Career: Trader or Quant?

[Onamor]

Hi all,

Started on these forums trying to help people with whatever homework, that wasn't mine, needed to be done. But coming across these threads I realised I actually had a question myself. I'm very grateful for all the information/replies on this topic already and even more so to any and all that can help me here.

I'm about to start my penultimate year of a Physics Masters in London, and am considering one of two routes:
-either becoming a trader after my Masters (hopefully from an internship next summer)
-or doing a PhD and becoming some kind of quant.

I was hoping for any kind of for/against arguments, but more specific questions I have between these two are:
-is there any math in being a trader?
-(starting and future) pay prospects
-transition from one to the other possible?

and possibly a bit off-topic:
-what's the difference in being a buy side or sell side trader?
-is there the same devision for quants? I've never heard so.

I do enjoy Physics, and would possibly be interested in continuing it in some shape or form after a PhD, but that is (possibly) another decision to be made in the future.

Again, thank you for any responses. Questions, discussions, criticism warmly welcomed.

[hamster143]

You may be overestimating your employment prospects.

I too have a masters in physics, and, on top of that, some fairly interesting background in software engineering ... (let's just say that I wrote a piece of technology-heavy software that many of you have on your PCs.) I've been sending copies of my resume to prospective finance employers for the last couple of months, I hit up all major investment banks and a couple of recruiters. The response? Zilch, nada, zero. (This does not worry me too much because I think that I still have Microsoft as a fall-back option if/when my current job goes sour, but Microsoft does not pay nearly as well.) I'd started studying some quant textbooks, but I obviously can't put that into the resume, and, seeing as how the employers don't even acknowledge the receipt of my emails, I really don't see the point any more.

My feeling is, you really need to have a masters in financial engineering to be able to get into the industry. Masters in physics does not cut it the way it used to 10 years ago. Besides, we're dealing with bureaucratic behemoths (GS, for example, has 40 thousand employees), those systems tend to demand conformance. Most job descriptions I saw required either a degree in finance, 2+ years of experience in finance, or both. If you don't conform, unless you have a man on the inside, not much you can do.

But I'm sure that we have more knowledgeable people :wink: :wink: who can answer your questions from their perspectives.

Here's my perspective though. Finance is not the only avenue for an intelligent person, nor is it the most intellectually rewarding one. People go into finance for the money. If you don't want to get into physics (as well you shouldn't, since you're not in China and you don't need a green card), and you want to do something that matters, look elsewhere. If you want to have a 40-foot boat, a maid, and a gardener, get a MFE, and do it while you're single and you don't have to support a wife and kids.

[Onamor]

Hi. Thanks very much for your reply, and sharing your experiences.
You may be overestimating your employment prospects.


Yes, I do agree I am assuming the hiring process to be straightforward.

If I infer correctly however, I believe our circumstances differ slightly in that you were applying for quant jobs with a Masters (and work experience?), whereas I would be applying for only a trader position with a Masters.

I disagree with you praise for MFE by the way. I find these are mainly money-spinner degrees, not entirely dissimilar to MBA's. And I would argue that as financial "hot" topics change so quickly, whatever is taught may well be out of date - it's not exactly set-in-stone "curriculum" material.
But certainly, if this is what pleases the "laymen" in HR (who probably think studying physics makes you a physician), I can see why it has an advantage - shame really.

[hamster143]

If I infer correctly however, I believe our circumstances differ slightly in that you were applying for quant jobs with a Masters (and work experience?), whereas I would be applying for only a trader position with a Masters.

My point was mostly that I was unable to elicit any response at all from big finance, given my background ... I believe that, if I fit a trader or C++ developer position, they would've responded regardless of the specific wording of the "objective" section in my resume.

If you have an internship position for the next summer secured, that would certainly simplify things ... You might start at a lower salary than an outsider with MFE, because you wouldn't have an opportunity to choose between employers, but getting the first job is what matters.

I disagree with you praise for MFE by the way. I find these are mainly money-spinner degrees, not entirely dissimilar to MBA's. And I would argue that as financial "hot" topics change so quickly, whatever is taught may well be out of date - it's not exactly set-in-stone "curriculum" material.

Well, I'm sure that 90% of what real traders/quants do is proprietary stuff and not quantitative finance 101. MFE demonstrates your seriousness and it is needed to get you past the bureaucrat in charge of hiring.

MBA is a totally different story, which is, I believe, not fit for this thread.

[Onamor]

I believe that, if I fit a trader or C++ developer position


I think its very hard to define how to really "fit" a trader position. They're so muddy in articulating what they "look for" in a candidate.
Besides some personality traits and a sound academic track record, it could really just be how happy the person reading your resume/interviewing you is on that particular day.
They barely specify degrees most of the time. But again coming back to my original post, it depends what type of trader we're talking about.... ?

I'm sure that 90% of what real traders/quants do is proprietary stuff and not quantitative finance 101

Ye, this is what I was asking. Whats the difference? Is one a computer geek and the other a glorified HR representative?

[hamster143]

That's all I know, let's wait for other responses.

BTW, here's a job description for a "QUANT TRADER" from Wilmott:

ROLE DESCRIPTION:

· Job Title: Quant Trader / Portfolio Manager - Futures.

· Implement and trade existing strategy and scale it to new markets, particularly Asian futures & Japanese equities

· Research, develop and Implement new high frequency strategies for trading futures. (Particularly within Asia but also US and European Exchanges).

· Monitor the strategy, continually innovate.


Requirements

· Successful track record as a quant trader focusing on strategy research, implementation and trading.

· Experience developing futures strategies / (high or mid freq)

· Solid object oriented programming and computer science background.

· Strong mathematical and research skills.

---

You can become a quant trader, but you need successful track record as a quant trader ...

[BenTheMan]

Let me say, at the risk of offending people here, that (at least in the US), a M.S. in physics is seen as somewhat of a consolation prize. That is, students who make it through their classes with decent marks, but who can't pass the qualifying or candidacy exams are often given an M.S. degree, along with the boot, from grad school.

I can't remember where I read this, but I seem to recall a colloquium given by a senior quant to some grad students. One grad students asked: "Can I get a quant job with an MS in Physics?" and the quant replied, "We prefer you to have succeeded at something else, before becoming a quant." The obvious implication is that the M.S. degree signifies a failure at getting a Ph.D.

Now, whether this is fair or not is debatable. I certainly know several people who have CHOSEN to stop with an MS degree. Some of them went on to get other degrees, the ones who didn't are still out of work. The point is, for a lot of the roles that I'm seeing advertised, the companies really want someone who is a strong, independent thinker. This is something that most (but not all) Ph.D.s have. Otherwise, they want someone who will take the minimum amount of preparation, like someone with an MS in Financial Engineering.

Again, I don't want to offend anyone here. But you must acknowledge that SOME people with M.S. degrees are failed Ph.D. students. Then it is in the recruiter's interest to weed out the people with M.S. degrees first, or (equivalently), consider their applications last. I will also say that coming from a not-top-ten Ph.D. program has the same effect, though it is not as bad. I am experiencing this effect currently :) The basic rule is that recruiters and HR people are lazy bastards, and they get a ton of resumes anyway. Then it is in their interest to cherry-pick the candidates that they KNOW will pay off---remember that recruiters ALWAYS work on commission, and they have a reputation.

[Onamor]

Hi, thanks very much for adding your discussion and experiences, I really value them.
I certainly know several people who have CHOSEN to stop with an MS degree. Some of them went on to get other degrees, the ones who didn't are still out of work.

Wow, this is insane. Are there really Physics Masters flipping burgers? Or have they just not sold themselves? - maybe a bit off-topic.

