Waggie, I don't think you know who you are talking to here. I could write a book on volatility OK? I worked with one of the brightest firms on the CBOE, yes, I think even brighter then Susquehanna. I know what volatility trading is. There are guys that made a killing being long gamma during the crash of 87. Those same traders then sold puts to hedge their huge negative delta positions and doing so got short vega at the top. They made even more money when the premiums came in after that. Don't give me this "they don't have the capital to sell volatility crap". Dude THEY SELL VOLATILITY FOR A LIVING!!!!!!!!!!!!! This is why they are financially backed by firms like First Options, Abn Amro and the such. Get a grip man. What do you think these guys do. Have you ever been down to the floor of the CBOE? I'll tell you what, if I had to put all my money behind either a quant on a desk somewhere or a bright disciplined market maker on the floor, I would choose the market maker 7 days a week and twice on Sunday. I don't know what your trying to sell here, but no one is buying. It's time to come back to reality my friend.
You continue to miss my point, and for some reason are unable to see the fact that the so-called "quants" on equity-derivative desks are in fact, TRADERS! Many of the guys that are now senior traders on the equity-derivative desks of Goldman, Lehman, Morgan-Stanley, and Deutsche Bank came up through the ranks at O'Connor and Susquehanna. They are in fact, MARKET-MAKERS!!!
I don't care where they come from. You said the guys on the floor can't sell volatility. That's a crock of shit. Then you said the guys on the floor are not adequately capitalized, that's a crock of shit. Then you implied the guys on the floor only hold positions for a day, that's a crock of shit. Oh and by the way, most quants as they are known today, don't trade! They are hired for statistical analysis and model building and get paid pretty well for that. Most of the time, not all the time, but most of the time, they are not the actual guys hitting the buy and sell button. What is this fascination you have with guys on equity derivative desks? They are not that special I can assure you. Oh and one more thing. Most market makers don't go to equity derivative desks at big institutional banks because most of them shun that kind of culture. That is why they choose to be on the floor. They are the exact opposite in personality for what institutional banks are looking for.
Getting back to the point about the big banks looking for a 'pedigree' for their prospective traders. I doubt few people actually believe an ivy league education better prepares one to trade, BUT, as you suggest above, the background helps the individual fit in with the culture of the firm. Thus, a trader with a solid education may be thought as more promotable, or flexible to move to other parts of the bank if the need/opportunity arises. From the employer's perspective, the ivy league trader is optionable whereas the schmoe off the street is not. Better to hire ten traders w/ management potential than ten dead-enders.
if you're trying to rag on the academics upstair, please quit glorifying market makers on the floor. they're just 2 shades better than specialists and I hope we're all in agreement on them. If you could pick from 100 people with below average intelligence and 100 people with 130+IQ to trade for you which would you choose? of the top 5 % from each group with personality traits suitable for trading, the smarter ones will produce more.
Well, I hope your not saying locals on the floor have an IQ below 130. Most guys I know that make markets in options are very very bright. I would put them in at 150 IQ or higher. Guys that trade outrights, well that may or may not be another story. And I am not ragging on the guys upstairs. I'm just saying that if you do enough research and read enough books you will learn that the normal distribution curve for successful traders is the same whether that have a quant background or not. And by quant, I mean they might work for a bank, a hedge fund, or out of their basement at home. You would be surprised how many quants are NOT in the mainstream and work for themselves. And I would not put specialists in the same group as option market makers. Have you ever stood in an option pit and had to make markets in 20 different stocks over 12 different months in over 100 strikes and at the same time maintain your risk exposure in the process? Ok, then. Also as far as above average or below average intelligence goes, that is not even a part of this discussion so I don't know why that was brought up unless you mean to presume that only quants are intelligent and anybody that is not a quant is not intelligent. That would sure get a laugh around here.
Yes, in the institutional world, it's all about corporate culture and connections. BTW, for most of you that don't know, the reason rich parents send their kids to ivy league schools is not for the education but for the connections. A friend of mine that went to Princeton, went to school with a Prince from Saudi Arabia, Brook Shields, knew at least a dozen guys who dads were CEO's of major companies, and many sons and daughters of US senators and congressman. It's a nice alumini network to tap into after graduation I can assure you.
