms, all with the purpose trading to risk management. of predicting future market movement,” Dostellio says. Rutgers’ Longo breaks down traders in today’s mar- Over the next few years, Columbia’s Derman adds, ketplace into two camps: traditional traders whose the roles of the trader and computer programmer skills are more intuitive and relationship-oriented; and will continue to converge. But even as the technology program traders, who are now responsible for the becomes more sophisticated, the role of human lion’s share of the volume that’s transacted on a daily intuition in the trading process isn’t likely to vanish basis. And since the prices of stocks and other assets anytime soon, he suggests. “The big fraction of the now are often fragmented across a wide array of ven- trading on the New York Stock Exchange is algorith- ues — from exchanges to electronic communication mic, and to some extent it does become a battle of networks (ECN) and dark pools — firms place a pre- the programs. Even the market making — there’s mium on quants who are able to help their trading very little open outcry,” Derman explains. desks source the best, or truest liquidity, he says. “But good traders are still going to need some Of the quant grads who wind up working for tradi- combination of technical skills and have a good gut tional asset management firms, Longo says they usu- understanding of how to trade, not just relying on a ally end up in the risk management department. They program,” he emphasizes. “They’re going to have to may even find themselves working on enhanced index build sensible behavior into their programs.” ■
ADVANCED TRADING • www.advancedtrading.com• June 2012 15 cover story
Where will the next generation of quantitative engineers come from? According to Wall Street pros, these are the elite quant programs.
lot has happened in the capital markets since 2008, when Advanced Trading first published its ranking of quant schools. Bear Stearns and Lehman Brothers imploded, Merrill Lynch is now the wealth management arm of Bank of America, and a raft of new regulations, including Dodd-Frank, has changed the way businesses operate.
But one thing hasn’t changed: the need for quantitative four years ago, only one new addition has forced its way analysts. In fact, if anything, the demand for quants has onto the list, but it has done so convincingly — MIT was intensified. While Wall Street has seen wave after wave the only favorite among all five of our judges. of layoffs since the financial crisis — some counts point Interestingly, Harvard University received several votes to more than 200,000 lost jobs — quants have remained from our judges even though the university does not offer a hot commodity. As one mathematics professor told us, a quantitative or financial engineering program per se. quants are smart, and smart people don’t get laid off. While Harvard has a highly respected engineering and So where will the next generation of elite Wall Street applied sciences department that would lay a solid foun- quants come from? Advanced Trading assembled a group dation for an advanced degree in quantitative finance, of five top Wall Street pros with extensive experience on we moved Team Crimson to the Honorable Mentions list. the trading desk, in senior management or in hiring quants (For additional Honorable Mention programs, see page to help identify the top quant programs in the U.S. Our 22.) For the top 10 quant programs, we limited selectees panel consisted of Scott R. Burrill, partner and managing to schools that offered a master’s degree. director at Rosenblatt Securities; David Leinweber, algo- While these programs offer varied paths to enlighten- rithmic trading pioneer and author of “Nerds on Wall ment, our panel agrees that they do the best job of Street”; Michael Levas, principal of Olympian Capital preparing candidates for quant jobs on the Street (and Management; Unson Allen, global head of recruiting at they all help graduates land those jobs). What follows is Knight Capital; and Lou Ricci, a quant headhunter for the a brief description of each program, culled from our pan- Hagan-Ricci Group. (For more on our panel of experts, el of experts as well as from the schools’ own websites. see our selection committee members’ bios, page 18.) But if you think we missed a worthy program, we want The Advanced Trading TOP 10 QUANT SCHOOLS OF to hear from you before we update the list for 2013. 2012 are, in alphabetical order: Carnegie Mellon University, After all, the best gauge of a quant program isn’t stu- Columbia University, Cornell University, the Massachusetts dents’ success in the classroom — it’s how well graduates Institute of Technology (MIT), New York University, apply that education to the search for alpha. Princeton University, Rutgers University, Stanford University, the University of California at Berkeley and the Note: Advanced Trading would like to thank Maggie University of Chicago. Since we first created this ranking Patrick-Sternin for her help compiling these rankings.
16 June 2012 • www.advancedtrading.com • ADVANCED TRADING Carnegie Mellon Columbia University University Degree: Master of Degree: Master of Science in Financial Science in Computational Engineering Finance (M.S.C.F.) Program Description: Program Description: The financial engineering The M.S.C.F. program was program falls under the first computational Columbia’s Department finance master’s degree of Industrial Engineering in the world, and it estab- and Operations Research. lished Carnegie Mellon Students can choose from among four concentrations: as a leader in the discipline. The university’s program is Finance and Economics, Derivatives, Asset Management, or offered jointly by the Department of Mathematical Computational Finance/Trading Systems. The first half of the Sciences, the Tepper School of Business, the Department of program is devoted to the tools of the trade and their use in Statistics, and the H. John Heinz III College; students apply modeling financial markets and instruments. Students take through the Tepper School of Business. The curriculum courses in stochastic processes, optimization, numerical tech- includes instruction in probability, statistical analysis, niques, Monte Carlo simulation and data analysis. They also numerical methods, computation and simulation methods, study portfolio theory, derivatives valuation and financial risk stochastic processes, and economics, and their application analysis. The second half of the program gives students the in the financial markets. Applicants should hold an under- opportunity to take more advanced courses or study special- graduate degree in mathematics, computer science, ized topics and markets. Students also can choose from a engineering or economics. Students may enroll full- or variety of courses from various schools within the university. part-time, or work toward the degree online. Location: Manhattan Location: Campuses in Pittsburgh and Manhattan; profes- Program Established: 1998 sors move between the two campuses and stream lectures Applicants/Acceptances: 65 to 80 students enroll each live, though the Pittsburgh campus hosts more live lectures. year from among more than 1,200 applicants. Program Established: 1994 Program Term: 12 courses. The program begins in July; Number of Applicants/Acceptances: 146 students students can graduate within one academic year, at the accepted from among 1,125 applicants. end of the following summer or in the following December. (right) Program Term: 25 courses/16 months/three semesters of Class Size: 10 students for seminars, up to 76 for lectures. study; most students also complete a summer internship. Professional Placement: 95 percent of 2010’s class was Class Size: 40 students in Pittsburgh and 40 in New York. placed, with base salaries ranging from $50,000 to Professional Placement: 92 percent of the class of 2011 $120,000. Hiring companies include Barclays Capital, was employed within three months of graduation. Hiring Bloomberg Finance, BNP Paribas, Capco, Citi, Credit Suisse, firms include AXA Equitable, Bank of America Merrill Lynch, Deutsche Bank, First New York Securities, Goldman Sachs, Barclays, BNP, BNY Mellon, Boston Consulting Group, Knight Capital Group, Morgan Stanley, Nomura, PwC, RBS, Chicago Trading Co., Citi, Credit Suisse, Deutsche Bank, SimCorp, Societe Generale and UBS.
, Photo courtesy of wallyg via Flickr. courtesy via Flickr. Photo of wallyg , Ernst & Young, Fannie Mae, Fidelity, Goldman Sachs, Website: ieor.columbia.edu
(left) JPMorgan Chase, Nomura, RBS, S&P, UBS and USAA. Program Director: Emmanuel Derman became director Website: tepper.cmu.edu of Columbia’s financial engineering program in 2003. He Program Director: Rick Bryant joined the Tepper School also is head of risk management at Prisma Capital of Business in 1999 as executive director of Cornell’s com- Partners. Derman earned a Ph.D. in theoretical physics putational finance program. An adjunct professor of indus- from Columbia University. He is co-author of the widely trial administration, he previously served in H. J. Heinz Co.’s used Black-Derman-Toy interest rate model and the corporate M&A and treasury areas, as treasurer at Reebok, Derman-Kani local volatility model. Derman was a manag- and as CFO at broker-dealer Hefren-Tillotson. Bryant ing director at Goldman Sachs and is the author of “My earned an M.B.A. from Carnegie Mellon in 1980. Life as a Quant” and “Models. Behaving. Badly.” Program Highlights: Bloomberg terminals are available to Program Highlights: Students have access to high-speed M.S.C.F. students. The annual Deutsche M.S.C.F.Trading computers and Bloomberg terminals. The program hosts a Competition challenges students to manage fictional Financial Engineering Practitioners Seminar on Monday positions in the U.S. equity and equity futures markets nights, at which Wall Street and industry practitioners pres- using real data feeds. Top student traders are awarded cash ent seminars on their recent research or particular special- prizes at a reception hosted by Deutsche Bank. ty. A dedicated M.S.F.E. career placement officer is available. Photo courtesy of ©Carnegie Mellon University. All rights reserved. All rights reserved. courtesyPhoto Mellon of ©Carnegie University.