But yes, I would certainly imagine that it is indeed very difficult if not impossible to gain a quant role with just a masters. Maybe not so much the "failed PhD" reason, more just the huge gaping void of knowledge/theory and experience that a Masters student lacks in comparison to a PhD.

Would you have anything to add on the trader vs quant disussion?
In the UK, the campus recruitment schemes pretty much stipulate that they want a PhD for a quant role, whereas just a Bachelors (in pretty much anything) will do for a trading role.

I'm just questioning whether traders are anything more than politicians, or is there actually some rigor/skill involved? I'm sure trading is exciting, but at what cost?

[BenTheMan]

Wow, this is insane. Are there really Physics Masters flipping burgers? Or have they just not sold themselves? - maybe a bit off-topic.

They're not flipping burgers :) But my guess is that they haven't sold themselves. This is always a problem for physicists in general, but was never a problem for me. I was always good at the selling myself part.

Maybe not so much the "failed PhD" reason, more just the huge gaping void of knowledge/theory and that a Masters student lacks in comparison to a PhD.

Again, I'm not speaking from a position inside the industry, but I think the reason IS because a lot of people with Master's degrees are failed Ph.D.s. It's a negative stereotype, it's not fair, and we do it all the time.

Would you have anything to add on the trader vs quant disussion?
In the UK, the campus recruitment schemes pretty much stipulate that they want a PhD for a quant role, whereas just a Bachelors (in pretty much anything) will do for a trading role.

I'm just questioning whether traders are anything more than politicians, or is there actually some rigor/skill involved? I'm sure trading is exciting, but at what cost?

This is a good question, and I think it depends on the place you work. You might PM twofish-quant and ask him what he thinks. My impression is that some traders are discretionary and some are non-discretionary traders. I know, for example, a buddy of mine works for a hedge fund building models. His models are coded up by the software guys, and they are automated. The traders he works with are more or less there to unplug the computers if things go to hell. (This is from his mouth, so I trust this assessment.)

But this is obviously not how all places work. In a lof of investment banks, for example, things are the other way around (as far as I can tell). The traders tell the quants what to do, and ultimately make the decisions about where the money goes.

And as you might have guessed, determining where the money goes usually nets you a good percentage of it.

So, I'd say, if the role you're looking at is in an automated trading outfit, then you'll probably be pushing buttons while some Ph.D. dudes do the model building. This is not to say that the job won't be lucrative, or difficult, or that you could move into the other type of job in the future.

[Ryker]

Again, I'm not speaking from a position inside the industry, but I think the reason IS because a lot of people with Master's degrees are failed Ph.D.s. It's a negative stereotype, it's not fair, and we do it all the time.
Does this stereotype apply to all professions or is it just the physicists who get the brunt of it? And from what I can tell, this really seems limited to the US. Or am I mistaken?

[hamster143]

Again, I'm not speaking from a position inside the industry, but I think the reason IS because a lot of people with Master's degrees are failed Ph.D.s. It's a negative stereotype, it's not fair, and we do it all the time.

I think it should depend on circumstances. It's one thing if you see a guy with a M.S. followed by X years of employment (though in this case employment can be a redeeming factor). It's different if it is a 24-year-old who just got his M.S. and he's already applying for jobs. It's something else entirely if it's someone who got his M.S. in physics in 2007-09 and his M.S. in financial engineering in 2009-10.

It's obviously very hard to land an interview for a quant position if you're a 24 year old whose CV is blank except for the master's degree. Ph.D. in physics should prove you somewhat more capable of "achieving" things, but it does not give you any knowledge or virtually any relevant experience.

Does this stereotype apply to all professions or is it just the physicists who get the brunt of it? And from what I can tell, this really seems limited to the US. Or am I mistaken?

In software engineering, people with Ph.D.'s are often viewed unfavorably, because they spent a lot of time doing irrelevant stuff instead of learning practical skills, and therefore ended up unable to write decent code. I've seen one too many distinguished Ph.D.s in CS who seemed to barely know C++.

[BenTheMan]

I think it should depend on circumstances. It's one thing if you see a guy with a M.S. followed by X years of employment (though in this case employment can be a redeeming factor). It's different if it is a 24-year-old who just got his M.S. and he's already applying for jobs. It's something else entirely if it's someone who got his M.S. in physics in 2007-09 and his M.S. in financial engineering in 2009-10.

It's obviously very hard to land an interview for a quant position if you're a 24 year old whose CV is blank except for the master's degree. Ph.D. in physics should prove you somewhat more capable of "achieving" things, but it does not give you any knowledge or virtually any relevant experience.

I agree with you, it SHOULD depend on circumstances...but I don't think HR people/recruiters see it the same way. At the end of the day, those guys work on commission, and they're lazy. When you have a stack of CVs from Ph.D.s and a stack of CVs from guys with M.S. degrees, and you can only interview 10 people, my guess is that the stack of resumes from guys with M.S. degrees is the last thing they HR people look at. It's just a numbers game, and it sucks, but it is a game.

The exception, as you pointed out, is if you have an MS in physics and an MS in financial math.

Like I said, I could be wrong. Maybe twofish will say something different---he's actually in the field, and (judging by his comments here) he's actually been the one sifting through applications before.

[hamster143]

When you have a stack of CVs from Ph.D.s and a stack of CVs from guys with M.S. degrees, and you can only interview 10 people, my guess is that the stack of resumes from guys with M.S. degrees is the last thing they HR people look at.

What if there's also a stack of CVs from guys with B.S. degrees from places like Romania and such?

[twofish-quant]

I've been sending copies of my resume to prospective finance employers for the last couple of months, I hit up all major investment banks and a couple of recruiters. The response? Zilch, nada, zero. (This does not worry me too much because I think that I still have Microsoft as a fall-back option if/when my current job goes sour, but Microsoft does not pay nearly as well.)

Try applying *after* you've worked in Microsoft a few years. If you apply directly after getting a masters in computer science, your chances of getting a job in finance is low. If you get a masters in computer science and *then* work as a software developer for three years, then you become a hot commodity. If you work on the internals of something like Microsoft Excel, people are going to come looking for you.

Also the going rate at Microsoft is somewhat less than a developer at a bank once you consider the high cost of living in NYC, but Microsoft pays good money.

My feeling is, you really need to have a masters in financial engineering to be able to get into the industry.

Nope. MFE's are a total waste of time, IMHO.

Masters in physics does not cut it the way it used to 10 years ago.

I don't think that Masters of physics has ever been a major route in. Ph.D.'s in physics are different.

Besides, we're dealing with bureaucratic behemoths (GS, for example, has 40 thousand employees), those systems tend to demand conformance.

Sure, but that's true for any large company. Too much conformance and you kill creativity. Too little, and you have anarchy. Trying to maintain the right balance is pretty tough.

Most job descriptions I saw required either a degree in finance, 2+ years of experience in finance, or both. If you don't conform, unless you have a man on the inside, not much you can do.

Or you can have someone on the inside tell you how to get in. There are a number of ways of getting in. Since this "geek board", people here are probably going to be more interested in getting in by being a hot shot C++ programmer than by doing an MBA or going to law school.

Here's my perspective though. Finance is not the only avenue for an intelligent person, nor is it the most intellectually rewarding one. People go into finance for the money.

Sure, but that's not the only reason.

If you don't want to get into physics (as well you shouldn't, since you're not in China and you don't need a green card), and you want to do something that matters, look elsewhere.

What ever happened to curiosity and the wonder of learning something new?

If you want to have a 40-foot boat, a maid, and a gardener, get a MFE, and do it while you're single and you don't have to support a wife and kids.

IMHO, MFE's are a waste. Also most people in finance *do not* make mega-mega bucks. The people at the top do, but the founders of google and Microsoft also are loaded.