Mav is quite right about the floor - lots of bright people there, may be not as quantitatively inclined, but they are pretty good at what they do. As for quantitive trading - it is about the same thing, having a view on the market in some shape or form. The difference is mainly not for exchange traded stuff but for exotics where good RM and pricing comes into play. Anyway, I posted this one already in options thread (it did not get much exposure there), it is semi-true story, a bit re-written. I think it will clarify a lot about quantiative trading etc. etc: I have come to New York with a PhD from ********. Quickly, I answered an internet ad by a chasseur de tête who sent me to a foreign bank. Two interviews and I aced them all. A week later, I'm on the desk. "Dude, you are getting a Dell!" I say to myself. With my scientific PhD, I find option theory easy as p. I have studied heat conduction and quantum mechanics so I quickly comprehend the options: a is intercept, b slope, G curvature, D tangent, s temperature, q sensitivity, m drift. If I know derivatives, I know Derivatives. Soon I am an expert at Black-Scholes and Beyond. Yield curves are strings. Feynman to me? Kaç to you! Everything's an option. I am one dynamic hedger, man. On the prop desk my boss is Alden, an MBA, and I'm his quantitative guy. He calls me a geek; he knows no math but he sure knows business; he can use the same word as noun, adjective, exclamation and gerund in single sentence when he's angry. Alden's risque assistant is Lidia, a truly exotic option, a total knock-out with a non-normal distribution which makes the option salesman whistle and mutter softly about barrier penetration. I have rational expectations for Lidia but I feel she don't respect me. She like old movies but has no taste for mathematics and its beauty. To her I am far out-of-the-money. Now the bank wants to do structured products. I have Excel, I have VBA, I get models from optionmodels.com and now I'm in business. We're doing long-term puts and calls, down-and-outs, converts, one-touches, spread options, CDS, vol swaptions, whatever, and I'm getting all the prices. I find model for anything. Easy as Dell. Once a week we run my spreadsheet to mark the book. Big P&L fast. Then late dinner with Alden at Bouley or Jean-Georges. But always Lidia's on my mind. When I watch her wandering across the floor, I cannot but think of excess kurtosis. I try to cliquet with her for coffee but she DK my trade. I sense there is little chance of a transformation between her p-measure and my q-measure. One day someone offers Alden a big position in spread option barrier reversal American no-touch interest rate euro swaptions, denominated in Turkish lira. According to my model, these Sobranies are pretty cheap. Lots of a, high k, big Sharpe. Alden take $100 million face for the desk and his boss bought some for his own PA too. Next day the broker offered us much more at the same price ? great deal! Each day's close I tell Alden how my model says to rehedge the Eurodollar futures and the lira, and then we execute. Except I am always thinking sadly about Lidia, dreaming of her capital assets. Will I ever know her efficient frontier? Next week comes by the head of model risk, ENS graduate Dr Jean-Martin Geille, an expert in Malliavin calculus. And Vlad, chief risk modeller. "You're VAR is way up, mon ami," said J-M to Alden, very loud. "What model 'ave you used for the Sobranies?" My model is one-factor Monte Carlo with control variate, $125 from the web. Vlad's is three-factor Crank-Nicolson PDE with fat tails and LU decomposition, he tells me, written in Java on his Linux laptop. His say we have a lot less a than mine. "You pay too much m for too little k!" say Vlad. "What's it all about, a?" Lidia sings in her deep voice. She cannot understand the situation is serious. But J-M does. "I am arrestin' you for ze future mis-markin' of complex instruments," he yells, waving his hands as he jumps in front of Alden. He joke, but Alden doesn't laugh. He knows J-M would do anything to make risk department look good. We are e away from big trouble. That night the risk committee uses Vlad's model. Their report shows big drop in our marks. "No-one knows what this is really worth," moans Alden. "We'd better unwind and cut our losses. No Zermatt this Xmas ..." Bonus day is only a month away. So much volatility is difficult to concentrate... At the close I execute the end-of-day Eurodollar hedge and leave lira rebalancing for next morning. When I get to work Alden is popping. "Did you hedge last night?" he yell. "Eurodollars yes, lira no!" I say. "Great!" shout Alden. "Trouble in the Middle East ? 7 percentage point drop in the Turkish lira overnight. The Sobranies knocked in. How'd you guess?" "I been learning extreme value theory," I tell Alden. "Good call, guy!" he say as he squeeze my shoulder. The Sobranies triple and we close out. I make 20 units for the desk. Lidia looks at me with new respect. On bonus day I invite her to dinner at Jean-Georges. "How did you do it?" she smile at me over the Petrus '85. I can see our implied correlation is approaching unity and I am ready to early exercise. "Behavioural finance," I tell Lidia as I take her hand. "The market is like a shy woman who suddenly find she's beautiful: slow to passion but fiery when aroused..." Soon perhaps I start my own market-neutral hedge fund, offshore. Meanwhile, I hope my story encourage your readers.
BINGO! The same way people invest in an education, many invest in social network to get ahead. Think of the education as a "filter" that gets you the interview. Firms need something to filter appicants out, and a pedigree sure helps, whether it is right or not. On average those taht attend better schools, will be able to grasp new/related concepts easier than those without. Having said that, there is a huge grey area where many get caught in teh shuffle... This is where connections come into play.