ADVANCED TRADING • www.advancedtrading.com• June 2012 17 cover story
Meet Advanced Trading’s School Selection Committee
Scott R. Burrill is manag- dollar portfolios on Wall Street and is the gists, business and project ing director and a partner author of “Nerds on Wall Street: Math, managers, and portfolio at Rosenblatt Securities. He Machines and Wired Markets.” managers in the U.S. and was responsible for devel- Europe. Allen also estab- oping the firm’s pre- and A regular speaker at lished Knight’s campus post-trade analysis tools and Rosenblatt Advanced Trading’s Buy- recruitment efforts as well as the electronic Integrated Transaction Analytics (RITA). Side Trading Summits, trading group’s mentoring program. Prior to joining Rosenblatt in 2005, Burrill Michael Levas is founder, served at Russell Investment Group, senior managing principal As a headhunter for the CalPERS and Westpeak Global Advisors. and director of trading for Olympian Capital Hagan-Ricci Group, Lou Management. Previously, he was VP and Ricci has been helping A Haas Fellow in Finance at portfolio manager in the private client financial firms find and the Haas School of Business group at Lehman Brothers. place traders and quants at U.C. Berkeley, David for more than 25 years. He has been a Leinweber is the founder Unson Allen is VP and global head of source in several Advanced Trading stories of two financial technology recruiting for Knight Capital Group. Among about hiring and firing on Wall Street. His firms. (Ed. note: He was not allowed to vote her responsibilities are the recruiting of job listings can be found at hrg.net and for U.C.B.) He also managed multibillion- quantitative strategists, traders, technolo- advancedtrading.com/jobs.
Cornell University
Degree: Master of BlackRock, Capital One, Citigroup, Goldman Sachs, HSBC, J.P. Engineering with Financial Morgan, Morgan Stanley, MSCI, Nomura Securities, Pimco, RBS, Engineering Concentration UBS and Wells Fargo are among the firms that recently hired Program Description: CFEM graduates. More than 95 percent of December 2011 grad- Cornell’s financial engi- uates found full-time work within three months of graduation. neering program is offered Website: orie.cornell.edu/academics/master/cfem by the university’s School Program Director: Dr. Victoria Averbukh. Averbukh received of Operations Research and a B.A. in Mathematics from New York University and an M.S. Information Engineering and Ph.D. from the Cornell School of Operations Research (ORIE) at its College of Engineering in Ithaca, N.Y. Cornell and Information Engineering (ORIE) in 1997. After completing Financial Engineering Manhattan (CFEM), based on Broad her Ph.D., Averbukh worked in fixed-income research at Street in lower Manhattan, is home to the program’s final Salomon Brothers (now Citigroup) as a strategist covering semester. Its proximity to Wall Street allows students to gain U.S. Treasury futures and later in mortgage-backed securities. practical understanding of the financial markets through In 2004 she joined Deutsche Bank, where she became the professional development programs and a tailored curricu- head of structured residential mortgage-backed securities lum — financial engineering students who spend their final research. She joined CFEM in 2007. semester at CFEM learn directly from Wall Street practitioners Program Highlights: CFEM’s broadcasting system allows for and participate in various networking events. interactive seminars and lectures between the main Cornell Location: Ithaca, N.Y., and Manhattan campus in Ithaca, N.Y., and the Manhattan campus. Weekly Program Established: CFEM graduated its first class in guest lectures by Wall Street professionals enhance the prac- December 2008. titioner-taught curriculum, which is updated every year to Program Term: 1.5 years — fall-spring-fall semesters. respond to the changing demands of the financial services Class Size: 35 to 45 students. industry. Classes include team-based projects sponsored by Professional Placement: CFEM graduates typically land jobs in financial companies that range from building high-frequency sales and trading at global investment banks, buy-side trading and hedging strategies to trading and predictive asset/portfolio managers and high-frequency trading shops, as models. Students are expected to participate in a summer well as in financial risk management, financial software model- internship before the third semester. M.F.E. students have free ing, and quantitative modeling for buy-side and sell-side firms. access to Cornell’s Center for Advanced Computing grid American Express, Archelon, Barclays Capital, BNP Paribas, network (www.cac.cornell.edu/services/Default.aspx). Photo courtesy of ©Cornell University. 2012. 2012. courtesy University. Photo of ©Cornell
18 June 2012 • www.advancedtrading.com• ADVANCED TRADING Massachusettes New York University Institute of Technology Courant Institute of Sloan School of Business Mathematical Sciences
Degree: Masters Degree: Master of in Finance Science of Mathematics Program Description: in Finance (M.S.M.F.) The precursor to the Program Description: quant program, the MIT The M.S.M.F. curriculum is Sloan Finance Group, was comprised of five compo- founded in the late nents: financial theory 1960s. Many break- and modeling, mathe- throughs in financial matical tools, financial economics are associated with MIT faculty, including the applications, computational skills, and practical training. Black-Scholes/Merton option-pricing model; the Core courses include derivatives securities, risk, and portfolio Modigliani-Miller theorems; continuous-time models of management with econometrics and electives such as consumption and portfolio choice; applications of option- algorithmic trading and quantitative strategies, mortgage- pricing theory to real investments, corporate finance and backed securities and energy derivatives, interest rates and other real options; equilibrium models of the term structure foreign exchange, time series models, and statistical arbi- of interest rates; binomial option-pricing; and the risk- trage. Students also receive practical training in quantitative neutral pricing kernel for pricing derivative securities. problems while working on their master’s projects. Students Location: Cambridge, Mass. are expected to find internships at financial institutions. Program Established: 2009 Location: Manhattan Number of Applicants/Acceptances: For the class entering Program Established: 1999 in 2011, 73 students enrolled from among 970 applicants. Number of Applicants/Acceptances: Only 10 percent of Program Term: 1 year. applicants from around the world are accepted. Class Size: 43 students. 2012’s incoming class is expected Program Term: The program consists of 12 courses (11 to be 120 students. In the most recent class, 71 percent are one-semester courses plus the master’s project), to be international students. completed over three semesters, or 1.5 years. Professional Placement: Nearly 90 percent of graduates Class Size: 120 students; 35-40 full-time, with the remain- accepted offers within three months of graduation. Hiring der split between part-time and non-degreed students. firms include BofA Merrill Lynch, Barclays, BlackRock, BNP, Professional Placement: Graduates find positions in a range of Citi, Credit Suisse, Deloitte, Deutsche Bank, GETCO, Goldman quantitative areas across the finance industry, including Sachs, Jane Street, J.P.Morgan, Morgan Stanley, RBS and UBS. research, trading, asset management and risk management. Base salaries ranged from $115,000 to $140,000. Graduates have secured jobs at firms such as BlackRock, (right) Website: mitsloan.mit.edu Goldman Sachs, JPMorgan Chase, Merrill Lynch and BNP Program Director: Heidi V. Pickett most recently served as Paribas. In 2010 and 2011, the placement rate was nearly 99 per- senior managing director of global business integration for cent; in 2012, more than 85 percent of graduates found jobs. State Street Global Markets. Pickett was a member of State Website: math.nyu.edu/financial_mathematics Street Global Markets’ executive management group. She Program Director: Petter Kolm joined the Courant also held senior positions in the office of the CFO and corpo- Institute of Mathematical Sciences as a clinical associate rate management at State Street. professor of mathematics and as the deputy director of the Program Highlights: The MIT Sloan School of Management mathematics in finance M.S. program in 2007. In May 2010, opened a fully equipped, state-of-the-art trading room in he became director for the program. Previously, he worked
, Photo courtesy of edenpictures via Flickr. courtesy Photo of edenpictures via Flickr. , 1996, the first built on a university campus. The room in the quantitative strategies group at Goldman Sachs consists of an electronic ticker with price information from Asset Management. Kolm holds a Ph.D. in Mathematics multiple markets, covering all 300,000 financial instruments from Yale University, as well as advanced degrees from the worldwide; two Trans-Lux DataWall panels;and 23 trading Royal Institute of Technology in Stockholm and ETH Zurich. stations. The trading room serves as a research center; Program Highlights: NYU holds a weekly seminar series in current projects include developing novel visualization which practitioners from Wall Street speak on different topics. techniques for representing complex portfolios; studies on Classes are offered in the evenings to allow working students the psychology of how human behavior influences trading to attend. A key component of the program is recruitment of decisions; and computational techniques that incorporate adjunct professors from major Wall Street firms. Career servic- artificial intelligence and neural-network theory. es works with students to help them find internships. Photo courtesy of bettlebrox via Flickr. (left) via Flickr. courtesyPhoto of bettlebrox
ADVANCED TRADING • www.advancedtrading.com• June 2012 19 cover story
Princeton University Degree: Master in Finance two years, depending on the individual’s prior knowledge of Program Description: the field, mathematical aptitude, experience and job offers. Princeton’s Master in Class size: The 2012 class includes 43 students; admission Finance program places this year was offered to 48 students. In 2010 admission was emphasis on financial offered to 31 of 605 total applicants (5 percent). economics in addition to Professional Placement: Princeton achieved 100 percent financial engineering and placement for 2010 and 2011 summer internships and full- computational methods. The time positions. Graduates obtained positions with BNP program, which is full-time Paribas, Morgan Stanley, Citi Quantitative Strategies, GETCO only, is intended to prepare students for careers both inside and and Goldman Sachs Asset Management, among other firms. outside the financial industry, including financial engineering Website: princeton.edu/bcf/graduate and risk management, quantitative asset management, macro- Program Director: Yacine Ait-Sahalia is director of the economic and financial forecasting, quantitative trading, and Bendheim Center for Finance, which offers the Master in applied research. Students gain an understanding of the funda- Finance degree. He also is Princeton’s Otto A. Hack Professor mental quantitative tools from economic theory, probability, of Finance and Economics. Ait-Sahalia earned a PhD. from statistics, optimization and computer science. Electives include MIT’s department of economics in 1993. He earned his Portfolio Theory and Asset Pricing; Options, Futures and undergraduate degree from Ecole Polytechnique in 1987 and Financial Derivatives; and The Rise of Asian Capital Markets. his graduate degree from ENSAE in 1989. He has been at Location: Princeton, N.J. Princeton University since 1998. Program Established: 2000 Program Highlights: The Master in Finance program has com- Program Term: The program can be completed in one or puter clusters and access to campuswide supercomputing.