[twofish-quant]

I disagree with you praise for MFE by the way. I find these are mainly money-spinner degrees, not entirely dissimilar to MBA's.

There is a difference. People with MBA's to get hired for their MBA's. I don't know of a single person with an MFE that would not have gotten hired without the MFE. The term "placebo degree" comes to mind.

The problem with the MFE is that it's a little bit of everything, and not enough of one thing. Most teams in finance are teams of experts. You have a hot shot C++ programmer together with a hot shot salesman with a hot shot manager with a hot shot numerical modeler. The trouble with MFE's is that you don't become an expert at anything.

But certainly, if this is what pleases the "laymen" in HR (who probably think studying physics makes you a physician), I can see why it has an advantage - shame really.

In most financial companies, HR has very little influence in hiring decisions. They'll do background checks, they may ask a few personality questions, and they'll shuffle papers, but the people making the hiring decisions are technical people. At my interview, I got grilled with questions in numerical relativity.

One of the reason I went into finance was that I like working in a place where the people four levels above me are geeks.

[neil.thompson]

In most financial companies, HR has very little influence in hiring decisions. They'll do background checks, they may ask a few personality questions, and they'll shuffle papers, but the people making the hiring decisions are technical people. At my interview, I got grilled with questions in numerical relativity.

One of the reason I went into finance was that I like working in a place where the people four levels above me are geeks.

This is intruiging and seems to me like very good news. I have worked for large companies before, and I have often been left feeling frustrated that managers and above don't understand the work that I have been doing. It makes things like career progression difficult to discuss, and left me feeling generally disorganised about my role and future. Thank you again for more interesting comments.

[hamster143]

Try applying *after* you've worked in Microsoft a few years. If you apply directly after getting a masters in computer science, your chances of getting a job in finance is low. If you get a masters in computer science and *then* work as a software developer for three years, then you become a hot commodity

I guess I wasn't clear? I already have a masters and three years of experience as a software developer (more than three, really). I did get a voice mail from a recruiter yesterday (after I sent a salvo of CVs for "quant developer" positions) so it does not look like a totally lost cause any more. But enough about me.

Also the going rate at Microsoft is somewhat less than a developer at a bank once you consider the high cost of living in NYC, but Microsoft pays good money.

order of 100k before bonuses, if Glassdoor is to be trusted. I'd call that decent but not particularly good. 100-120k is fairly typical for software engineers with more than 5 years of experience.
The people at the top do, but the founders of google and Microsoft also are loaded.

I did the numbers some time ago. If you're a software engineer, your chances of winning seven digits in an IPO lottery over your lifetime are something like one or two per cent. The remaining 98% can usually manage decent comfortable living, but can't afford 40-foot boats. Most people who make lots of money in IT (google and microsoft aren't very good examples) are not numbers people at all, they are extroverted MBAs and JDs who happen to wander into the field. As you yourself mentioned a while back, there's a sort of a glass ceiling in IT that you can't easily get through unless you seriously go managerial.

[neil.thompson]

I'm about to start my penultimate year of a Physics Masters in London, and am considering one of two routes:
-either becoming a trader after my Masters (hopefully from an internship next summer)
-or doing a PhD and becoming some kind of quant.


If you are passionate about physics, you should look at PhDs anyway - in case there is something that sounds magical to you. I am mid-way through my PhD in the UK just now - well, another year or so to go - and I am considering a job in finance afterwards. I have thoroughly enjoyed my time in academia - but I just feel that finance is where my interests lie, and I love the kind of problems I have encountered in it so far.

If you did decide to do a PhD, remember that success with that is the first thing you need to focus on. The job in finance you would want aftewards would be a long way off - but if you take a position with plenty of coding it looks as though you will give yourself many options come the end of it anyway.

I would only take the PhD if you are sure you can enjoy spending that amount of time intensively reading about a single subject. It is a very stressful time, and you will often feel extremely frustrated - so make sure it is what you want to do, and don't imagine it as a stepping stone to a finance job.

I know I have not answered your questions directly, but I hope I can give some help seeing as I am in a similar position to you, albeit a bit further along the line.

Regards,

Neil.

[Onamor]

Thank you to all for your replies, they are hugely valued by myself and many more, I am sure.

If you did decide to do a PhD, remember that success with that is the first thing you need to focus on. The job in finance you would want aftewards would be a long way off - but if you take a position with plenty of coding it looks as though you will give yourself many options come the end of it anyway.

I would only take the PhD if you are sure you can enjoy spending that amount of time intensively reading about a single subject. It is a very stressful time, and you will often feel extremely frustrated - so make sure it is what you want to do, and don't imagine it as a stepping stone to a finance job.


Yes I agree fully, and I could imagine this to be the case. And yes, I think it's always dangerous to do anything (a PhD or even banking!) without actually enjoying it, but clearly this is still difficult in practice. The amount I enjoy my current studies, I'm not too worried about not enjoying a PhD - but ask me again in a few years ^^

Forgive me if I am reeling this discussion off its course, but I would like to raise my original question again:

Is there any advantage to being a trader over a quant?

It seems (or I am lead to believe) that you have to choose which you want;
- the thrill of the chase (trading roles) or
- studying, learning and trying to understand (quant roles)
Is it really so black and white?

[twofish-quant]

I did the numbers some time ago. If you're a software engineer, your chances of winning seven digits in an IPO lottery over your lifetime are something like one or two per cent.

I'd estimate that your chances of getting a seven-digit salary in finance is about 5%-10% starting from a technical physics position.

The remaining 98% can usually manage decent comfortable living, but can't afford 40-foot boats.

Neither can most people that work in investment banks. One problem with media portrayals of Wall Street is that they tend to focus on the executive suite, where people make insane amounts of money, neglecting the fact that most executives in large companies make insane amounts of money. If you look at the average job, the pay is good, even great, but it's not buy a yacht, have a mansion great.

Most people who make lots of money in IT (google and microsoft aren't very good examples) are not numbers people at all, they are extroverted MBAs and JDs who happen to wander into the field.

And technical people that make a lot of money in finance tend to be extroverted physics geeks that wandered into the field. If I thought that I had any realistic chance of being a professor at a major research university, I would have done that. But it was pretty obvious to me that I didn't have any chance of doing that, so I found the job that was the closest thing.

As you yourself mentioned a while back, there's a sort of a glass ceiling in IT that you can't easily get through unless you seriously go managerial.

There's also a glass ceiling in finance, but it tends to be higher.

[twofish-quant]

I'm about to start my penultimate year of a Physics Masters in London, and am considering one of two routes:
-either becoming a trader after my Masters (hopefully from an internship next summer)
-or doing a PhD and becoming some kind of quant.

If you aren't totally passionate about physics then don't go for the Ph.D. It's a truly, truly, truly awful idea to do a physics Ph.D. unless you want to to physics.

-is there any math in being a trader?

Yes, but it tends to be back of the envelope, algebra, rough guestimate type math. No PDE's.

-transition from one to the other possible?

There's no rule against it, but people that make good quants tend to make lousy traders, and people that make good traders tend to be lousy quants. Traders tend to be sensory people, whereas quants tend to focus deeply on one problem.

I'd personally hate to be a trader.

-what's the difference in being a buy side or sell side trader?

Buy side are people like pension funds. mutual funds, airlines that are mostly interested in taking cash and buying something. Sell side are people like investment banks or brokerage firms that are selling some sort of product.

-is there the same devision for quants? I've never heard so.

Quants are overwhelming on the sell side. I've met some quant or quant-like people that do things like work for insurance companies and mutual funds, but they are rather uncommon.

[twofish-quant]

I believe that, if I fit a trader or C++ developer position, they would've responded regardless of the specific wording of the "objective" section in my resume.

