Finance for Physicists

This page arose because I am often asked for advice and suggestions about how to prepare for and get a job on Wall Street as a quantitative analyst.  Everything here is subjective and personal opinion, but I hope that you will find it useful.

Here is a good article from the Dec 1999 issue of The Industrial Physicist magazine, which describes the impact physicists are having on Wall Street:

Risky business on Wall Street

There is no doubt that physicists and "quants" make a real difference to the way in which Wall Street works in the 21st century.  Read more about the trends and the dangers ...

Physics with finance at the University of Illinois at Urbana-Champaign

In order to provide a cheap and easy way for physics students at my home institution to become knowledgeable in finance, I created a course option that yields a Masters in Finance for Physics students. Students registered for the University of Illinois Physics Ph.D can be enrolled in the Masters in Finance program, and receive credit for their physics courses. In other words, you can get a Masters in Finance for relatively little extra work. This is highly recommended for students contemplating a career as a quant on Wall Street. Unfortunately, this option has been discontinued at the time of writing (2008).

Courses at other universities

There are many courses offered in computational finance at academic institutions.   A partial list is given in this article from the July 1999 issue of RISK magazine.   They offer useful training, of course, but if you are thinking of taking one of these programs, I suggest that you bear in mind the cost, the opportunity cost, and the fact that many of the physicists currently working on Wall Street are self-trained and apparently able to do their jobs.

Job hunting on Wall Street

To get a job on Wall St., it is essential to be well-prepared and knowledgeable about financial derivatives. The days are over when you could get in with no knowledge and expect that your physics Ph.D would be enough. A useful qualification is to do a Masters of Finance course, if your institution permits it. This may not go far enough however, and more advanced reading should be done.

A fun place to start is the ingenious Comix series, from the trade magazine Derivatives Strategy.

It is also worth doing a summer internship at one of the major investment banks.   Since entrepreneurial spirit is one of the qualities that they prize, I will let you figure out how to arrange that ...

Books

Here are some recommended books on the theory of derivative securities, together with comments:

• J. Hull, Options, Futures and Other Derivatives (3rd edition). Previous editions were called Futures, Options and other Derivative Securities.  In the mid 1990's this was the only book available, and it is still useful and has been somewhat updated.  Most physicists will, however, feel that the presentation is too heuristic.
  Compulsory reading.
  
  
• Neil Chriss, Black-Scholes and Beyond: Option Pricing Models.  Excellent overview of modern day finance, financial models, and their shortcomings.  A great blend of practical and theoretical knowledge, clearly presented.
  Compulsory reading.
  
  
• J.-P. Bouchaud and M. Potters, Theory of financial risk and derivative pricing: from statistical physics to risk management. Probably the best book I have seen in the "econophysics" field, focusing not on the standard quantitative finance calculations (i.e. the stuff that actually gets you a job on Wall Street), but on the far more interesting and important aspect of better modeling of financial markets. The authors have lots of real world experience, as well as being excellent physicists, so this is a great transition book for lapsed physicists to read.
  Recommended reading.
  
  
• P. Wilmott et al., Option Pricing. Presents option theory from the differential equation point of view, with little stochastic differential equation theory. Some emphasis on simple numerical methods. Beware: poor discussion of interest rate derivatives.
  Accessible introduction for physicists, but not sufficient on its own.
  
  
• M. Baxter and A. Rennie, Financial calculus. A very good and readable introduction to stochastic differential equations, martingale theory and option pricing. The emphasis complements Wilmott et al., and the writing is clear and lucid, and occasionally entertaining.
  Recommended reading.
  
  
• D. Shimko, Finance in continuous time: A primer. Lucid and crisp presentation of stochastic calculus with lots of examples on which to practice manipulations.
  Recommended reading.
  
  
• P. Jorion, Value at Risk. An elementary introduction to modern day risk management and the concept of value-at-risk.
  Suggested reading.
  

Here are some books that will give you a general background and are definitely worth reading if you intend to make this your career.  I know of at least one talented individual who eventually realised that Wall Street was not what he was looking for in life.  

• E. Derman, My Life As a Quant. A personal memoir of one physicist's journey from academia into quantitative finance. Derman's account is both a cautionary tale about the challenges of scientific and academic life and a realistic perspective about the "glamour" of Wall Street. Derman avoids superficial gloss and is refreshingly frank about the rewards and limitations of a career in quantitative finance. Recorded with equal candour are the author's limited successes in physics, the despair and loneliness of parts of his life, the invigourating success of parts of his work at Goldman, Sachs, and his dissatisfaction with some aspects of his career on Wall Street. The book is particularly successful where it describes the physical intuition he used to develop his most substantial contributions to financial modeling: interest rate dynamics, and the volatility smile. I found this part skillfully written, particularly as it highlights the point I personally make in my own presentations: that the greatest value physicists can potentially provide to Wall Street is better modeling, rather than better and faster calculations on wrong or ill-founded models. Another important lesson from the book is the value of listening to the "customer" (in this case, traders), for whom an easy to use graphical interface is more important than all the math in the world. Derman's book is a must-read for would-be quants and academic physicists.
  
  
• G.J. Millman, The Vandal's Crown. A rather breathless account of the history of finance. The two chapters on "Nuclear Finance" and "Risk Management" are the most pertinent, describing modern day Wall St. Informative and easy to read.
  