Rutgers University
Degrees: Rutgers offers gram requires 10 courses, practical training experience and a two quant degrees: an M.S. master’s degree project. It typically is completed in 1.5 years. in Quantitative Finance via Class Size: M.S.Q.F.: 30 students; M.S.M.F.: maximum of 50. the Business School and an Professional Placement: Firms hiring M.S.Q.F. graduates M.S. in Mathematics with include ABN, Barclays, Citi and J.P. Morgan. Eighty-seven percent an Option in Mathematical of 2011 graduates from the M.S.M.F. program were employed Finance via the School of with firms including Barclays, BofA, BNY Mellon, Bloomberg, Arts and Sciences. Credit Suisse, Deutsche Bank, Fidelity, Goldman Sachs, ING, Program Descriptions: JPMorgan Chase, Morgan Stanley, State Street and Wachovia. Since its inception, the M.S.Q.F. program has grown along with Websites: business.rutgers.edu; finmath.rutgers.edu. the Rutgers Business School, which was named the No. 1 Program Directors: Yangru Wu is the director of the M.S.Q.F. public business school in the Northeast by U.S. News & World program.He has held assistant professor positions at the Report in 2011. Last year the program sponsored the first Chinese University of Hong Kong and West Virginia University. annual Quant Summit in the Nasdaq Tower in Times Square. Wu’s research areas are international finance and empirical M.S.M.F. graduates typically go on to careers in investment asset pricing. Associate professor of mathematics Paul Feehan banks, hedge funds, asset management firms, financial soft- is the founder and director of the M.S.M.F. program. He was ware and data companies, and insurance companies, with awarded in 2004 a grant by the division of mathematical
roles in financial modeling and software development, risk sciences at the National Science Foundation to encourage (bottom) courtesy Photo via Flickr. of vtbrak , (top) management, asset valuation, trading, and portfolio manage- collaborative academic-industry research in ment. The program accepts full-time and part-time students. mathematical finance and graduate-level education. Location: Newark and New Brunswick, N.J. Program Highlights: The M.S.Q.F. program offers a dedicated Program Established: M.S.Q.F.: 2001; M.S.M.F.: 2006. Master in Quantitative Finance Fellowship. The M.S.M.F. program Number of Applicants/Acceptances: M.S.Q.F.: 103 enrolled; offers Bloomberg terminals. Students participated for the first M.S.M.F.: 65 students admitted from among 626 applications. time this year in the Rotman Trading Competition in Toronto, Program Term: The M.S.Q.F. program requires 15 courses and which is dedicated to job placement. Students also receive can be completed in three to six semesters. The M.S.M.F. pro- individual support from a full-time director of career services. Photo courtesy of ©Princeton University. University. courtesyPhoto of ©Princeton
20 June 2012 • www.advancedtrading.com• ADVANCED TRADING Stanford University University of California at Berkeley (Haas Degree: Master of School of Business) Science in Financial Mathematics Degree: Master of Program Description: Financial Engineering Stanford’s quant program Program Description: consists of 15 courses, The Haas M.F.E. program including six core classes is among the few and six electives. The financial engineering remaining three may be programs offered solely chosen from other relevant departments or include accred- under the auspices of a ited internships. Three quarters of the students in the most business school. M.F.E. recently accepted class were undergraduate math majors. students learn about computational finance within the Successful applicants also should have some finance experi- context of business and economic principles. For example, ence, typically in an investment bank or hedge fund. macroeconomics is taught in relevant context in the fixed Location: Palo Alto, Calif. income markets course. The M.F.E. program includes a 10- to Program Established: 1999 12-week internship undertaken from October to the end of Number of Applicants/Acceptances: For the most recent January, after completion of 75 percent of the coursework. class, 23 students were offered admission from among 348 Location: Berkeley, Calif. applications (about 7 percent annually). Program Established: 2000 Program Term: 15 courses completed in nine to 15 Number of Applicants/Acceptances: For the current months. With faculty mentoring, students choose their class, 89 students were offered admission from among own set of electives and pace of study. Typical course loads 509 applicants; 68 enrolled. include five courses a quarter for three quarters, or nine Program Term: 1 year. MFE students must complete 28 months; or, more commonly, three courses per quarter for units of coursework (1 unit = 15 class hours), including the five quarters, including one summer quarter (15 months). Morgan Stanley Applied Finance Project, plus an intern- Class Size: 45 students. ship or on-site project. The 10- to 12-week internship is a Professional Placement: Fifteen percent to 20 percent of required condition for graduation. program graduates continue to higher education (Ph.D. or Class Size: The class of 2012 comprises 67 students. faculty positions), while 80 percent to 85 percent are placed Professional Placement: Of 67 students who graduated in the financial industry, typically as quantitative modelers or in 2011, 66 were seeking full-time positions, and 65 were traders. Hiring firms include Morgan Stanley, Goldman Sachs, placed into full-time positions within 6 months of gradua- Deutsche Bank, Credit Suisse, Barclays, J.P. Morgan, Citi and tion. Graduates received a total of 109 job offers. The UBS, as well as hedge funds, banks and other firms. average yearly total compensation was $158,273. right) Website: finmath.stanford.edu Website: mfe.haas.berkeley.edu Program Director: Dr. Tze Leung Lai directs the program. Lai Program Director: Linda Kreitzman helped launch the received a B.A. with first-class honors from the University of M.F.E. program in 2000 with professor David Pyle and Hong Kong and an M.A. and Ph.D. from Columbia University adjunct professor John O’Brien. Kreitzman manages the cur- in 1970 and 1971, respectively. His research interests include riculum, admissions process and the placement of students sequential experimentation, adaptive inference and control, in internships. Kreitzman offers numerous seminars to help stochastic optimization, time series analysis and forecasting, students prepare for careers in the financial field. She holds regression analysis of censored and truncated failure time post-graduate degrees in political science and economics. data, design and analysis of clinical trials, probability theory, Prior to joining the Haas School of Business, she managed and stochastic dynamical systems. programs in finance and taught economics courses for the
, Photo courtesy of brainchildvn via Flickr. ( courtesy Photo via Flickr. of brainchildvn , Program Highlights: Students are encouraged to apply for University of California at Berkeley extension.
(left) course credit for a summer internship. Department profes- Program Highlights: The Class of 2012 served intern- sors hold weekly luncheon seminars with informal presenta- ships inside Bank of America (4), BlackRock (7), BNP tions on trending financial topics. This past fall and spring, Paribas (3), Camden Asset Management, Citigroup (6), the department sponsored formal two-day conferences on Goldman Sachs (2), JPMorgan Chase (2), Mellon Capital quantitative finance and fixed income markets. There are no Management, Morgan Stanley (2), Royal Bank of Canada, part-time students, no online or evening courses, and no Societe Generale (3) and State Street, among other firms. financial assistance. Incoming students should plan on Haas professor emeritus Oliver E. Williamson received the spending about $60,000 on tuition and living expenses. Nobel Prize in Economic Sciences in 2009. Photo courtesy of bryanh via Flickr. courtesyPhoto of bryanh via Flickr.