Not necessarily the case. There are twenty things that could have gone wrong. Also resume writing is something that is tricky to do. One problem is that it's pretty easy for anyone to write that they are a C++ guru. Writing a resume that makes it blindingly obvious that you really are one is non-trivial.

Finally, the economy is still not in the greatest of shape. People are hiring, but it's still a slog.

Well, I'm sure that 90% of what real traders/quants do is proprietary stuff and not quantitative finance 101.

Actually it is. Most of the stuff that gets done is pretty basic from a modeling standpoint. That's why people really don't care about your finance knowledge. What finance knowledge you need, you can pretty quickly pick up.

MFE demonstrates your seriousness and it is needed to get you past the bureaucrat in charge of hiring.

So the sales brochures for the MFE programs claim when they ask you to had over their $50K. I think this is bull****.

[twofish-quant]

About the ad.

I think that's a silly ad. There are quants. There are traders. There are portfolio managers. Personally I've never met anyone that simultaneously filled two roles, but I suppose they might exist. Can't imagine anyone being all three. This is what that ad looks like to me......

WANTED: Person able to turn water into wine. Must have skills in brain surgery, ability to juggle chainsaws, and speak Armenian natively. Marathon runners preferred.

Now I really may have a position available for this person, and if I magically ran into anyone that happen to have that qualification, they get the job. But it's not an accurate description of what jobs are available.

[twofish-quant]

In the UK, the campus recruitment schemes pretty much stipulate that they want a PhD for a quant role, whereas just a Bachelors (in pretty much anything) will do for a trading role.

It's likely because most people that have the personality to finish a Ph.D. make lousy traders and most people that have the personality that make great traders make lousy Ph.D.'s. To finish a Ph.D. you have to be insanely obsessed over some esoteric topic that you are willing to go through agony to spend several years of your life on the topic. Good traders tend to be extremely sensory, emotional, and reactive.

There is the stereotypical absent-minded scientist that trips over his untied shoe laces because he is pondering the big bang. That's the exact ***opposite*** of what you want in a good trader.

I'm just questioning whether traders are anything more than politicians, or is there actually some rigor/skill involved?

Politics is a skill. It's actually a very important one which you'll need if you want to work in any large company in whatever role. Traders aren't political specialists. That role goes to the managers and to the structurers.

[twofish-quant]

My impression is that some traders are discretionary and some are non-discretionary traders. I know, for example, a buddy of mine works for a hedge fund building models. His models are coded up by the software guys, and they are automated.

One thing that you have to be careful about is that people use the same job title to refer to different things, and often different job titles to refer to the same thing. What a trader does in a quantitative hedge fund is so much different from what a trader does in an investment bank desk, that it's really a different job. For that matter there are about ten different jobs that could reasonably be called quant.

I've been working in finance for several years, and I'm not sure if I'm a quant or not. Some days I think I am. Some days I think I'm not. No one has told me. I'm not sure what my job title is really.

The traders tell the quants what to do, and ultimately make the decisions about where the money goes.

That's the old rules. The rules have changed, and people are still trying to figure out what the new rules are. Personally, I think that the new rules will be that traders listen to quants who listen to risk who listen to Tim Geithner and Ben Bernake.

[twofish-quant]

When you have a stack of CVs from Ph.D.s and a stack of CVs from guys with M.S. degrees, and you can only interview 10 people, my guess is that the stack of resumes from guys with M.S. degrees is the last thing they HR people look at.

For these sorts of technical positions, HR doesn't do the sorting because they usually do not have the technical expertise to figure things out. As far as what gets looked at, it really depends on what the position is. There is an effort to make sure there is a good mix of people. One word that gets tossed around a lot is "diversity" and one thing that means is that if it turns out that everyone in the group has a physics Ph.D., there is a strong effort to make sure that the next person hired *doesn't* have a physics Ph.D.

You look at the team, see what's missing, and then try to fill the spot. If everyone has a physics Ph.D. then it's sort of silly to hire one more.

The trouble is that from an outsider the process looks totally random, because it is.

The exception, as you pointed out, is if you have an MS in physics and an MS in financial math.

To be honest, it sort of looks bad if you have two masters degrees and no work experience.

[twofish-quant]

One other thing about masters degrees. If you have to choose between a masters in computer science and a computer science Ph.D., it's not obvious that the Ph.D. is going to be the better programmer, and curiously the odds are that the masters degree holder will program better. I've know a lot of people with Ph.D.'s in CS that are just totally incompetent programmers. Brilliant researchers and theorists. Totally incompetent programmers. I don't know anyone with a masters in CS that is an incompetent programmer. Some are better than others, but no one that is incompetent.

In physics in the US, the masters degree is often seen as a consolation prize, but the situation is very different in CS, where the masters and the Ph.D. are just different degrees.

Also, I don't know any physics Ph.D.'s that end up as traders. I don't think that there is any rule that keeps physics Ph.D.'s from being traders, and I think the reason why there are so few Ph.D.-traders is the same reason there are few Ph.D.'s that are airplane pilots or movie producers. Having a physics Ph.D. simply does not help you be an airplane pilot, movie producer, or bond trader.

If I did want to be trader, I don't think it would be too hard for me to get into trading, but having seen what traders do, I think I would be extremely unhappy doing it. Now as far as the money goes, head traders do make insane amounts of money. Junior traders, however, make salaries that are good, but not insane, and I think I'd make no more money as a junior trader than I make now, and I'd likely go totally insane before I had a shot at being a senior trader.

This goes in general with salaries in finance. The salaries in finance are good, but most people don't make the totally crazy amounts of money you see in the movies, and a lot of people lose their interest in finance once they figure out how much money they really make.

As far as why I find the job cool. Being a physics professor was not my first choice of career. What I really want to do is to be a starship captain. I grew up on Star Trek and I'm old enough to remember when the space program wasn't a total joke, and when I was eight years old, I couldn't wait to grow up and work on the mission to Mars and work for NASA.

When I go to the trading floor, it *feels* like going on the deck of the starship Enterprise or those pictures of mission control. Something that gives you an idea of what the job can *feel* like is the movie Apollo 13, and being in the belly of the beast when the world financial system was on the brink of total disaster in 2008 was in fact an Apollo 13 moment that I'll remember for the rest of my life.

[boseliquid]

I would like to address this question to twofish:

My current grad studies involves mainly monte carlo simulations of lattice models which I code in pure C language. I thought C++ is quite bloated and have never bothered to learn any object-oriented programming and all along is contented with such a tiny language, sufficient just for coding numerical project, as well as simply I/O for processing numerical data. But from reading about the importance of C++ experience, I would like to ask whether my C experience would be counted as nothing at all?

[ovechkinsgoal]

Also, I don't know any physics Ph.D.'s that end up as traders. I don't think that there is any rule that keeps physics Ph.D.'s from being traders, and I think the reason why there are so few Ph.D.-traders is the same reason there are few Ph.D.'s that are airplane pilots or movie producers. Having a physics Ph.D. simply does not help you be an airplane pilot, movie producer, or bond trader.


I'm going to cosign on this.

[twofish-quant]

My current grad studies involves mainly monte carlo simulations of lattice models which I code in pure C language. I thought C++ is quite bloated and have never bothered to learn any object-oriented programming and all along is contented with such a tiny language, sufficient just for coding numerical project, as well as simply I/O for processing numerical data. But from reading about the importance of C++ experience, I would like to ask whether my C experience would be counted as nothing at all?

You are going to be a lot, lot more marketable if you have some (even minimal) C++ ability. If you pick up a book on object-oriented programming and spend about a month reading it, you are going to be much more marketable.

