After the cold war, a lot of government projects got scrapped in the former Soviet Union that focused and employed physics professionals. All over eastern Europe and Central Asia, physicists lost jobs. The next best thing they could do was to use their expertise in a new world of Finance.
If you have seen the movie “Margin Call” then you might have understood why one of the protagonists of the movie, Zachary Quinto was playing the role of a Rocket Scientist as Peter Sullivan. Peter explained to Jared Cohen, the Head of Capital Markets that he choose to join the wall street instead of pursuing a career in science because the “money was good.” It stood true for real life characters such as Katrin Suder who were working on neurophysiological mechanism at Ruhr University in Bochum, Germany not so long ago. Now she is working at one of the top management consulting firm, McKinsey, as a finance consultant. Since her area of expertise focused on modeling mathematical equitation, she is currently applying same quantitative analysis techniques, computational and mathematical skills for modeling factors in consumer finance.
Internationally reputed firms like McKinsey had been recruiting laid off scientists with prestigious PhDs and giving them short courses on Economics and Finance so that they can work on complex quantitative nature of modern day Finance. Long gone are the days when Wall Street and financial houses used human traders to make money. In this new brave world of quantitative finance, every single market tick is the direct output of algorithms, programmed by scientists who came from very different background.
You will not only find physicists but biologist who worked on human neutral networks, chemists who worked on evolutionary biology to be working on financial formulas to find the “edge.”
University of Illinois now offers Physics PhD candidates to join their Masters in Finance programme. Guess, the demand for scientists in Wall Street is so high that now the financial firms are actually expecting academic education in Economics and Finance from them to be hired as “Quant.”
Quantitative finance is now responsible for almost as much trade volume as human traders in major exchanges, including the Forex market. When quants are helping finance to make it more efficient and reducing the “human” lag. However, there is some significant consequence as well. Lot of experts blame the highly mechanical trading methods run by high frequency finance providers for the few market crash since the sub-prime crisis. Because these computer models and automated strategies don’t understand the concept of intrinsic value, they often over sell and over buy. Means, trends become stronger and often they can become more irrational compared to a situation where human traders would have gone before. Making short term trading more risky for everyone, including these quantitative strategies.
Next time if you find your next door physicists to be driving a Ferrari, you might not wonder what he actually does after knowing the new opportunities scientists are pursing in the world of finance.
Regardless how much we blame the systematic mathematical trading methodologies for the global financial crisis derived from the system risks they created, the fact remains that the future of international finance will include more scientists and quantitative trading because they are more efficient compared to human traders.