ADVANCED TRADING • www.advancedtrading.com• June 2012 21 cover story
University of Chicago
Degree: Master of Science Class Size: 90 students. of Financial Mathematics Professional Placement: Graduates of the M.S.F.M. program Program Description: typically work as quantitative researchers, traders, analysts, The University of Chicago’s engineers and risk analysts at firms such as Goldman Sachs, M.S.F.M. program is part of Booz Allen Hamilton, XR Trading and Societe Generale. the Department of Website: www.finmath.uchicago.edu Financial Mathematics. The Program Director: William DeRonne is the executive direc- program offers one year of tor of the University of Chicago M.S.F.M. program. He has accelerated coursework more than three decades of experience working in the finan- that explores the deep-rooted relationship between theoreti- cial markets; most recently he was president and chief com- cal and applied mathematics and its role in the world of pliance officer at Fox River Financial Resources. DeRonne has finance. The school says its aim is to equip students with a experience in all of the primary markets as well as their deriv- solid foundation in mathematics to enable them to apply atives and has worked in China, Japan and Europe. He’s also what they’ve learned to complex financial models on Wall managed and directed researchers and traders at TradeLink, Street. A student’s syllabus includes subjects such as Market Liquidity Network and Chicago Research & Trading. stochastic calculus, portfolio theory and risk management, Program Highlights: Students who are studying advanced and regression analysis and quantitative trading strategies — options pricing are taught using live Bloomberg and where students learn how to develop a trading strategy Thomson Reuters Eikon screens as they tackle subjects such based on a quantitative factor model. as option adjusted analysis and hedging applications. The Location: Chicago University of Chicago is a member of Trading Technologies’ Program Established: 1996 university program, which enables students to learn in a Program Term: Students must complete nine courses to simulated trading environment while using TT’s X_Trader graduate. Full-time students complete the program in nine software. The school also has a campus in Stamford, Conn., months; part-time students finish in two or three years. The though it’s limited either to employees of UBS or employees program must be completed within four years. of the Swiss investment bank’s institutional clients. Photo courtesyPhoto of Chicago. of ©University
Honorable Mentions
While the Top 10 Quant Schools all received three or more GEORGIA INSTITUTE OF TECHNOLOGY votes from among our five judges, the following institutions also The Master of Science in Quantitative and Computational garnered votes from our panel. They may not be MIT or Stanford, Finance (Q.C.F.) program at Georgia Tech in Atlanta provides but they offer rock-solid mathematical engineering programs. students with practical skills and theoretical understanding focused on the formulation, implementation and evaluation of BARUCH COLLEGE financial models. The program boasts a trading floor, complete Manhattan already has NYU, Columbia and even Cornell’s Broad with Bloomberg data feeds and market simulation software. Street campus, but if there were an award for Little-Quant- www.qcf.gatech.edu School-That-Could, it would go to Baruch. Full-time students complete the financial engineering program in three semesters. HARVARD UNIVERSITY Part-time students may attend for five or six semesters. (See our Despite a stellar mathematics and engineering program, the interview with co-professor of mathematics Jim Gatheral and direc- leader of the Ivy League does not offer a dedicated quantitative tor of the financial engineering program Dan Stefanica, page 22.) finance program. Still, a science degree from Harvard is an mfe.baruch.cuny.edu impressive start to a Wall Street career, and that’s why more than one selection committee member nominated the school. BOSTON UNIVERSITY www.math.harvard.edu The 17-month Master of Science in Mathematical Finance pro- gram at Boston University focuses on the mathematical concepts UNIVERSITY OF PENNSYLVANIA that led to the development of the Black-Scholes option pricing There are three reasons the University of Pennsylvania earned method. The program focuses on mathematical finance rather inclusion on our list: the Wharton School of Business, the Wharton than treating mathematics and finance as separate entities. School of Business and the Wharton School of Business. management.bu.edu www.math.upenn.edu ■
22 June 2012 • www.advancedtrading.com• ADVANCED TRADING October 21-23, 2012 The Biltmore Miami • Coral Gables, Florida Today’s Buy-Side Trader: New Rules for a Changing Market The Buy-Side Trading Summit 2012 is an exclusive, invitation-only event for senior-level buy-side traders, executives and hedge fund managers. If you are a buy-side trader or an IT executive at a buy-side firm, this event was designed for you.
Each year, the editors of Advanced Trading gather the leading minds of the hedge fund and buy-side industry for one of the most informative events in the capital markets. The Advanced Trading Buy-Side Summit 2012 – entitled Today's Buy-Side Trader: New Rules for a Changing Market – will feature networking events and insightful panels on the topics that matter to you most: the efforts to control and contain high-frequency trading, what's happening inside dark pools, the new age of tighter regulatory compliance, disruptive technology, risk management and the changing role of today's traders. If it's important to buy-side traders, it will be discussed and debated here. As an attendee, you will have the opportunity to network with your peers, independent analysts and our sponsors throughout the three-day event. This exclusive, invitation-only event is one that you won't soon forget.
Agenda Highlights
• The Buy Side Wish List: Is anyone really answering your needs? • Derivatives Clearing and Swaps: Is the Buy Side prepared? • What You Don't Know Can Hurt You: In this Advanced Trading Face-Off, we examine the complaints of the Buy Side about their counterparties. • Looking Ahead: Recovery or Recession? Where are the new opportunities for the ambitious trader or hedge fund manager? • Attracting – and Keeping – New Talent: Why is Google hotter than Goldman Sachs for today's college grads? Network With Your Peers www.advancedtrading.com/summit2012/register Qualified buy-siders attend for free. For more information, e-mail [email protected]
Sponsored by: Produced by:
Note: The summit is open to buy-side executives only. Event producer reserves the right to qualify any interested party and refuse attendance. cover story
QUANBUILDING BETTER T S
Wall Street firms may be shedding jobs, but they still need quants. What’s in store for the Quant Class of 2012?
fter decades on Wall Street, you’d thinkJim Gatheralwould buy a yacht and sail around the world, sipping his own brand of wine. Instead, the Bank of America/Bankers Trust/Merrill Lynch veteran turned to academia in 2009 when he joined Baruch College in Manhattan as co-professor of the school’s mathematics department.Advanced Tradingeditor-in-chief Phil Albinusrecently spoke with Gatheral and his colleague,Dan Stefanica, who serves as director of the master in financial engineering program at Baruch, about the differences between academia and Wall Street, the current demand for quants in financial services, and the possibility of a coming quant glut.
Jim, you worked for 17 years at Merrill Lynch before joining When was the quant program at Baruch established, and how Baruch College. Why the move from Wall Street to academia? many students currently are part of the program? Jim Gatheral: There are two parts of that question: Why leave Gatheral: It’s 10 years old, and we have 30 students. Wall Street, and why Baruch College? The first part is freedom. Dan Stefanica: The number of students varies from 20 to 40. Academic freedom is a very valuable thing. The ability to say We interview a lot of people and do two rounds of interviews. and write what you want without any commercial constraint Last year we received 672 applications; we offered spots to 43 is very valuable and is one reason I came to Baruch. students, and 30 accepted our offer. As for why Baruch, I was already familiar with the program. They had invited me to talk to their students — I liked the Has there been a dip in interest in becoming a quant since the atmosphere here, and I liked that I was going to be part of market meltdown? the mathematics departments as opposed to an engineering Stefanica: Yes, initially in 2009. People were making career deci- department or a business school. Here, I have a friendly group sions while the crisis was unfolding, and across the board there of people who are experts who will help me accomplish my was a 35 percent dip in numbers. After 2009 the numbers started research goals. recovering to the point that last year was actually a record year for all of our programs. And this year was comparable to last year. What was the bigger lure — the opportunity to pursue So there was a one-year dip. And I think it mimics what hap- research or teaching the next generation of quants? pened to employment in the industry. Gatheral: It’s a different feeling, but love teaching. One of the reasons to like teaching is that it helps with research, It seems like most Wall Street layoffs have been in the back because to teach something, you have to understand it. One office and on the trading desk. Has the downturn hit quants? can also say that one never really understands something Gatheral: Certainly not at the company I came from. There unless one teaches it, and for most people you don’t discover was an implicit understanding that smart people don’t get fired, that until you teach it. and almost by definition, quants are smart. Even the undergrads I teach — it’s helpful because I have to go back to basics to explain these things to people who haven’t Are big pay and job security the lures of being a quant? been exposed to financial mathematics before. Teaching under- Gatheral: It’s clear that compensation is major part of it. The grads is a cleansing experience. best students can do almost anything — they can do chip
24 June 2012 • www.advancedtrading.com • ADVANCED TRADING design or computational genomics, anything technical. But sadly, there isn’t that much demand for technical graduates in other fields. But there is huge demand for it in finance. “Smart people And the compensation is high relative to any “normal” job. don’t get fired, Even the starting salary is high. I remember working with a phenomenal guy at a hedge fund and almost who was working at a software company in California; he said that compared to working there, working at an investment firm by definition, on the East Coast is hard work. The pay was low and it was boring. quants are Working in an investment bank — it’s pretty lean. There are lots of smart people, and you are constantly pushed. smart.” —Jim Gatheral, While the role of the quant hasn’t changed much, it has expand- Baruch College ed as algorithmic and black-box trading have flourished. Gatheral: That’s right, because every role that you can identify has become a quantitative role. And that’s true of society at Gatheral: I think there will be a glut in the investment banks. With large, not just in finance. In the beginning days of risk manage- the increasing regulatory overhead, many banks are going to exit ment, it was about talking to people and telling stories to senior businesses that employ quants. That’s inescapable. After regulation management: “This is what people are doing. This is how I see it just becomes much more expensive to run a business. the risk profile of the institution.” There might have been one But do I think in general in the finance industry that demand page of numbers from a spreadsheet. for quants is going to go down? On the contrary, I think everything Now everybody needs to see scenarios, for example. And if that is being done will require some degree of quantitative skill. you have a portfolio of complex instruments, you need to do Any fleeting function at all will require higher quant qualifications. what-if scenarios that require heavy computation. You need peo- ple who can figure out how to do fast computations with finite Stefanica: There are a number of quant programs in the U.S., resources, and you need people who know how to do parallel and there are new ones starting every year. So every year there computation, people who know how to use the cloud and so on. is a large number of freshly minted financial engineers who hit Every time somebody asks for something, there is a demand the market. But a good part of those people actually never for somebody more quantitative. As you see, all these cash make it into the markets in the U.S. — they end up doing some- traders have been replaced by algorithms. So there’s no future thing else. So the top people are certainly in demand. for traders — there’s a big future for sales traders, but no In addition, there are more and more small companies that future for traders. compete with the investment banks for talent; it’s no longer just the lure of the big investment banks. There is no future for traders? Gatheral: If you look at a hedge fund, what does the trader Gatheral: Here’s a specific example: The market making com- do? Programs. He does some statistical analysis, which is some- panies in Chicago weren’t hiring quants three years ago. Now thing that we teach; and then he does some programming, all of them have to hire quants. which is something that we teach, too. What is the next big quant trend in the coming three years? Are veteran Wall Street traders going back to school at night Gatheral: Where are these small companies coming from any- to get quant skills? way? We see more and more coming from the existing market Gatheral: Yes, we have a number of them. making companies in Chicago, but there are also proprietary traders who are getting thrown out of investment banks who Is this a difficult transition for them? are setting up on their own. They need quants. Gatheral: If it were hard for them, we wouldn’t have let them in. It’s exciting — I have a guy in one of my classes who is with a Do you miss Wall Street, Jim? high-frequency trading firm. He is doing what I am telling the Gatheral: I would be lying if I said I didn’t miss it, but what I really students about — he is actually doing what I never did. I can miss is running my own trading book. The last time I did that was talk about it, but he is actually doing it. But he doesn’t know the- years and years ago. It’s a factor of getting older. But if you’re ory — and I am providing the theory. So it’s pretty interesting. good at it, you end up managing people, and that’s not the same as running your own book. I have mixed feelings about that. Stefanica: Traders who are trying to get quant degrees often Ideally I would be running my own book and people would have a quant background, so they do very well. leave me alone, but that’s no longer possible these days. Yes, I did love it when I was doing it. But I am having a lot of fun Is a quant glut inevitable? Will they eventually have to go off teaching. I have a particularly good class this year, and my and start their own hedge funds to find work? research is coming along nicely. ■
ADVANCED TRADING • www.advancedtrading.com• June 2012 25 June 2012 Directory of Agency Brokerages
Capital Institutional Services (CAPIS) ...... 26 Loop Capital Markets ...... 28 Instinet ...... 27 Northern Trust Securities ...... 29 Interactive Brokers ...... 27 Rosenblatt Securities ...... 29 ITG ...... 28
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*This is not a comprehensive list of agency brokerages. Advanced Trading invited other firms to participate in the directory, but they declined to submit updated information by press time. Firms entered their own information, which has been edited for space. For additional details on these and other agency brokerages, as well as additional directories of trading technology companies, see our online directories at www.advancedtrading.com/directories.
Capital Institutional Services (CAPIS)
Description of Firm What types of relationships do you have with other brokers? CAPIS is an independent agency broker offering global equity, fixed Execution, Introducing, Clearing, Give-Ups. income, portfolio and derivative trading execution. CAPIS also offers How does the firm accept orders electronically? commission management tools, independent research and capital CAPIS primarily accepts electronic orders through FIX but can markets services. accept orders through various other methods as well, including In which products/markets is the firm engaged? Excel spreadsheets and electronic bulletin boards (flat files). Domestic Equities, International Equities, Developed Markets Once a trade is received, how long does it take to load it into Equities, Emerging Markets Equities, U.S. Treasury, U.S. Agency, your trading system and execute? Investment Grade Corporate, Mortgage-backed, Asset-backed, Trades can be loaded into our trading system within milliseconds. Municipals, High Yield, Corporate, International, Futures/Options. Average execution time depends on whether the order is Which trading venues do you access? high-touch or low-touch and to which execution venue the CAPIS has access to all major trading venues, including brokers, order is routed. dark pools, ECNs, crossing networks and exchanges. What is your average negotiated commission rate for domestic How many full-time traders do you employ, and what is their equities? For international equities? average experience? Full-service domestic equity: $.03/share. 16 full-time traders with an average of 17 years experience. Execution-only domestic equity: $.01/share. To what types of DMA/algorithms does the firm have access? Full-service international equity: 5 to 8 bps. Can they be integrated into clients’ OMSs/EMSs? Can they be Execution-only international equity: 3 bps. customized? Does your firm trade international equities during local CAPIS has access to all DMA venues as well as 40+ algos. market hours? The algos can be integrated into OMSs and EMSs. Certain algos Yes. can be customized. Future Plans Does the firm have deal flow? Are IOIs value-added? CAPIS recently launched a futures desk and capital markets We do not have deal flow. We provide IOIs through various systems. department and will be working to grow and develop those Does the firm provide pre- and post-trade analysis? Yes. offerings. CAPIS is looking into FX capabilities and international portfolio trading. Detail the firm’s order management and execution technology. We use Fidessa’s OMS and portfolio trading system, BEAM. Both Contact Information systems have been customized for CAPIS’s needs. We also utilize Wendy Dailey systems from Bloomberg, BofA Merrill Lynch and Macquarie. 214-978-4767 [email protected] What value-added services does the firm provide? www.capis.com Soft-dollar services, research services, technology, transaction cost reporting.
