Does Every Buy-Side Trader Need To Be a Quant?

Advanced Trading: How has the life of the buy side trader changed in the past 10 to 15 years? Things are more automated now, algos do the actual trading so what does a hedge fund or buy side trader do these days?

Tim Grant, Benchmark: This is highly dependent on the asset class in question. Though algo trading has become more prevalent in the FX and equity markets, fixed income markets remain fundamentally dark and, therefore, algo or high frequency trading is broadly not feasible. This means that traditional skills around relative value, fundamental and macroeconomic analysis remain essential for a successful buy side fixed income trader.

Equally important is an understanding of market technicals and trading dynamics among market participants and in fixed income timely and accurate pricing information is at a huge premium.

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Advanced Trading: What skills does a new member of the Buy Side need these days? Should they know programming as well as have an MBA?

Grant: This is dependent on asset class. Broadly, however, the assertion that programming is as important as analytical skills or an MBA is false. There is no doubt that a more quantitative skill set is becoming increasingly desirable as tools become more sophisticated and allow a more transparent perspective on risk in terms of accuracy and frequency. There is ultimately, however, no substitute for deep analytical abilities and the traditionally highly valued skill of being able to decompose risk and develop convictions within a disciplined trading strategy. This is especially true within fixed income.

Advanced Trading: Does every Buy Side trader need to be a quant?

Grant: There will always be certain traded products where a more quantitative background can give an edge, such as some complex derivatives and certainly in the algo space. More important is the ability to understand and trade liquidity. As real time and accurate liquidity measures, such as those being developed for the OTC credit markets by former traders and market professionals, come online, the ability to incorporate this perspective into a profitable trading strategy will be essential.

Advanced Trading: With automation do firms need fewer traders and more sales people? Is this more of a client management role these days?

Grant: As a blanket statement this does not hold true and, in fact, we often see the opposite. As markets become transparent in a given asset class the role of both trader and salesperson certainly change and likely there are fewer people required to service a higher trading volume (with lower margins). As an illustration, take the US corporate credit market for bonds and credit default swaps. With time, markets have slowly become more liquid (notwithstanding the recent perturbations in liquidity in the credit markets).

Subsequently, the role of the client manager has become less important and the need for a trusted partner and source of value added advice has become more prevalent. Clients have relationships with firms rather than individuals and as we cross a new frontier of transparency with the possibility of real time pricing, this will only act as a catalyst to that process.

Advanced Trading: Do young math grads even want to work for Wall Street these days or would they rather work at Google or Facebook? Have the capital markets lost their luster with smaller bonuses and Occupy Wall Street?

Grant: There's certainly a palpable shift in sentiment from new graduates who seem to be thinking twice about roles on Wall Street. And there's no doubt that they are right to think twice because we are in the midst of tectonic shifts in business models across both the buy side and the sell side.

Google, Facebook and other high tech companies are certainly attracting talent that may have otherwise gone into finance, but there is a new breed of companies in the financial sector, which are themselves attracting significant young talent. They fuse the knowledge of the sell side banks, the entrepreneurial zeal of the smaller buy side players, and the sophisticated and high tech underpinnings of companies like Google, and represent an important evolution of market microstructure.

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio