Next-Gen Buy Side Traders: Know Your Math

With the speed and complexity of financial markets increasing, buy-side traders are facing a more data-intensive world than 10 or 15 years ago, when the position was less sophisticated and the job didn't require a trader to be a techie or a math whiz. In the past decade, the job of the buy-side trader has become more quantitative, and analytical skills are definitely in demand.

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The financial markets sophistication is driving changes in educational background requirements, says Sylvain Privat, head of buy-side products at Misys, a provider of analytical, risk management and portfolio management tools. "It's good for them to take finance, of course, as well as mathematics, artificial intelligence, data management and information technology," Privat says. "There is more and more data, and they have to handle [it] in a short time."

With regulations changing every day, on top of algorithmic trading, complex order types, collateral requirements and social media feeds to parse, adaptability to change is one of the most important qualities for a trader.

"If I was going to be hiring someone tomorrow, I would look at a minimum bachelor's in a field that you had to do critical thinking, some economics, math, some statistics or probability in there -- not a major but a sign that the person took interest in the field," says Joan Stack, trading manager at the Ohio Public Employees Retirement System (OPERS), which has $80.3 billion in assets under management. Competition is so fierce that getting an extra degree never hurts, Stack says.

According to Sang Lee, managing partner at Aite Group, "Having some sort of technology or quant or statistical or mathematical background will help. Clearly the equities markets are very much electronic, and that trend is happening across different asset classes as well as across different regions." At the same time, there's an increasing emphasis on understanding market microstructure, perhaps which wasn't important 10 to 15 years ago, says Lee.

As investment management firms and hedge funds look to hire the next generation of traders, Advanced Trading examined what educational background and skill sets they are going to require to land a job. This is especially true for those just entering the workforce. College graduates need to know what educational background will set them apart. Do they need a master's degree or a Ph.D. to qualify for a seat on the desk? Should they have a background in computer programming?

Based on the survey, 21% of respondents said the educational background needs to be quantitative, 16.5% said finance, 10.6% picked computer science and 1.2% chose engineering. More than 50% of survey respondents said that traders of the future should study all of these subjects.

"You have to know math and the rest is an option," says Philippe Buhannic, CEO of TradingScreen, a supplier of execution management systems. "You have to have a strong interest in calculations." According to Buhannic, the ideal candidate has strong analytical skills together with a level of curiosity, flexibility and adaptability. "That is the only background you need," he says.

But studying finance is not necessarily the only background. Buhannic, who was a professor for 22 years, noticed that those who had taken financial-type courses, in one sense, were blocked, less flexible and adaptable. "It was better to have people who were not good at math, with a history degree," he says.

Ultimately, there is no one major that is right or wrong. Robert Shapiro, head of global trading and consulting at Bloomberg Tradebook, notes that engineers are analytical, exceptional in math and solutions-oriented. "Those three skills are really important in the business," says Shapiro. While "financial engineering may be an obvious skill set for this day and age, this doesn't give you the whole scope of what you need to be successful at a firm," cautions Shapiro. "For every financial engineer from Cornell, I've met a liberal arts major from Michigan, and they are equally successful." Although many in the business say traders are creatures of habit, "from a behavioral standpoint, the key to success as a buy-side trader is having an open mind and embracing change, which is hard to do," says Shapiro.

One Size Does Not Fit All

"There are a whole range of buy-side traders that require different skills sets," says Stack of OPERS. Some traders are like clerks transferring orders, for instance, in the WRAP business, she says, while others are quasi-portfolio managers in the index fund business. "If you are at a big shop, you probably need to be more specialized, and if you are at a small shop you have to be more generalized," adds Stack.

While many colleges have their own trading labs, with real-time data, terminals from Bloomberg or Thomson Reuters, and simulators to build trading models, on-the-job training can be more valuable.

Students coming out of college know the technology and applications such as Excel and PowerPoint, says Stack. "I do think in the future, you might want a trader on the desk who knows how to code and program," she says. But many of the skills they will need to learn, such as micromarket structure, will come from firsthand experience on the trading desk.

Given the complexity of the asset classes, collateral management, inventory management, products and technology, internships are geared to learning all the tools of the job, says TradingScreen's Buhannic. Many of the big brokerage houses offer training programs, but that doesn't exist on the buy side. While buy-side internships are rare, Stack says it may be possible to shadow someone for a day or a week.

Most of the training for the buy-side trader role is going to happen on the trading desk, according to 70% of the survey respondents, while 15% said on the sell side, more than 9% said at college in a lab and close to 5% said at a hedge fund.

According to Stack, the job is not always well-understood from the outside. "Until you've actually seen the business, a lot of college students have the idea that they are trading their own portfolios and making all of the decisions," she says. "A trader has to remember you are implementing somebody else's idea. Although you can make suggestions, give color, strategize, at the other end of the day it's the portfolio manager's job to decide whether they want to buy or sell."

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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