  
• P. Bernstein, Capital Ideas. A readable history of financial economics, from Markowitz, who developed the theory of portfolio optimization to the more recent growth of the derivatives markets.
  
  
• Frank Partnoy, F.I.A.S.C.O. A completely "gloves off" description of the dark side of Wall St, which has provoked predictable denials from the industry. The author worked for several years on Wall St., not as a quant, but as an investment banker, designing sophisticated derivatives products at Morgan Stanley and CS First Boston to enable clients to hide investment losses, make risky bets on forbidden categories of investments etc. Controversial, scurrilous, cynical, almost libellous, and amusingly written in parts. The narrative ends with the author leaving Wall St. after realising that "everyone I knew who had been an investment banker for a few years, including me, was an asshole".
  
  
• Roger Lowenstein, When genius failed.  A very readable account of the failure of Long Term Capital Management, widely regarded as the preeminent hedge fund on account of the stellar reputations of its principals, two of whom were Nobel laureates.   LTCM's disastrous performance in the summer of 1998 threatened to cause a systemic collapse of the world's capital markets.  More ...
  

Getting a job

The most efficient way to get a job is to contact a headhunter (see below). However, you might want to take a look at some other resources to get some idea of what is out there:

QuantFinanceJobs.com and Quantster and Fincareer and PhD.org and QuantFinanceJob
are online job boards that cater specifically to quantitative finance professionals and potential employers.

Do make use of the following websites:

a. Monster.com ( http://www.monster.com )
    A must do!  Headhunters read this and will start calling you several days after you post your resume. 

b. Huxley Associates ( http://www.huxley.com/ )

c. Hagan-Ricci Group ( http://www.hrg.net/hrg/ )

Here is the contact information of headhunters with whom I or colleagues have had some contact in the past. Disclaimer: by providing these numbers below I am not making any recommendation about the quality of these individuals, and this list should not be considered any sort of endorsement of the services they provide.

Barry Franklin
Integrated Management Resources
51 West Elliot Rd., Ste 108
Tempe, AZ 85284
ph. (480) 460-4422
fax (480) 460-4424
barry@integratedmgmt.com

Bob Long
Denison Group
551 Madison Avenue,
New York, New York 10022
ph. (212) 588-8883
boblong@denisongroup.com

Thomas Gan
Options Group
(212) 982-8359
tgan@optionsgroup.com

Joshua Bloom
Candidates on Demand Group, INC
(212) 213-0982 x107
jbloom@codgi.com

Ed Vertucci
WidePoint Corp.
(630) 953-6520
evertucci@widepoint.com

Note:  The company primarily works in the Chicago area.

Jim Brescoll
Columbia Technology Corporation
(212) 280-5500
jbrescoll@columbia-tech.com

Here are other headhunters whose numbers I have been given in the past, but I have had no personal contact with them.  Disclaimer: by providing these numbers below I am not making any recommendation about the quality of these individuals, and this list should not be considered any sort of endorsement of the services they provide.   I do not even know if all the numbers below are correct.

Beth Akins (212) 759-6400
Jaime Fields (212) 513-7777 
Scott Gerson (212) 986-3344
Linda Greenberg (212) 286-9409
Robin Isacson (212) 254-4452
Jiin Kang (212) 947-7114
Deborah Kolb (818) 999-9891 
Tom Morgan (212)513-7777 (ext 358)/ tom@pencom.com
Steven Popper (212) 719-0101
Steve Newman (212) 687-9696
Bob Reed (212) 378-4830
Daniel Raz (212) 545-8511
Gail Tudisco (212) 980-1411
Dina Wehn (212) 675-3224

I would suggest that before you get in contact with a headhunter, have a resume prepared, and do the apppropriate readings in finance. Since most of the places will actually ask questions and trick questions related to options, one has to be both prepared and show them that you are serious and have undertaken the necessary steps. Also things usually progress rather quickly; you may be expected to go for an interview within two weeks.

Getting a job: Interviews

Interviews on Wall Street have two goals, primarily: (1) To see if you are bright and can think on your feet quickly and accurately; (2) To see if you have any background knowledge about finance. Goal (1) is usually accomplished with brainteaser questions that have no finance content. Goal (2) is usually accomplished by seeing if the candidate's proclaimed expertise survives a reality test. I once interviewed a candidate who claimed extensive familiarity with interest rate models but was unable to write down the stochastic process for the Hull-White model. If you are thinking of working on Wall Street, and do not know the answer to this simple question yourself, consider that the interest rate derivatives market is the largest in the world: for example, according to the US Treasury, the notional value of interest rate derivative securities held by US commercial banks at the end of the 4th quarter 2004 was $76 trillion. You might enjoy comparing this number with the US gross national product (GNP).

Excellent advice on how to give an interview is available here (along with lots of other useful advice), and this can also be used to the advantage of the interviewee.

Here is a website that has some good brain teasers to practice on: these brainteasers test your ability to construct and understand algorithms for challenging problems that are unfamiliar.

Here is a new book that contains specific interview advice for those being interviewed for quantitative positions on Wall Street:

Heard on the Street : Quantitative Questions from Wall Street Job Interviews by Timothy Falcon Crack.

Back to my home page.

Nigel Goldenfeld
Updated March 2008