The problem is that C++ is sometimes overkill for a simple numerical project, but in industrial programming, the monte carlo code is going to be a small part of a much larger system, and if you know even basic C++ you can interface your code with the production system. If you don't know *any* C++, then the company will have to hire someone else to interface your system.

The will do this, but then your monte carlo skills have to be outstanding. I do know of a few people that are that good, but they are professors in major research universities that have literally written books on the subject. If your mathematically skills are "merely good" then a little C++ knowledge will help you a lot.

The other thing is if people assume (usually correctly) that if you can handle C++, you can handle anything else. So if it turns out that your MC code has to work in a system that works in java, C#, matlab or perl, if you have C++ on the resume, then it's assumed that you can deal with those other languages.

[Patrick_Nth]

One other thing about masters degrees. If you have to choose between a masters in computer science and a computer science Ph.D., it's not obvious that the Ph.D. is going to be the better programmer, and curiously the odds are that the masters degree holder will program better. I've know a lot of people with Ph.D.'s in CS that are just totally incompetent programmers. Brilliant researchers and theorists. Totally incompetent programmers. I don't know anyone with a masters in CS that is an incompetent programmer. Some are better than others, but no one that is incompetent.

Would you be able to comment on how easy/difficult it would be to show some sort of competency in programming if one were applying with another technical Masters' degree (EE and Mech. E in particular)?

[twofish-quant]

Would you be able to comment on how easy/difficult it would be to show some sort of competency in programming if one were applying with another technical Masters' degree (EE and Mech. E in particular)?

No one really cares what you got your degree in at all. It's not that hard to see how good/bad a programmer is in an interview setting. It is a bit tricky in a resume to show that you have programming skills, but it can be done. Anyone can say "I know C++" but it's harder to say "I was a programmer on system X with Y lines of code and wrote Z."

[Clover_job]

One other thing about masters degrees. If you have to choose between a masters in computer science and a computer science Ph.D., it's not obvious that the Ph.D. is going to be the better programmer, and curiously the odds are that the masters degree holder will program better. I've know a lot of people with Ph.D.'s in CS that are just totally incompetent programmers. Brilliant researchers and theorists. Totally incompetent programmers. I don't know anyone with a masters in CS that is an incompetent programmer. Some are better than others, but no one that is incompetent.

In physics in the US, the masters degree is often seen as a consolation prize, but the situation is very different in CS, where the masters and the Ph.D. are just different degrees.

Also, I don't know any physics Ph.D.'s that end up as traders. I don't think that there is any rule that keeps physics Ph.D.'s from being traders, and I think the reason why there are so few Ph.D.-traders is the same reason there are few Ph.D.'s that are airplane pilots or movie producers. Having a physics Ph.D. simply does not help you be an airplane pilot, movie producer, or bond trader.

There is no offense to people in master in physics, however, based on everyone's reply, sounds like it's very difficult for master in physics to get a job, either as a quant or a trader, if my understanding is correct? BTW, what do you suggest a physics graduate student to do if he is not interested in physics at all and wants to be a trader eventually? Should he go like physics master -> apply for a trader job or physics Ph.D. -> apply for a trader job, or physics Ph.D. -> apply for a quant job (if trader is impossible right after phD)-> transfer to trader?

[twofish-quant]

There is no offense to people in master in physics, however, based on everyone's reply, sounds like it's very difficult for master in physics to get a job, either as a quant or a trader, if my understanding is correct?

It's difficult in general to get a job either as a quant or trader. If you don't have a Ph.D. in physics, then there is nothing to make it easier.

BTW, what do you suggest a physics graduate student to do if he is not interested in physics at all and wants to be a trader eventually?

Get an internship or something that will let you see what trading is really like. It's generally a seriously bad idea to make career decisions based on the movies or from brief exposure. If you hate it, you found that out early. If you love it, then you have some contacts in the business.

Should he go like physics master -> apply for a trader job or physics Ph.D. -> apply for a trader job, or physics Ph.D. -> apply for a quant job (if trader is impossible right after phD)-> transfer to trader?

If you hate physics, then it's a seriously bad idea to go for the Ph.D.

[xbomber88]

I have a question. I'm going into my last year of my undergraduate Physics degree and for a long time my goal was to become a tenured professor at a research university but lately I've been realizing how incredibly stressful and difficult that would be and how little my chance of success is. So now I've been thinking of alternative career paths and I've been thinking that working as a quant is something I might like to do. So now I'm trying to decide if I should still try to get a PhD in Physics even though I don't think I want to be a professor before or if I should end my physics education with my BS in physics. From what I understand it's not that difficult to get a job as a quant if you're a Physics PhD but is there a more direct route? Is it stupid to get a PhD in Physics knowing beforehand that I probably won't want to stay in Physics after I'm done? What type of Physics should I study in grad school if I think I might like to be a quant? Do quants tend to be theorists or experimentalists and do they come from certain fields of Physics more often than others such as high energy or condensed matter?

[Locrian]

From what I understand it's not that difficult to get a job as a quant if you're a Physics PhD but is there a more direct route?

I think the opposite has been stated pretty clearly in this thread by people who would know. I know lots of physics PhD's who would, with their current skill set, have 0 chance of getting a job as a quant - none of them have any experience with any programming languages (or any other skill useful in finance).

You need to change the way you're thinking. People in the private business world rarely care about your level of education - they care about whether you have skills that are valuable to them. Figure out what skills are necessary for the job you want to do (and that shouldn't be too hard, given this thread and the other 10,000 like it online) and get those skills.

[xbomber88]

I think the opposite has been stated pretty clearly in this thread by people who would know. I know lots of physics PhD's who would, with their current skill set, have 0 chance of getting a job as a quant - none of them have any experience with any programming languages (or any other skill useful in finance).

I may be wrong about this but I swear I've heard twofish-quant say in another thread that he doesn't know of anybody with a Physics PhD that wanted to get a job on wall street and was unable to do it and that people with PhD's in Physics have a much better chance of getting a job on wall street than people who studied finance. I don't expect to be able to do it without picking up any of the necessary skills in grad school such as computer programming but it's my understanding that if I do that and market myself well I should be able to get a job as a quant.

[twofish-quant]

So now I'm trying to decide if I should still try to get a PhD in Physics even though I don't think I want to be a professor before or if I should end my physics education with my BS in physics.

It's simple.

If you love physics, then do the Ph.D. If you don't love physics or are indifferent to it, don't do the Ph.D.

At some point you have to do things for the sake of doing them. Do the physics Ph.D. if you think it's worth doing the physics Ph.D. Doing a physics Ph.D. is great if you like doing physics.

From what I understand it's not that difficult to get a job as a quant if you're a Physics PhD but is there a more direct route?

If you want to do finance and are indifferent to physics, there are hundreds of easier ways of getting into finance than doing a physics Ph.D. However, if you are indifferent to physics, I don't see why you want to be a quant, since there are hundreds of easier ways of making money.

Also why do you want a more "direct route"? It's easier to get to the top of Everest with an airplane than climbing it, and it's easier to move 27 miles by driving a car than by running a marathon, but what's the point? To quote Kennedy, we do things not because they are easy but because they are hard.

Is it stupid to get a PhD in Physics knowing beforehand that I probably won't want to stay in Physics after I'm done?

If you love physics, then you spend six to eight years of your live doing physics which isn't stupid, and then you can spend the rest of your life doing physics-like things.

Also, I want to stay in physics. It's universities that I can't stand. That's something different.

What type of Physics should I study in grad school if I think I might like to be a quant?

Hard stuff with lots of math and maybe computers.

Something that needs emphasis, is that Wall Street banks hire physics Ph.D.'s because they are physics Ph.D.'s. Do whatever you need to do a quality dissertation and be a good physics Ph.D.