26 June 2012 • www.advancedtrading.com• ADVANCED TRADING Instinet Description of Firm Detail the firm’s order management and execution technology. As a global agency-only broker, Instinet helps institutions lower Instinet’s Newport, Trading Portal and TOP front ends are advanced, overall trading costs and improve investment performance through multi-asset, broker-neutral EMS platforms geared toward a variety an advanced suite of electronic trading tools, sales and portfolio of client types. trading, commission management services, and access to What value-added services does the firm provide? independent research. Soft-dollar services, research services, technology, transaction cost In which products/markets is the firm engaged? reporting, corporate access via Instinet’s Meet the Street subsidiary. Domestic Equities, International Equities, Developed Markets What types of relationships do you have with other brokers? Equities, Emerging Markets Equities, Futures/Options. Execution. Which trading venues do you access? How does your firm accept orders electronically? Instinet provides access to all meaningful liquidity pools around Excel spreadsheet, electronic bulletin board (flat file), and direct the world, be they exchanges, ECNs, ATSs, MTSs, PTSs, etc. FIX connectivity. How many full-time traders do you employ, and what is their Once a trade is received, how long does it take to load it into average experience? your trading system and execute? Instinet has approximately 200 front-office personnel throughout Instinet’s core trading system, originally architected as an exchange its 14 offices around the world. platform, is among the fastest in the industry. To what types of DMA/algorithms does the firm have access? What is your average negotiated commission rate for domestic Can they be integrated into clients’ OMSs/EMSs? Can they be equities? For international equities? customized? Not disclosed. Instinet provides a full suite of advanced trading tools — which includes the Execution Experts algorithms and its low-latency smart Does your firm trade international equities during local order router — for trading more than 40 markets around the world. market hours? Yes. All Instinet products are fully customizable and can be accessed Future Plans from all major OMS/EMS platforms. Instinet prides itself on its history of innovation and protects its Does the firm have deal flow? Are IOIs value-added? strategic product road map. Clients interested in learning more Instinet’s sales traders are able to source natural liquidity among about future product developments for our various applications its institutional client base via IOI. The firm does not provide access should contact Tom Whelan, Head of Product Sales, North America, to deal flow. at 212-310-7713. Does the firm provide pre- and post-trade analysis? Contact Information Instinet’s Insight analytics and visualization suite provides Institutional Sales & Trading pre-, post- and intra-trade analytics. 877-467-8463 [email protected] www.instinet.com
Interactive Brokers Description of Firm combination prices available at the time of an order and seeks to Interactive Brokers provides electronic access to stocks, options, immediately execute the order electronically. Price improvement futures, forex, bonds, CFDs and funds on more than 100 market statistics and full details are available on our website. centers in 19 countries from one account at low cost. What value-added services does the firm provide? In which products/markets is the firm engaged? Soft-dollar services, research services, direct brokerage support, Domestic Equities, International Equities, Developed Markets technology, transaction cost reporting. Equities, Emerging Markets Equities, U.S. Treasury, Investment What types of relationships do you have with other brokers? Grade Corporate, Municipals, High Yield, Corporate, Futures/Options, Execution, Introducing, Clearing, Give-Ups. Foreign Exchange. How does the firm accept orders electronically? Which trading venues do you access? Excel spreadsheet, electronic bulletin board (flat file). Interactive Brokers provides electronic access to stocks, options, futures, forex, bonds, CFDs and funds on more than 100 market Once a trade is received, how long does it take to load it into centers in 19 countries from one account. your trading system and execute? N/A How many full-time traders do you employ, and what is their average experience? What is your average negotiated commission rate for domestic All trading is done electronically. equities? For international equities? N/A To what types of DMA/algorithms does the firm have access? Can they be integrated into clients’ OMSs/EMSs? Can they be Does your firm trade international equities during local customized? market hours? Three equity algorithms and three option algorithms. Both types Yes. can be customized and integrated to OMSs. Contact Information Does the firm have deal flow? Are IOIs value-added? No. Ellen Winston 203-618-8002 Does the firm provide pre- and post-trade analysis? Yes. [email protected] Detail the firm’s order management and execution technology. www.interactivebrokers.com IB SmartRouting searches for the best firm stock, option and
ADVANCED TRADING • www.advancedtrading.com• June 2012 27 directory of agency brokerages ITG Description of Firm markets and easy-to-use tools to help achieve best execution. ITG ITG is an independent research broker and financial technology firm that Order Management System (formerly called Macgregor XIP) offers partners with global portfolio managers and traders throughout the multi-asset trading and portfolio management capabilities and can investment process, from investment decision through to settlement. be integrated with most major third-party front ends. In which products/markets is the firm engaged? What value-added services does the firm provide? Domestic Equities, International Equities, Developed Markets Equities, Soft-dollar services, research services, direct brokerage support, Emerging Markets Equities, Futures/Options, Foreign Exchange. technology, transaction cost reporting. Which trading venues do you access? What types of relationships do you have with other brokers? All major global equity venues and listed futures and options exchanges. Execution. How many full-time traders do you employ, and what is their How does your firm accept orders electronically? average experience? Excel spreadsheet, electronic bulletin board (flat file). We have more than 50 experienced traders in the U.S., Canada, Once a trade is received, how long does it take to load it into Europe and the Asia Pacific region. your trading system and execute? To what types of DMA/algorithms does the firm have access? We offer extremely low-latency trading. Can they be integrated into clients’ OMSs/EMSs? Customized? What is your average negotiated commission rate for domestic We offer algo trading in 35 countries and a broad algo suites, many equities? For international equities? with OMS integration and customization capabilities. Determined on a client-by-client basis. Does the firm have deal flow? Are IOIs value-added? Does your firm trade international equities during local ITG is an agency broker — we do not engage in investment market hours? banking work, and we do not make markets. Yes — we have trading desks in London, Hong Kong and Sydney. Does the firm provide pre- and post-trade analysis? Contact Information Yes. ITG’s Transaction Cost Analysis tools are the most widely used by Sales Desk institutional investors worldwide, according to Greenwich Associates. 212-588-4000 Detail the firm’s order management and execution technology. [email protected] Our Triton EMS provides direct, broker-neutral access to global www.itg.com
Loop Capital Markets Description of Firm provides a seamless interface with clients and trading destinations, Loop Capital Markets is one of the nation’s fastest growing enabling us to handle basket trades as easily as single-stock trades. investment banks and broker-dealers. Loop Capital Markets serves What value-added services does the firm provide? clients in public and corporate finance, and taxable, tax-exempt and We add value for our clients through customization of our services on a equity securities sales and trading. client-by-client basis — from low-touch to high-touch, we offer cus- In which products/markets is the firm engaged? tomized reports, analytical services, DMA, advanced trading color, and Domestic Equities, International Equities, Developed Markets our leveraged relationships with brokers from both sides of the industry. Equities, Emerging Markets Equities, U.S. Treasury, U.S. Agency, What types of relationships do you have with other brokers? Investment Grade Corporate, Mortgage-backed, Asset-backed, Execution, Introducing, Clearing. Municipals, High Yield, Corporate, International, Futures/Options. How does the firm accept orders electronically? Which trading venues do you access? Loop Capital has FIX connections with the vast majority of our Loop Capital’s equity trading desk has access to various trading clients. We are capable of receiving orders in virtually any format. “venues, including traditional exchanges and ECNs and a number of alternative trading systems, such as dark pools and crossing networks. Once a trade is received, how long does it take to load it into your trading system and execute? How many full-time traders do you employ, and what is their There is very little lag time for orders received outside of a FIX average experience? connection. Orders sent over FIX are instantaneous. Loop Capital employs three full-time traders with average experience of 10 years. What is your average negotiated commission rate for domestic equities? For international equities? To what types of DMA/algorithms does the firm have access? For domestic equities, the average commission is 3 cents, which is a Can they be integrated into clients’ OMSs/EMSs? Customized? combination of high-touch and low-touch trades. For International Loop Capital’s trading desk has access to a full suite of algortithms, equities, the average rate varies from country to country. including custom-designed algos from various third-party providers, all of which can be integrated into the client’s OMS. Does your firm trade international equities during local market hours? Yes. Does the firm have deal flow? Are IOIs value added? Yes, we provide our clients access to various IPO and secondary Future Plans offerings. Yes, IOIs are value-added. We will be adding more algos and increasing access to additional dark pools. We also will be further customizing our trade analytics. Does the firm provide pre- and post-trade analysis? We provide both pre- and post-trade analysis for our clients, Contact Information customized to reflect various benchmarks of our clients’ choosing. Andrew Heilig 312-913-4908 Detail the firm’s order management and execution technology. [email protected] Loop Capital employs FlexTrade as our primary EMS. Our technology www.loopcap.com
28 June 2012 • www.advancedtrading.com• ADVANCED TRADING Northern Trust Securities Description of Firm Detail your order management and execution technology. Northern Trust Securities Inc. is a wholly owned subsidiary of The We use Bloomberg’s sell-side OMS and connect to all major Northern Trust Corp. NTSI trades in an environment completely free of buy-side trading systems via FIX. conflict, on an agency-only basis. Clients benefit from a trading desk that does not pursue proprietary trading. What value-added services does the firm provide? Soft-dollar services, principal trades, direct brokerage support, In which products/markets is the firm engaged? technology, transaction cost reporting, Bloomberg Transaction Domestic Equities, International Equities, Developed Markets Cost Analytics (BTCA). Principal trades are for fixed-income only. Equities, U.S. Treasury, U.S. Agency, Investment Grade Corporate, Mortgage-backed, Asset-backed, Municipals, High Yield, Corporate, What types of relationships do you have with other brokers? International, Futures/Options, Foreign Exchange. We serve as both a prime broker and an executing broker for prime brokerage trades. We provide step-ins and outs. We also serve as a Which trading venues do you access? CMTA broker for options, give-ups, clearing, execution. We also provide All major global markets and currencies; liquidity is sourced on more soft-dollar and commission recapture services. than 35 exchanges, ECNs, automated trading systems and dark pools. How does the firm accept orders electronically? How many full-time traders do you employ, and what is their Excel spreadsheet, FIX. average experience? 13 traders with an average of 22 years of industry experience across Once a trade is received, how long does it take to load it into all market sectors and asset classes, plus a sales trading staff of eight. your trading system and execute? It depends on how the trade is received: milliseconds for trades To what types of DMA/algorithms does the firm have access? received via FIX; seconds to minutes for trades received in Excel Can they be integrated into clients’ OMSs/EMSs? Customized? or basket trades. DMA to major global and regional exchanges; 60+ different algorithms, which can be customized by our traders. We can What is your average negotiated commission rate for domestic provide direct access to the buy side for certain algos. equities? For international equities? 1.5 cents to 5 cents for domestic equities. Does the firm have deal flow? Are IOIs value-added? 12 bps to 18 bps for international equities. Yes. We are a transition management provider and a corporate buy-back broker. We also trade for hundreds of money managers. Does your firm trade international equities during local As a result we are willing to take IOIs to look for potential crosses. market hours? No. Does your firm provide pre- and post-trade analysis? Contact Information Yes. Terrence J. Ransford 312-444-4331 [email protected] www.northerntrust.com Rosenblatt Securities Inc. (RSI) Description of Firm reduce trading costs and maximize returns. Rosenblatt helps institutions navigate an increasingly complex and frag- Detail your order management and execution technology. mented equity marketplace. Rosenblatt’s thought leadership includes We employ a customized version of Fidessa EMS for both single- market structure analysis, TCA and portfolio construction issues. stock and portfolio equity executions. With respect to options, we In which products/markets is the firm engaged? employ the PrecISE terminal from ISE along with KnightDirect. Domestic Equities, Futures/Options. What value-added services does the firm provide? Which trading venues do you access? Soft-dollar services, research services, direct brokerage support, Access to all U.S. Exchanges and ATSs, bolstered by an NYSE on-floor technology, transaction cost reporting, market structure analysis staff of 10 traders. We directly connect to all major dark pools that and consultation, ETF agency execution and research, option trad- are permissioned to the sell side. ing, derivative analytics, research, portfolio hedging consultancy, global macro strategist, global economist. How many full-time traders do you employ, and what is their average experience? What types of relationships do you have with other brokers? 17 full-time traders who on average have more 12 years of experience. Execution, Introducing, Give-Ups. Eligible execution brokers on Instinet’s T*Share and ConvergEx’s network. Research provider on To what types of DMA/algorithms does the firm have access? Morgan Stanley’s Broker in a Box. Can they be integrated into clients’ OMSs/EMSs? Customized? We offer sponsored DMA to all major displayed market centers, as well How does your firm accept orders electronically? as most of the major non-displayed markets.Core algos — VWAP, Excel spreadsheet, electronic bulletin board (flat file), FIX protocol. TWAP, Implementation Shortfall, Percent of Volume, Dynamic Once a trade is received, how long does it take to load it into Participation, Defined Participation, and Liquidity Seeker — are acces- your trading system and execute? sible over Bloomberg, Triton, Realtick and Fidessa, but we can work It is a fully automated process, so within seconds. with clients seeking access via other systems. What is your average negotiated commission rate for domestic Does the firm have deal flow? Are IOIs value added? equities? For international equities? With permission, and only on occasion, we make targeted and Average research rate: .35 cps. intelligent calls or send an electronic message to advise clients of High-touch: .02; low-touch rates: lower than .02. potential liquidity in small and midcap equities. Does your firm trade international equities during local Does your firm provide pre- and post-trade analysis? market hours? No. Yes. Rosenblatt combines visualization tools with deep analysis of execution outcomes, including examining relationships between Contact Information PMs and traders, to help clients change behavior in ways that Joe Benanti 212-607-3155 [email protected] rosenblattsecurities.com
ADVANCED TRADING • www.advancedtrading.com• June 2012 29 industry voice
For ambitious buy-side firms, robust compliance policies and procedures are the bedrock of successful risk management. Hedge Funds Must Search for Alpha Compliance, Too
he Dodd-Frank Act has ushered in a paradigm shift in the traditional compliance risk management practices on the buy side — especially for hedge funds. This shift has been accentuated to a great extent by the recent perp walks, indictments, civil and criminal prosecutions, and heavyweight convictions relating to old and new clandestine insider trading activities. The old mind-set dealt with hedge fund compliance as either a “necessary evil” that could be risk managed superficially with minimum capital expenditure, or as a risk that could be ignored with little consequence to the fund and/or its management. That is no longer the case. TAs recently inducted regulated entities, hedge funds must with which the firms deliver alpha returns to their alter their approach to compliance; those old-style options are portfolios, and they will make a real effort to devel- now off the table for hedge funds, which can expect that they op a strong compliance program. will face a new level of scrutiny from both regulators and For those firms, robust compliance policies and investors. The challenges these firms face are indeed daunting, procedures are the bedrock of successful compli- and there are two paths forward for funds. Some firms will ance risk management. Obviously, the development continue to be under-resourced and under-focused on compli- of policies and procedures requires an in-depth ance, risk controls and technology, potentially leaving a ticking understanding of the business models, strategies time bomb under the beds of their chief compliance officers and execution activities of the fund in order to (CCO) and C-suite partners. For others, compliance will be ensure that they contemplate the corresponding addressed with the same gusto, spirit and expectation of results compliance risks. Policies and procedures need to be owned and managed as living documents and About the Author updated contemporaneously with regulatory changes and/or additions to the business models. Stephen Anikewich is head of U.S. compliance for NICE Actimize. He is responsible Good News and Bad News for business development of the The good news is, for most hedge funds the devel- institutional risk platform and opment of such policies and procedures is the easy provides consulting support part of establishing the compliance infrastructure. to help Actimize clients meet The not-so-good news is that creating the risk con- compliance and business needs. trols that will enable the organization to execute Anikewich has more than 30 its own self-professed policies and procedures is, years of experience in the capi- without exception, both challenging and daunting tal markets compliance industry. (e.g., having the capacity to connect the dots across multiple asset classes that are part of the
30 June 2012 • www.advancedtrading.com• ADVANCED TRADING industry voice
same strategy, high-frequency algo gaming, etc.). ensure that the organization has the resources to effec- Yet the crucial step of moving from policies and pro- tively risk mitigate its activities, it will also provide the cedures to thoughtful and sophisticated risk controls that much needed flexibility and scalability firms need to deal are capable of detection and prevention is essential. with changing regulation and strategies over time. For Failure to do so will only exacerbate the risks to the firm organizations with a global footprint, the scalability of a and its management associated with a breach of the rules, homogeneous risk platform that contemplates the com- regulations and statutes that govern the activities of hedge pliance risk needs across all regions is critical. For all funds. Developing compliance risk controls requires that firms, having a platform that enables “reactive” and accountabilities and responsibilities are appropriately “proactive” compliance risk management is imperative. delegated both within business management and the com- pliance department, and the manner in which those Taking Responsibility responsibilities are discharged are the hallmark of any Whether moving forward with a low-cost but unproven successful compliance risk management program. internally built system; commercially available software; Risk controls at hedge funds seem to be implemented a blank-slate tool kit; or a plug and play, peer-driven, with three varied approaches: The first is the “do nothing” best practice solution, hedge funds will need a com- approach in which the organization takes a deep breath, mercial case manager (or, perhaps, depending on their closes its eyes and keeps its fingers crossed. The second model, an enterprise risk case manager) to establish approach is what is perhaps best described as a “fictional” the workflow process, allocate responsibilities, facili- surveillance program that monitors activities manually tate analysis, document resolutions and, most impor- (the old-world “eyes-on method”). The third strategy, which we’ll call the “High-Frequency Data Collection and Anyone who has convinced Analysis” approach, uses technology to collect, collate and interpret data through algorithms and to identify himself that compliance can activities and behavior patterns that breach the company’s risk controls. These three approaches are utilized cur- effectively be risk managed rently by buy-side firms and, as hedge funds feel the pres- sure to step up their compliance and risk programs, they manually is not accepting will be expected to implement an approach that leans on technology, despite the proclivity of some to lean toward the reality of the legal, “doing nothing” or to rely on manual monitoring. To correctly implement the third type of compliance regulatory and reputational risk management