Last Updated on 14 October, 2021 by Samuelsson
With financial trading become increasingly complex and algorithm-driven, demand has grown steadily for professional quantitative analysts, often called quants, who can create computer-based complex mathematical models that facilitate trading, generate profits, and reduce risk. But how much do quants make; can they make millions?
Yes, quants are one of the highest-paid professionals on Wall Street and can also make a lot of money trading for themselves; however, many of them do fail to make money. Whatever the approach, success in trading requires a lot of hard work and dedication. Trading as it is presented in mainstream media is exaggerated.
Quant trading requires a blend of mathematics, finance, and programming skills, which many people don’t have. In this post, we will discuss the following:
- Who quants are and what they do
- How they make money
- How much they are paid on Wall Street
- How much they can make trading for themselves
- What you need to become a quant
Who are quants and what do they do?
Normally known as quantitative analysts, quants are traders who analyze a huge amount of market data using complex mathematical and statistical models to find tradable opportunities in the markets. Being knowledgeable in math, statistics, programming, and quantitative research processes, quants are often referred to as the scientists of Wall Street.
Because of the availability of online data feeds and the advancement of computer programs for analyzing a large amount of data in a very short time, using quantitative analysis, rather than qualitative factors and discretion, to find trading opportunities has become more popular, especially among big trading firms which have what it takes to provide the necessary tools for such analysis. While the analysis is computer-based, quants are the human element behind those analyses, as they create the mathematical models and write the programs that run the models.
Quants mostly make use of price and volume data; they research the available data to identify profitable trading opportunities and then create relevant trading strategies to capitalize on those opportunities using self-developed computer programs. Apparently, quants are usually very different from traditional retail traders and investors since they use a very different approach to trading: instead of relying on their expertise in the financial markets and using their discretion as traditional traders do, quants use algo-based, complex statistical models to scan the markets for some trading edges.
As you would expect, a quant trader should have a mix of good mathematics and statistics knowledge, programming skills, and some practical trading experience. Large investment firms, such as hedge funds, banks, and prop trading firms, which are known to employ the quant trading approach often have a dedicated quant team that creates their computer algorithms and does their market analysis to find trading opportunities, as well as other traders that manage risk and take care of the trade execution.
In such a setting, quants can work directly with those traders, providing them with pricing or trading tools, and they are usually called “front-office” quants. On the other hand, in the “back office,” quants conduct research, develop and validate the models, and create new trading strategies using those models. Thus, when hiring quants, a firm looks for a degree in math, statistics, or software engineering, as well as a certification in financial modeling. An experience in data mining and real-live exposure to the market may also be required.
However, now that many brokerages and trading providers are beginning to allow their clients to trade via API, some quant traders tend to trade for themselves by coding their own systems that trade for them. Rather than going through an entire research and strategy development, some may customize and automate an existing strategy with a proven success rate by creating an algorithm to run it instead of just identifying opportunities and having to execute the trades manually.
Whether quants are working for a firm or trading for themselves, what they do requires substantial computer programming expertise and the ability to work with numerical data and application programming interfaces (APIs). So, they need to be very good in several coding languages, including C++, Java, MATLAB, and Python.
How do quants make money?
As you may have realized from our discussion so far, quants have two career options:
- Working with an investment institution, such as hedge funds, trading firms, banks, insurance companies, and so on
- Trading for themselves
Working for a financial trading institution
Each of those career paths can make them a lot of money. Quants that work in financial institutions may work as front-end quants — providing the traditional traders in the firm with pricing or trading tools. They may also work in the back office, where they create and validate new models, conduct research, and develop new trading strategies. However, in banks and insurance companies, the work is focused more on risk management than trading strategies. While front-office positions are typically more stressful and demanding, they are better compensated.
Whichever place they work in a financial firm, quants are among the most highly paid professionals, about the same level as investment bankers. Some of them even earn as high as seven digits per annum, but many are in middle six digits. They also earn fat bonuses, which may be as big as the salary, each year.
Trading for oneself
While the majority of quants work for the financial firms, which can afford the supercomputers and data feeds necessary for the quantitative analysis, a growing number of them are now trading on their own. These traders set up their trading rooms and subscribe to the necessary data and live quotes. They do their research, create a strategy, develop the right model, write the code, and run their algo system. While profitability varies with traders, many of them still make good money for themselves.
Basically, the required skills to start quant trading on your own are the same as the ones necessary to work in a financial firm. So, if you hope to try out quant trading for yourself, there is a need to have the exceptional mathematical knowledge to be able to build and test your statistical models. In addition to that, good programming skills will enable you to create your system from scratch. You will also need a good understanding of mathematical concepts, such as kurtosis, conditional probability, and value at risk (VaR). But even with all these skills, there is no guarantee that you will make money; you may even lose money.