Don't try to study something that you think is "relevant" to finance, because you'll probably guess wrong, and no one really knows what will be relevant in five years. Do study something that you feel passionate about.

Do quants tend to be theorists or experimentalists and do they come from certain fields of Physics more often than others such as high energy or condensed matter?

Not really. People do tend to come from parts of physics that are heavily computational.

Let's suppose you study something like polymer physics. I have no clue what polymer physics has to do with finance, but you are the expert in polymer physics, you tell me.

[twofish-quant]

I know lots of physics PhD's who would, with their current skill set, have 0 chance of getting a job as a quant - none of them have any experience with any programming languages (or any other skill useful in finance).

On the other hand, it's more of an attitude thing. If you've mastered quantum field theory, then you have the intellectual skills to learn basic C++, write a resume, and learn to talk on the phone. Whether you have the desire and mental flexibility to do it is something else.

Figure out what skills are necessary for the job you want to do (and that shouldn't be too hard, given this thread and the other 10,000 like it online) and get those skills.

Also those skills may be something that you didn't think is that important. It's trivial for me to learn stochastic differential equations. Learning to talk on the telephone and realize that MBA's do something useful was quite a bit harder. Something that's *really* hard for Ph.D.'s to do is to shut up and take orders.

[xbomber88]

It's simple.

If you want to do finance and are indifferent to physics, there are hundreds of easier ways of getting into finance than doing a physics Ph.D. However, if you are indifferent to physics, I don't see why you want to be a quant, since there are hundreds of easier ways of making money.



I absolutely do love Physics it's just that I don't want to allow my life to become completely consumed by Physics like the lives of so many of the people I know who have been successful in Physics. I want to have a life outside of Physics and I'm not sure that you can do that and be successful in Physics at the same time unless you're a genius which I'm not. Also, money definitely is not my primary goal though I will admit that the money does have something to do with my interest in being a quant. Primarily what I'm looking for is a job that involves a lot of math and problem solving which isn't as stressful as trying to become a tenured professor of Physics and if I can make a lot of money while I'm at it then that's great too.

[twofish-quant]

I may be wrong about this but I swear I've heard twofish-quant say in another thread that he doesn't know of anybody with a Physics PhD that wanted to get a job on wall street and was unable to do it and that people with PhD's in Physics have a much better chance of getting a job on wall street than people who studied finance.

That's true. However, Lociran and I may know different people and different Ph.D.'s. Among the people I know personally, I don't know anyone that couldn't get a job on Wall Street if they wanted it.

However, I do know a lot of people that don't want it, once they see what it's really like.

I don't expect to be able to do it without picking up any of the necessary skills in grad school such as computer programming but it's my understanding that if I do that and market myself well I should be able to get a job as a quant.

There is a difference between "getting a job on wall street" and getting a job as a quant. There are a *lot* of different jobs on Wall Street. Some are clearly quants, some clearly aren't, and some maybe are and maybe aren't. If you are going on the market next year, then right now Wall Street is hiring lots of mathematically literate people to fill out the documentation that the regulators are requiring. That's not what people think of as "quants" but it pays the bills.

The jobs that most people associate with "quants" (i.e. derivatives pricing) has been stagnant for the last few years.

If you going on the market in three years, then everything will be different. Different good, or different bad I don't know.

[twofish-quant]

One other thing. Banks right now aren't hiring physics Ph.D.'s in large numbers as quants or traders. The big hiring right now is for a job that I don't think has a name yet.

[boseliquid]

You are going to be a lot, lot more marketable if you have some (even minimal) C++ ability. If you pick up a book on object-oriented programming and spend about a month reading it, you are going to be much more marketable.

The problem is that C++ is sometimes overkill for a simple numerical project, but in industrial programming, the monte carlo code is going to be a small part of a much larger system, and if you know even basic C++ you can interface your code with the production system. If you don't know *any* C++, then the company will have to hire someone else to interface your system.

The will do this, but then your monte carlo skills have to be outstanding. I do know of a few people that are that good, but they are professors in major research universities that have literally written books on the subject. If your mathematically skills are "merely good" then a little C++ knowledge will help you a lot.

The other thing is if people assume (usually correctly) that if you can handle C++, you can handle anything else. So if it turns out that your MC code has to work in a system that works in java, C#, matlab or perl, if you have C++ on the resume, then it's assumed that you can deal with those other languages.


Hi Twofish,

Thanks for your reply, which I truly appreciate. I still have one or two projects to complete before starting to write my thesis, so I still have some opportunity to do "real" C++ coding in my grad studies.

Thank you

[snowjoke]

Hi, I just registered on the site to say: thanks to twofish-quant for taking the time to write these very useful and frank replies.

I worked in management / IT consultancy in London for nearly 5 years after university and I didn't like it much, as it was totally non-stimulating intellectually, while oscillating between the very boring and the insanely stressful. So I'm looking at a career change into finance. I like the idea of being a fund manager in the long term. I've studied for (and passed) the CFA exams in my spare time, but I'm also thinking about applying to some master's courses in financial maths. This would clearly be the minumum for working as a quant, but my fear is that, without a bachelor's in maths or a PhD, I might end up being very mediocre in this field. I have no insecurities about my raw intellect; it's just that I will be surrounded by many people who have studied a lot more maths than me. Do you think the best mathematicians make the best quants? I might just be better off looking at non-quantitative analyst (equity research etc) roles, which might be interesting as well, although not in quite the same way. Any thoughts on this?

[Artus]

This post is awesome. Thank you guys for the information. I wrote a post about using math for Economics:

http://www.physicsforums.com/showthread.php?t=420301

And I really appreciate your opinion. From this and other threads I understand models in Finance are not that useful but I don't know if I'm correct about that.

[Onamor]

Thanks again to all repliers - all opinions, questions and discussion are valued.

Maybe this should be a new thread, but its slightly related so excuse me for sliding it in here.

It's quite a standard question, but I don't think you can ask it enough times:
Can you be a "good" trader?
Can you be right more than wrong? Are some strategies better than others? Why shouldn't I just flip a coin? Does it depend on how well you can trick or manipulate the other players in the game? Are people predictable?
This includes the speculators (Buffet, Soros etc), quants (whatever that means), the automated trading models or any other magician.

Reason I ask is this:
If people are ready to dedicate their careers to this banking thing, the answer better be yes. Because otherwise, surely this part of the finance sector is just a (very old) bubble.
Why would anyone want to study or work in a field where the strongest (or only) factor affecting success is luck?

Would be great to hear everyone's opinion.

[twofish-quant]

I've studied for (and passed) the CFA exams in my spare time, but I'm also thinking about applying to some master's courses in financial maths. This would clearly be the minumum for working as a quant,

It's more complicated than that. There are a lot of different parts of finance and each uses different types of math. It turns out that the math that people use for CFA (statistics and covariance) is just different from the math that is used in derivatives valuation (stochastic differential equations).

Also "quants" don't exist anymore. The name has been over used to the point it that's pretty much a meaningless label.

I have no insecurities about my raw intellect; it's just that I will be surrounded by many people who have studied a lot more maths than me. Do you think the best mathematicians make the best quants?

Don't know. I'm not sure what quants do.

I might just be better off looking at non-quantitative analyst (equity research etc) roles, which might be interesting as well, although not in quite the same way. Any thoughts on this?

Hard to say. A lot depends on what you really are interested in, who you work with, and a dozen other factors that can't easily be summarized.

[twofish-quant]

Are some strategies better than others? Why shouldn't I just flip a coin?

Maybe you should. However then flipping a coin to trade a large number of shares is quite non-trivial. If it turns out that making money depends on flipping a coin, then the challenge becomes flipping coins faster than the person across the street.