program, next-generation technology is essential. Business models that are complex, and that risks that this invites. are based on scale, can only be effectively risk managed with a risk platform that is smart, agile and scalable. The tant, provide the first view across the firm. technology that firms use to support their risk controls The organization’s decisioning process when it comes needs to be intelligent enough to facilitate connecting the to addressing these red flags is almost invariably driven dots: the analysis of any anomalies; the identification of by considerations such as the availability of dedicated potential conflicts (at the enterprise level); the conclu- internal resources, business process efficiencies, the sions reached through the analysis of any anomalous total “all-in” cost of each respective option and the imme- activities, event or potential conflicts; and the resolution diacy of the organization’s needs. The decisioning and/or remediation of such matters. process when risks are identified is just as important as Many market practitioners have suggested that anyone the procedures, controls and technology leading up to who has convinced themselves that compliance can effec- that point. While most of the commercially available soft- tively be risk managed manually — and without periodic ware and risk platforms are very limited in their scope validation of the firm’s controls — is not accepting the and scale, enterprisewide risk platforms are indeed avail- reality of the legal, regulatory and franchise reputational able that are designed to risk manage compliance, risks and exposures that this methodology invites. The employee and customer fraud, money laundering, and challenge of analyzing orders and executions in the con- other forms of financial crime across the enterprise, and text of the prevailing market, their impact on the market, many firms are moving in this direction. the imputed economic benefit of such activities from a Hedge fund compliance is not just a compliance issue. P&L perspective and the delta in the risk position/exposure Whether you are the CCO, CRO, CTO or even the COO, are impossible to do via any manual process/methodology. you may just find that your quest for alpha might well As such, right-sized technology that aligns with the benefit from a focused approach to your hedge fund’s firm’s risk controls, policies and procedures will not only compliance risk management. ■
ADVANCED TRADING • www.advancedtrading.com• June 2012 31
By Larry Tabb Founder and CEO of street cred Westborough, Mass.-based TABB Group, a financial markets strategic advisory firm. [email protected]
The JOBS Act Is About More Than Jobs
t has been a tough year to be a hedge fund. Poor be open only to accredited investors, this nonetheless performance has taken its toll as regulation, high will radically change the character of the industry. If correlations, an uncertain Europe, U.S. govern- you look at industries in which advertising bans have ment acrimony, and a primary election campaign been lifted, you see significant change: Solo physician that looks more like the old Jerry Springer show practitioners are a thing of the past, pharmaceutical than what we have come to expect from the tight- firms now focus on blockbuster drugs, and lawyers and Ily organized Republican Party all have hurt returns. accountants have consolidated into fewer and larger While 2011 was nothing to write home (or your players. Regulation increases, and the game changes. investors) about, however, 2012 is beginning to show This same realignment will happen to the fund more promise. Though equity volumes are declining, industry as well. But who will end up on top? performance actually is up. We may not know for some As funds start to advertise, they will move from time whether the better performance on weak volume functioning as manufacturers to functioning as dis- is the result of a prolonged dead cat bounce, a lack of tributors. Why does someone advertise? To attract bank leverage or the beginning of a new bull rally, but more assets. And so it begins: The industry migrates 2012 certainly will be different than last year. from a focus on return to a focus on asset accumula- The most significant catalyst is the recent Jumpstart tion. And this will cause consolidation. Our Business Startups (JOBS) Act. Pushed through Traditional asset managers that currently advertise Congress with blazing speed, the JOBS Act will have will be attracted to vehicles they can now promote. two major and different impacts: First, and most pub- Larger hedge funds and public fund companies will licly, the JOBS Act will open up new ways for small be able to use their capital to attract more assets, and companies to obtain funding. The smallest companies now can leverage crowdsourcing mechanisms to raise capital without SEC registration. For larger private Small asset managers will companies, the JOBS Act increases the number of per- have a hard time surviving missable private investors to 2,000 from 500 before they need to file with the SEC and become “public,” on their own. and it creates larger Sarbanes-Oxley carve-outs. So what’s not to like about funding new and grow- the smaller funds will increasingly be marginalized. ing companies? The SEC and a number of brokers How many mutual fund companies do you see with are lining up against this part of the initiative, arguing under $1 billion in assets? Now tie this into the need that by drastically relaxing funding regulation, pump- for managers to be relevant, consolidating flow, and-dump and other scam artists will invade the sec- increasing regulatory burdens and, from the traditional tor and make it more difficult for legitimate fund perspective, business model compression from businesses to gain credibility and funding. That said, increased ETF competition, and it doesn’t take much however, there will be more companies raising capital, of a leap till you begin to see that larger traditional more ideas put into the public domain and hopefully funds will move in, accumulate assets and use their more capital allocated to developing new business, size to acquire smaller and more talented managers, which should be good for professional investors who which will have a harder time surviving on their own. have high due-diligence standards. While this won’t happen overnight, given the JOBS Act’s implementation timeframe, we should see this Turn On the Marketing Machine begin to play out over the next few years. That is, While new funding vehicles are interesting, even more unless the pumpers and dumpers quickly kill the goose interesting for the hedge fund community, the JOBS Act that lays the golden egg and Congress reacts by killing allows funds to advertise. While hedge funds still will the program dead in its tracks. ■
ADVANCED TRADING • www.advancedtrading.com• June 2012 33 By Ivy Schmerken at the close Editor-at-Large, she covers trading for both Wall Street & Technology and Advanced Trading. [email protected]
Quants Are In Demand, But Who’s Hiring?
ith the demand on Wall Street for trading business has grown, it has expanded across asset fresh talent to create automated classes and geographies, adding strategies for foreign trading strategies and code algo- exchange, fixed income, options and international equities, rithms still surging, on-campus according to Unson, and a number of the firm’s new quan- recruiting has become critical for titative hires support that expansion, she says. capital markets firms looking to scoop “In order to be successful, we need to hire more quants Wup the next generation of quants. Facing a host of new and add more strategies,” asserts Unson, who notes that regulations, financial services companies more than ever she began visiting and actively recruiting from the quant are relying on quantitative professionals and their tools to schools about three years ago. For the past two years, strengthen risk management and solve problems like Big Knight has looked to hire anywhere between 15 to 20 Data, as well as to uncover alpha. quantitative strategists, Unson continues. But in the past To scout for the best and the brightest math, computer two months, that number has gone up. “With our firm science, and quantitative finance or financial engineering exploding as it has been, we’re realizing there is an students, each year Wall Street firms descend on recruiting untapped market for these schools.” events at college campuses. “We are definitely concentrating But there are signs that quant hiring is slowing this year more time and effort in going out to the campuses,” comments compared to the past two years. In 2010 and 2011 New York Unson Allen, VP and global head of recruiting at Knight Capital University’s Courant Institute had no problem placing as Group, who started a mentoring program within Knight’s electronic trading group for quantitative strategists. While grades are important Unson is based in the firm’s Santa Clara office, which is conveniently located near the University of California at to becoming a successful Berkeley and Stanford. “We want to be on the cutting edge of technology and quant strategies, and we want students quant, it’s who you know to know that Knight is there,” she says. that really counts. Though recruiters tend to target the big name schools (see Advanced Trading’s “Top 10 Quant Schools for 2012,” many as 99 percent of its quant students within three months page 16), they also keep a close eye on some schools you of their graduation, says Petter Kolm, director of NYU may not have heard about previously. Knight’s Allen says Courant’s master program in mathematics in finance. But her top 10 quant schools include the University of Illinois just a little more than 85 percent of this year’s class was at Urbana Champaign, the University of Maryland at College placed as of April 2012, marking the first decline in placement Park and S.U.N.Y. Stony Brook on Long Island, all of which figures since the financial crisis years of 2008 and 2009, when are known for their computer science departments. the placement rate was just 75 percent, notes Kolm. To help its students find jobs in what is shaping up to be Is Supply Greater Than Demand? a more challenging job market, NYU Courant hires adjunct But is the demand for quants increasing fast enough to keep professors who work in quantitative finance at Wall Street up with the growing supply? Or are schools looking to cap- firms. “They not only teach but share the real practitioner italize on the quant trend churning out too many candidates models,” Kolm explains. The program also offers career with master’s degrees in computational finance and financial advice and workshops on resume writing and how to pre- engineering than Wall Street can actually absorb? pare for interviews, which is all tailored for geeks who may Though hardly scientific, it’s reasonable to assume that not have a natural proclivity for schmoozing with executives. the largest sell-side electronic trading groups — Morgan “While the academic side is important, networking is Stanley, Goldman Sachs, J.P. Morgan — are hiring more absolutely critical in today’s market,” insists Kolm. “If you quant graduates than smaller hedge funds and asset man- are going to be a successful quant today, it’s not just grades agement firms. In Knight’s case, as the firm’s electronic that count — it’s who you know that counts.” ■
34 June 2012 • www.advancedtrading.com• ADVANCED TRADING Outmaneuver the Competition
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