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While looking up on quants, I came across many sources that cited 'pricing quants' as one of the biggest chunks among all quant positions. But then I also came across many software companies providing tools that they claim can price even exotic derivatives with exotic underlying.

  1. Are there really such ready made modeling tools or at least a library of such tools that can be easily put together even by a trader?
  2. If yes, what exactly is (or will be) the role of pricing quants, with advanced training in stochastic calculus etc?

PS: There may be some overlap with the question Does pricing quant still have bright future? but that comes from an unrelated view point that exotic derivatives are shrinking, although the only answer there did mention 'software vendors' as one of the futures.

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FO is shrinking across the large investment banks. The market is not developing new products that will need new pricing formulas, if anything it is reverting to more vanilla structures.

Nowdays FO quants typically hack existing models around the corners to manage new market conditions (change Sabr a bit to deal with negative rates, refine the treatment of Fed meeting dates, deal with many curves, etc).

Also there are new regulatory requirements that affect the FO and engage FO quants. In addition the FO needs to provide tools/functionality for traders and desk risk managers to manage regulation. Things like better P&L attribution for FRTB, better treatment of shocks used for stress testing and stressed VaR, better alignment of sources for BCBS239, initial margins, 'what if'/ capital impacts, and more. This is again dev/db work but not pricing.

FO quants are expensive, and good ones are hard to find. Therefore banks would not easily fire them in large numbers, however they can stop hiring new talent and recycle existing headcount.

Fresh quants are hired in Risk to my knowledge. Actually, in many banks the FO has attempted to take over risk functionality. But this does not require pricing knowledge (actually the FO frame of mind might make things worse). For Risk you need good grasp of time series/ econometrics, statistics, economics, and a decent all-round understanding of FO models and market structure. You also need to be a good communicator.

Quants are also hired in hedge funds. Again this does not require pricing, but stats, machine learning, basic finance and databases. Unless you work at a very particular place.

This is obviously my personal experience (I am heading a team of quants in London). You can see that others here have a different perspective.

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  • $\begingroup$ Thanks! I have a couple of clarifications (1) I can see why funds would want to keep quant trading modeling inhouse, but I thought risk modeling can benefit from external vendors of software that are easy to use by risk managers directly, like in the case of those vendors supplying pricing softwares for traders? (2) By dev/db are you implying more of non-quant role in the case of compliance quant? $\endgroup$ – GuSuku Dec 7 '15 at 15:35
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There is absolutely bright future being a pricing quant, so don't make it a reason for you not doing a degree in financial engineering.

Being able to buy a relative cheap (still not that cheap, eg: Numerix charges like a million...) solution for quantitative pricing doesn't mean you don't need a quant. This is like saying we don't need a bus driver because we can simply start off the engine and let it go. Pricing quants are needed to use those softwares, someone must be able to interpret the outputs. A pure software engineer wouldn't be able to interpret a volatility surface generated by a software. This is like we need a bus driver who understands how to control a bus.

As far as I know, most of the quants spent most of the time on model validation and make sure they work comply with functional specification. They wouldn't spend all their time on stochastic calculus, they would learn and interact with other stakeholders in the business. There is indeed not much opportunity for pricing new derivatives. But we'd still need them for any quantitative task.

Nowadays, most of the actual pricing code is done by external software vendors. But you'd still need a quant to be able to talk to the vendor!

I used to work in a quantitative pricing vendor firm. It wasn't as advanced as you might have thought. We spent most of our pricing efforts in copying formulas from "The Complete Guide To Option Formulas". We actually spent most of our time on consultation, not actual pricing.

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  • $\begingroup$ In your analogy, my question would be, are driverless buses (at least those that need very minimal human control, if any) already here or about to arrive in pricing world? $\endgroup$ – GuSuku Dec 7 '15 at 13:31
  • $\begingroup$ I agree that even driverless buses are not going to get rid of drivers immediately, but will result in a downward trend in their demand (even if there is a short demand for few of them them in those new vendors providing driverless algorithms). Dont you agree? $\endgroup$ – GuSuku Dec 7 '15 at 17:17
  • $\begingroup$ @crackjack I personally don't agree, because there're lots of opportunities other than just implementing pricing code. $\endgroup$ – SmallChess Dec 7 '15 at 22:24
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I do not know about name of specific software that is being used by trader but you must have heard about Algorithm Trading. It involve use of advance techniques to identify trend and price differences in the securities through automated computer software. No human being is involved in execution of such trade. It rely entirely on use of software rather than human wisdom. Such software are expensive and beyond the reach of common investors but very common among big investment houses.

Now, comes to your second question about role of Pricing Quants in future. Would computer eliminate the Qunats Experts in future? Answer is absolutely NO. Software are static but the market and the products traded in the market are dynamic. You always need some Quants Experts to price new evolving products, to understand and model the behavior of investors(which now has become important part of investment strategy) and for managing risk.

Software are not entire solution to the problem. At the end you still need Quant Expert to code these algorithm in the software.

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