Maybe you should flip a coin. Maybe you shouldn't flip a coin. If you have a good trader that understands a market, then they'll tell you when it's random and when it's not.

If people are ready to dedicate their careers to this banking thing, the answer better be yes. Because otherwise, surely this part of the finance sector is just a (very old) bubble.

I don't follow the logic. Much of the markets are random, but characterizing how the type of randomness then becomes useful. Also there are dozens of jobs that don't involve trading.

And sometimes being a good trader means knowing when not to trade. If you know that things are random, then momentum and doubling strategies become very dangerous.

Why would anyone want to study or work in a field where the strongest (or only) factor affecting success is luck?

Because luck and randomness can be quantified and managed. Also, you end up further being a "failure" in finance than a "success" in academia.

[Onamor]

you end up further being a "failure" in finance than a "success" in academia.

Do you mean "richer" rather than "further" here? And this is my point; if "trading" is not an acquirable skill (I didn't say teachable), then why do people become traders? To be richer? Fun? Because it's the only (size-able) way to exchange assets/commodities etc in our current world society?
If this activity called trading is contrived and not really useful, surely one day (at least in a decent/honest/ideal society), it will cease to exist?

This was the logic behind the bubble analogy... But I suppose this is really a different question to whether or not traders can be "good." If no trader really knows what they are doing, there could still an argument for having traders - lack of a better system..?

Chances are more than likely that nobody knows whether or not the current market model is the "best" way (best meaning the most efficient and stable way to match supply and demand, and to ensure a free market? Question in itself). But for historical reasons (and possibly greed), we have the current state of affairs and procedures which are being studied in the mean-time.
If you have a good trader that understands a market, then they'll tell you when it's random and when it's not.

But if they truly understand, why aren't they always right? Personally I don't think you can be a better trader than someone else. Not unless you swindle someone directly, but this is a different topic. And even if you could manage risk better than someone else, you will still need to enter the market at some point to make money.
But I'm also not sure there is another possible way to have a market than what is current.
If it turns out that making money depends on flipping a coin, then the challenge becomes flipping coins faster than the person across the street.

I love this situation. Just because somewhere there could be a kid with a coin beating Goldman :rofl: (Or a monkey and a typewriter.....)
Anyways, I think if I don't aim on making more money than anyone else, just to make money, then it doesn't matter how often I flip my coin?

[snowjoke]

Onamor -

Here is a link (http://www.businessweek.com/magazine/content/03_29/b3842001_mz001.htm) to an interesting article I read recently about Steve Cohen, whose company makes millions of dollars per day from trading. It's a bit old and markets have probably changed, but it provides good insight into active trading.

Of course some traders are better than others, but it's not possible for everyone to be better than average.

[Onamor]

Hey, thanks for the article. Yes, these things are always interesting, and such success stories not even too uncommon. But I agree, it's very rare to get a decent look into what the hell it is that traders/hedge funds/banks do.

But I'd like to bring something up just for arguments sake,

Of course some traders are better than others

Why "of course"?!!
Such stories like this are just a small (overly focused on) view of a much larger picture. For each Cohen, Soros and Buffet, I bet there are a million or so people who lost money. Or worse yet, made a lot of money, then lost that too. I bet there were times when each of these great and very wealthy speculators were very close to bankruptcy. If they had gone under, would you ever have heard of them?

I would argue that this is not the norm for an investor - to be "right" over and over again.

[snowjoke]

You're right that for every winner there is a loser - that's what I meant by saying that not everyone can be better than average - but it's not necessarily random who the winners are. Being a good trader can range from not making mistakes, to acting on information more quickly than others. Ask yourself why Goldman Sachs makes so much money from trading every year, while 80% of day traders sitting at home lose money.

[Onamor]

It's a good point, but are Goldman never wrong (http://www.reuters.com/article/idUSTRE6781YC20100809)? Why not, if they know what they are doing? Scientific experiments are repeatable.
If you take the traders out of Goldman, sit them at home and have them trade like a day trader, I'm not sure they will do better. Else, why do they insist on trading from inside Goldman offices? Do they enjoy sharing their profits with the company?

I'm well out of my depth here, but I'd say that companies can have an edge from information and other external influences. Not a closed system I suppose.

[snowjoke]

Trading isn't a scientific experiment. Markets are largely stochastic rather than deterministic. You're sometimes right and you're sometimes wrong. You make money if you're right fractionally more often than you're wrong...

[Onamor]

Trading isn't a scientific experiment. Markets are largely stochastic rather than deterministic. You're sometimes right and you're sometimes wrong. You make money if you're right fractionally more often than you're wrong...

Completely agree. But are you saying there are strategies that are always right more often (even fractionally) than they are wrong? This is in essence the same thing, no?

[twofish-quant]

If this activity called trading is contrived and not really useful, surely one day (at least in a decent/honest/ideal society), it will cease to exist?

Let me tell you what a trader does.

I want to sell 100 shares of Exxon stock so I go to my computer and issue an order to sell 100 shares of Exxon stock. Now it is likely that somewhere in the world someone in the world wants to buy 100 shares of Exxon stock, but the odds are that they are not staring at the computer at the exact moment that I want to sell my stock. I could sit around at my computer screen for hours on end waiting for someone to buy my stock, but I have better things to do.

So you can pay someone to sit around for hours on end staring at a computer screen looking for someone wanting to sell 100 shares of Exxon stock and then wait for someone wanting to buy 100 shares of Exxon stock. That's a trader.

But wait.... Now that we have computers, can you program a computer to automatically look for people wanting to sell stock and then match them with people that want to buy stock. Sure. That's algorithmic trading.

If no trader really knows what they are doing, there could still an argument for having traders - lack of a better system..?

I said that the price of stock is random, that's a different statement. If a trader has just bought 100 shares of Exxon stock, their job is to find someone that wants to buy 100 shares of Exxon stock as fast as possible so that they can make money off the difference. Traders do not buy and hold because the longer they hold on to stock, the higher the chances that "something bad" will happen. So someone that trades Exxon doesn't care whether Exxon rises or falls.

Now portfolio managers do, but that's a different job.

But if they truly understand, why aren't they always right? Personally I don't think you can be a better trader than someone else.

Part of true understanding involves knowing what you don't know. Traders in general try to get rid of their positions as quickly as possible. I buy Exxon stock, I sell Exxon stock. The reason that people want to do this is that if you have a position something bad could happen, and your job is to provide liquidity and not to gamble on the long term direction of Exxon stock. You don't care what Exxon is going to do in a month. If you are a human trader, you are buying and selling on the order of hours. If you are a machine trader, you can react in milliseconds.

I love this situation. Just because somewhere there could be a kid with a coin beating Goldman :rofl: (Or a monkey and a typewriter.....)

There almost certainly is. The thing about random processes is that someone somewhere will win the lottery. If you have enough monkeys typing random stuff in a typewriter, someone will make insane amounts of money. You can mathematically show this to be the case.

But the difference between luck and skill is that your luck will run out. If you have someone win a lottery, the chances that they will win the lottery again isn't high.

Anyways, I think if I don't aim on making more money than anyone else, just to make money, then it doesn't matter how often I flip my coin?

Yes. Transaction costs. Every time you flip the coin, you have to pay someone something.

[twofish-quant]

Here is a link (http://www.businessweek.com/magazine/content/03_29/b3842001_mz001.htm) to an interesting article I read recently about Steve Cohen, whose company makes millions of dollars per day from trading. It's a bit old and markets have probably changed, but it provides good insight into active trading.

