Quants are it. While sales jobs in banks disappear and trading jobs are automated into mundanity, quants are the new thing. Banks are alert to the value of data, and quants are the alchemists who are supposed to turn their data into gold. - Barclays CEO Jes Staley typified the mood yesterday when he said Barclays is building a, "new strategic data architecture," and, "looking at using data in new and innovative ways." Barclays needs quants. And so does every other bank out there.
If quants are banks' new most special employees, they don't feel it. Somehow, the quant love isn't getting through. We spoke to a selection of quants in a selection of functions and the sentiment was often the same: What about the career path? - What about the pay?
"If you're a desk quant in a bank, you have one of two career paths," says a director-level quant at a U.S. bank in London. "You can do the same job, and become better in your niche - but then you'll get pigeon-holed and your work becomes repetitive and you get seriously bored. Or you can move into management, where it's all about politics. Being a quant in a bank is a good as a job, but not as a career."
When people refer to quants in investment banks, desk quants are usually what they have in mind. Desk quants work with banks' traders to create statistical models to analyze trading book risks and identify opportunities to create complex derivatives to help clients. The desk quants create pricing models for these derivatives. They also create models that create strategies to direct trading decisions and that make traders more efficient. But desk quants in banks aren't actually traders. And because of this, they're not as well paid.
"Even though quants are crucial to a bank's profitability, they're considered to be more of a support function," says Max Soslove, a senior headhunter at GQR Global Markets. "Quants build the pricing models and algorithms that price derivatives, so they are revenue generating - but not as much as traders." The director-level quant puts it more bluntly: "A trader can claim that he/she "made" X amount a year, and shall be compensated as such. As for quants? They are viewed by most people (traders, sales, senior management) as coders who are not completely useless."
This means that while successful traders in banks can still earn £500k+ ($625k+), successful quants tend to find their pay bounded at around £250k, or less. As one quant puts it, this isn't bad for, "writing several lines of code," but it's also a frustrating when the traders using the tools you create are being paid a lot more.
If they want to keep hold of the best desk quants, banks may need to up their game. After all, they're not the only ones chasing financially-literate quant talent: systematic macro hedge funds want it too. And systematic macro funds are willing to pay big money. "Some of the highest paid people I've ever seen are "quants" running systematic trading strategies in hedge funds," says one headhunter. "Those funds will hire from banks. They tend to want juniors who've spent a few years working in something like front office strats at Goldman Sachs. - A PhD who's had the edges knocked off."
Most desk quants would jump at the opportunity to move to a fund, but few are given the opportunity. Those who stay behind are advised to position themselves carefully. "The best banking quant roles are in highly electronic product areas," says the director. "When trading is largely automated and there are fewer traders, quants are better able to demonstrate their worth." Even so, he says it's still hard for individual quants to point to their personal P&L: "The electronic book is often group-managed, and in any case electronification eats dramatically away at trading margin."
Not all quants can be desk quants
While desk quants tend to gain the attention in investment banks, they're an increasingly small proportion of banks' quant universe. As Goldman Sachs' partner and senior quant Ezra Nahum said in a lecture last year, the role of quants in investment banks has changed: it used to be all about pricing exotic derivatives; now it's more about optimizing capital. For the past few years, the new big thing has been the "model validation quant" who checks banks' risk models are correct and is typically employed on a much-reduced salary away from expensive financial cities like London and New York.
These quants, together with quants in the risk function, tend to be less happy with their lot. Quants in banks' risk function earn salaries up to £130k ($162k) after seven years according to recruitment firm Morgan McKinley. The army of quants in model risk roles can expect to earn more like £60k - if they're in London. "Model validation jobs are to be avoided," says the director-level desk quant. "The pay is low, the work is boring, and it will be automated away quite soon." One experienced quant from elsewhere in the risk function, complains about juniorization: "Banks just chase after fresh PhDs. Experience isn't really valued."
Banks' demand for quants is only likely to increase. As well as desk quants, risk quants and model validation quants (appended to the risk function), banks also have quants in areas like human resources. Last time we looked, 12% of the jobs advertised at Goldman Sachs in Europe were in the banks "strats" (quant) teams. - And this didn't take into account the big numbers of quant the bank hires in Mumbai. As demand increases, however, banks will need to do more to keep their quant army happy.
"Traders still have too much power in banks," says one senior quant at another U.S. bank in London. "Because of this, banks risk losing us not only to hedge funds, but to technology firms. If you've had a solid quant career, it's easy to pick up machine learning skills, and the opportunities outside finance are huge."