How much are quants paid on Wall Street?
Quants who work with financial firms — be it in Wall Street or Chicago or other areas where investment firms tend to cluster, such as Boston, Massachusetts, Stamford, and Connecticut — are among the highest-paid professionals in the financial industry. It is a well-known fact that investment bankers rule Wall Street, but quants are closely behind them.
Some highly experienced quants are paid up to seven digits per annum, even before bonuses, and the bonuses can be as high as the basic salary or even more than that. But only a few of them are at this level. The majority are the middle six figures and may get to high six figures or seven figures with bonuses.
Compared to other professions, new entrants are also paid well. It is not uncommon to find an entry-level quant position with salaries of about $250,000 or more per annum, which can quickly increase $500,000 or more per year when the quant starts to earn bonuses. As with most careers, the main determinants to landing high-paying jobs is a resume filled with experience — especially with well-known employers — as well as making use of recruiting firms and professional networking for opportunities.
Of course, the highest-paid positions are with investment institutions, such as hedge funds or other trading firms, and part of the compensation depends on the firm’s earnings, also known as the profit and loss. Ironically, banks and insurance companies may not pay as well as the hedge funds do.
Can quants make millions trading for themselves?
While the highest earning quants among those working with financial firms can definitely make millions in a year or a couple of years, it is not that easy for quants who chose to trade for themselves. Not all of them make money from trading, let alone making millions. Some even lose their trading capital.
Apart from having all the necessary skillset required of a serious quant — mathematical, programming, and trading skills — one of the key factors in making good money from trading is having enough capital. No matter how good you are, it will take a very long time to grow a $5,000 account to $1 million. The truth about trading your own account is that you need huge money to make huge money. If your system is making, on average, a modest return of 30% per annum, you will need to up nine years to grow a $100,000 account to a million dollars, but you will only need 3 years to grow a $500,000 to over a million dollars.
Another factor is the mental skills for handling your own capital. Trading properly is easier when your money is not on the line, which is why a quant who has been making money for an investment firm may initially struggle to make money when trading for him/herself. Even when the entire process is automated, the fellow may find it difficult to properly allocate capital and manage account risk.
Furthermore, trading for yourself might mean that you have to be paying your bills from your trading income since that may be your only source of income. It is a lot more difficult to grow your account when you have to depend on your trading profit for sustenance.
Nevertheless, if one has the necessary skills, enough capital, and a well-thought-out plan, it is possible to grow and become a millionaire from trading.
What you need to succeed as a quant
Now, let’s take a look at the skills and qualifications you need to become a quant and secure a position as one. They include the following:
- In-depth knowledge of mathematics and financial models
- Necessary qualifications and certifications in the relevant fields
- Programming skills
- Some market experience
Mathematical and statistical Knowledge
While many financial securities, such as options and convertibles, are easy to understand conceptually, they are very difficult to model. Owing to this complexity, quants are expected to have the highest level of mathematics and computation skills to be able to create useful models and test them in a real-market environment. The value of a quant is in his/her ability to structure a complex problem. It is expected that a quant should understand the following mathematical concepts:
- Probability and statistics
- Calculus, including differential, integral, and stochastic
- Linear algebra and differential equations
Apart from the core mathematical and statistical knowledge, a quant should understand major financial topics such as the following:
- The capital asset pricing model
- Portfolio theory
- Equity and interest rate derivatives
- Credit-risk products
Furthermore, a quant may choose to specialize in specific products, such as commodities, foreign exchange (Forex), or asset-backed securities.
Education and Certifications
Most investment firms look for a Ph.D., or at least a master’s degree, in a quantitative subject, such as mathematics, statistics, or econometrics. A Master’s degree in financial engineering or computational finance may also be an effective entry qualification for quant careers.
An MBA is not enough to land a position as a quant unless the applicant also has a very strong mathematical or computational skill set as well as some solid experience in the financial markets. Most financial certifications, such as the Chartered Financial Analyst (CFA) designation may not add much value to the resume of a prospective quant. However, the Certificate in Quantitative Finance (CQF), which can be earned online in a six-month intensive program, may add something extra.
Programming skills are also crucial to becoming a quantitative analyst. High-frequency trading applications typically need C++, while offline statistical analysis is performed in MATLAB, SAS, S-PLUS, or a similar package. In addition, pricing knowledge may also be embedded in trading tools created with Java, .NET, or VBA, and they are often integrated with Excel — Monte Carlo techniques are essential.
It is also good to have some trading experience to understand the dynamics of the financial markets so as to create models that take those into consideration. The financial market is not a static environment and conditions can change pretty quickly. Models that work today may not work well tomorrow, so a quant needs to consider that in making capital allocation.