It really doesn't. Part of the reason people have huge misconceptions about finance is because of articles like these. One problem is that it gives people extremely inaccurate ideas for what most people in Wall Street actually make. Yes, if you run your hedge fund, you can make huge amounts of money, but you can also make huge bucks running a technology start-up.

Cohen is a hedge fund manager. His company trades stocks, but he isn't a stock trader (i.e. a market maker).

[twofish-quant]

Hey, thanks for the article. Yes, these things are always interesting, and such success stories not even too uncommon. But I agree, it's very rare to get a decent look into what the hell it is that traders/hedge funds/banks do.

I wouldn't post as much as I do, if there were better sources of information. People get their information from the movies and from articles about mega-millionaires, but that gives you a *really* bad idea of what people in banks do, and that distorts decisions making.

For example, people think that everyone that works for an IB is a mega-millionaire, which makes people drop everything to work at an IB and forget about working at Google and Microsoft. If people got a better idea of what the real salary levels are like, then maybe Google doesn't look that bad.

Salaries in finance are "good". They aren't insane.

I would argue that this is not the norm for an investor - to be "right" over and over again.

Correct, and its a big, big warning sign if you are making too much money. One thing that you absolutely have to do is to know when you are investing and when you are gambling. Gambling can be OK, you just have to realize when you are going it, and make sure people whose money you are using are also OK with it.

Also, you have to think economically. I can imagine arranging the world economic system so that everyone in the world makes say $200K/year. I can't imagine setting things up so that everyone makes $20M/year.

So if someone offers a whole bunch of $200K jobs, that seems sustainable. If someone offers a whole bunch of $20M/year jobs, then I get suspicious since I don't see where the money is coming from.

[twofish-quant]

Ask yourself why Goldman Sachs makes so much money from trading every year, while 80% of day traders sitting at home lose money.

Because day traders have to go through GS in order to get to a counter-party.

Let's suppose you are a "day trader" (and I use the words in quotes since no one that I know of that day traders is actually trading). What do you do when you have to buy or sell a stock. You go through a broker.

***BZZZZTTTTT*** game over, you've just lost.

You make money from trading by *being* the broker. However being a broker requires lots of money. You have to have dozens of lawyers and then you have a lot of computers, and then you have to hire a ton of people to run the computers.

Which is where I come in.....

Also trading as an economic activity generates value. It's a good thing that I can go online right now and sell 100 shares of Exxon and get cash for it.

[twofish-quant]

Markets are largely stochastic rather than deterministic. You're sometimes right and you're sometimes wrong. You make money if you're right fractionally more often than you're wrong...

That's one way to make money. There are others.

[Onamor]

Hey, thanks for your replies, particularly this part;
Let me tell you what a trader does.

I (and I'm probably not alone in this) have read books that simply don't state this as clearly as yourself, so thank you for that.

But could I throw you another question?

Now that we have computers, can you program a computer to automatically look for people wanting to sell stock and then match them with people that want to buy stock. Sure.

Why do we have have human market makers at all? Surely they must inject some kind of (human) prejudice into the process? Not just buying at the lowest, selling at the highest - a computer can do that as well...

[twofish-quant]

Why do we have have human market makers at all? Surely they must inject some kind of (human) prejudice into the process?

If that human prejudice includes wisdom and intuition, that's a good thing. Suppose you have a $1M position on Exxon stock. It's now down to $950,000. Then it goes to $900,000, and $850,000. If it hits $800,000, and you haven't closed the position, the system will automatically close the position since you've exceeded your trading limits, and bad things will happen to you.

So what do you do? If you've been trading Exxon stock for years, you'll have some idea as to whether or not to take the loss.

It should be noted that there is a human bias not to take losses and keep to a losing position rather than admit defeat. That will get you killed as a trader which is why most people don't make good traders. What happens is that traders have a trading limit, and if you exceed those, it's like maxing out on your credit card. Bad things happen to you.

As far as how those limits are set, there's another group of people that deal with that.

Not just buying at the lowest, selling at the highest - a computer can do that as well...

Computers can't think. What they *can* do (and do in fact do) is process vast data at millisecond frequencies.

Sure if you have a bunch of computer programmers programming the system and a bunch of traders that know the markets well enough to input trading strategies, but at the end of the day the computer is just a tool, and you need people to tell it what to do.

For example, one thing that the traders do tell me is not to try buying at the lowest and selling at the highest. If you try to time the peak, you'll always miss, and lose your shirt trying.

[Onamor]

Sorry, I don't think we're on the same page here. I was asking about why we have market makers - the guy that sits at the computer to match buyers and sellers. He just provides liquidity, and makes profit from the spread, if he sells higher than he buys, or vice versa.

The guy I think you were referring to here;
If a trader has just bought 100 shares of Exxon stock, their job is to find someone that wants to buy 100 shares of Exxon stock as fast as possible so that they can make money off the difference. Traders do not buy and hold because the longer they hold on to stock, the higher the chances that "something bad" will happen.

As far as I know, in broad terms, there's proprietary traders and market makers. One trades when he thinks he knows a profit opportunity and the other provides liquidity.
Why can't a computer do the job of the market maker? Do they do something else?

Sorry if it seems I'm hammering on here, but sometimes you have to ask the simple questions... So thanks again for any replies.

[snowjoke]

There are different types of exchanges for different instruments. For very liquid instruments, you have an automated order book system, where buy and sell orders are placed (which can be at limit, where maximum/minimum price is specified, at best, where you fill the order based on what's already on the book) and automatically matched. For less frequently traded instruments markets tend to be quote-based, i.e. the market maket provides a bid and ask price at all times. It's his job to decide what these prices are. For even more exotic and illiquid instruments, they might not even be listed on an exchange, and selling it might involve phoning up clients and negotiating prices.

[twofish-quant]

As far as I know, in broad terms, there's proprietary traders and market makers.

There are also other permutations of this. For example, there are portfolio managers that look for profits, but for pension funds, insurance companies, mutual funds, etc. That's another set of players.

One trades when he thinks he knows a profit opportunity and the other provides liquidity.
Why can't a computer do the job of the market maker?

They often do, but then someone has to program the computer to recognize market signals. In some markets, computers do badly either because there aren't enough trades to justify the expense of a computer, or because there isn't a single market, or because computers just aren't as good as human beings for recognizing market signals. Other markets are now dominated by computer trading.

Just to give one example in which computers aren't that good. If you want to trade Exxon stock, then there is only one real type of Exxon stock. If you want to trade a contract on the price of oil, there are a huge number of ways you can structure that, and so to place the order you have to be on the phone for a while getting the exact details of the contract.

Finally, you need a human being to recognize when the machine is going haywire and to shut it off. Most markets have a rule that say that if the index moves more than X% in Y minutes, then the computers get shut off and people have to execute orders by hand so that people can figure out what happened.

The trend over time has been for trading to become more and more automated. At one end you have market makers that just put in an algorithm and let the computer run. At the other end, you have people sitting in from of computer screens, but even they use a lot of compute power so that they can display the data in ways that they can find what they are looking for. And you have various combinations of man and machine in between.

But curiously more automation means more humans are involved. Computers don't program themselves, so what often happens is that you have programmers create a trading platform that takes canned strategies from traders and executes them. Even in the area in which people are making the trading decisions, they rely very heavily on computers to display information in some way that they find comprehensible.

The other thing is that computers just break down sometimes, and when you have computers making a lot of the decisions, it's a very, very bad thing when the computer just stops working suddenly. At that point you bring in a team of tactical programmers to fix the system, and that sort of work is very interesting.

Also, in some markets pretty much all trades are automated, so that point it's a fight between who has the better computer programmers.

One analogy is that traders are like race car drivers, but to get anywhere as a race car driver, you have to have a good pit crew and great engineers to design your car.