Category Archives: Creative

At times I get a little more creating and translate a story, review a book, share my thoughts on a quote, or write something on the fictional side. Here they are…

How to Take Beautiful Pictures

I recently learned a technique in portrait photography from this artist friend of mine. He told me that one could use backlight to create beautiful portraits. I had always thought that backlight was a bad thing, which was something my dad taught me. I trusted him. After all, he used to take impressive portraits with his faithful Yashica Electro 35. Later on, after acquiring my first SLR, I spent a lot of time understanding the merits of TTL (Through-The-Lens) metering and fill-flash to counter the evils of backlight.

So when Stéphane told me that the best way to capture nice portraits is to have the sun behind my subject, I was shocked. But experience had taught me to always pay attention to Stéphane. He used to take better pictures with a drugstore paper camera than I could with my prized Nikon SLR. He was right, of course. With the sun behind them, your subject doesn’t have to squint and screw up their eyes against the light. They are less distracted and tend to smile more readily. And, most importantly, their backlit hair looks magical.

To do backlight portraits right, however, you have to be careful about a couple of things. First, make sure that you don’t have direct sunlight on your lens, which will create unseemly flares. I’m sure the next time I meet him, Stéphane will teach me how to use flares to my advantage. But for now, I would avoid direct light on the lens. Look for a spot in the shade. For instance, look for a tree casting a shadow. Don’t try to stand in the shadow, but try to get the shadow on your face, which is where the camera is likely to be. Get the tree in between you and the sun. How do you do it in practice? Just turn around and look at the shadow of your head; if it is hidden within another bigger shadow, you are safe. If not, move.

Stephane in CassisThe second thing to pay close attention to is the background. It cannot be too bright, or the average metering of your camera will underexpose your subject’s face. (Again, another dictum the creative photographer will probably scoff at). Look at the portrait of Stéphane himself, taken by me the day after I got the revelation about backlight. You can see my reflection on his glasses, trying to crouch low so as to get the dark hill in the frame rather than the bright beach sand. I think this is a nice photo, at least technically. Stéphane looked at it and complained that he looked like a James Bond villain!

Kavita in Carnoux
Here is a backlit portrait of my lovely wife. See how the framing includes the dark shrubbery in the background giving the nice contrast and brightness to the face. All right, I will admit it, the composition was probably a lucky accident. But still, I wouldn’t have attempted this snap unless I knew that backlight could be good. So be bold, experiment with backlight. I’m sure you will like the results.

Here are some dramatic backlight portraits by a gifted photographer.


The last lifecycle event of a trade is, of course, its termination. It can be triggered for a variety of reasons. Whatever the reason may be, when a trade is terminated, it calls for settlements and documentation archival by Back Office. In addition, it may trigger public disclosures (in an aggregate form) by Finance, and incentive adjustments by Human Resources.

The common reasons for trade termination and the workflow it triggers are depicted in the figure below.

Trade termination

  • Trade Maturity: When a trade or an option reaches maturity, it gets terminated, which is the most uneventful mode of trade termination.
  • Option Exercises: If the bank or its counterparty exercises an option, it gets terminated. Exercises can take place any time during the lifetime of a trade, or only on specific dates, depending on the termsheet description of the product involved.
  • Barrier Breaches: Barrier options (or knock-in and knock-out options) may breach the pre-defined barriers and may get terminated generating settlements or new trades.
  • Target Triggers: Instruments that accumulate toward a target (such as range accruals or target redemption forwards) may get terminated when the target is reached.
  • Trade Novation: Novation is the special process by which the trade counterparty changes. In effect, the original counterparty sells the the trade or the option to another one. When a novation happens, the original trade is terminated and a new one initiated with special characteristics.

Validation and Processing

Once a trade is booked into the trading platform database, it triggers a whole chorus of validation and daily processing. The validation process is a to-and-fro dance between the trading desks in Front Office and the control units in Middle Office, all mediated by the trading platform. The traders may insert a trade on an experimental basis. Once they are convinced that it is a viable trade, they push it to a confirmed state, which will be picked up by the treasury control unit. If the traders decide to discard the trade, the trade ends up in the trash pile (but never deleted permanently). The control unit typically works in a four-eye, double validation mode. They verify the trade inputs, and control limits such as the number of trades allowed for a particular product. If the trade passes their tests, they set its status to a validated state, which triggers a second level of checking. If the trade fails either level, they are pushed back into a state that allows the traders to either amend it or discard it.

Trade validation

Once the trade is fully validated, the processing part begins. It involves multiple teams and multiple perspectives, starting from how a trade should be identified to what the basic information unit that should be identified.

Daily Processing

As shown in the figure above, regular processing takes place in various business units.

  • Trading Desks monitor trades for hedging and rebalancing, monitoring profit and loss (P/L), and staying within the risk limits. The senior traders get distilled information from the junior ones through this regular processing and take appropriate actions.
  • Middle Office plays a crucial role in regular process. They monitor target and barrier breaches, rate fixings and option exercises, cash flow generation, and spawning other cash trades. They generate (with the help of the trading platform) appropriate accounting triggers for Back Office to act on, in order to perform settlements, trade confirmation, documentation archival etc.
  • Product Control is another business unit embedded within the middle office that actively monitor the P/L on a daily basis, with a view to explaining their movements based on the sensitivities and market movements, providing an independent computation of the profitability of the trading activity. Their computations of reserves feed into the finance and human resources departments and affect trader incentives and compensation.
  • Market Risk Management also has hordes of staff employed to perform daily monitoring of trading limits (such as notionals, delta-equivalents etc.) as well as VaR computation, Stress VaR tests. In most banks, they also handle compliance reporting to regulatory authorities and provide concise and actionable intelligence to the upper management who decide the trading strategies.

As we shall soon see, the different and specific focus of each business unit demands a unique projection (which we will call a perspective) of the trading information from the trading platform. This requirement is one of the things that make its design and implementation so challenging.

Trade Inception

The inception events of a trade can be classified into two categories. The pre-trade activities are those that have to take place even before the first trade is booked. The per-trade inception activities are the ones specific to each trade.

Pre-trade activities

The pre-trade activities are related to new product on-boarding and approval. As we saw, in-house trading platforms are designed to be nimble and responsive. In principle, it should take little time for a new product to be on-boarded. The last system I worked on, for instance, was designed to deploy a new product idea in a matter of minutes. But the architects of such systems tend to forget the human, process-related and control elements involved in it. As the slide above illustrates, a new product idea or a new pricing model originates from the work of a model quant or a structurer in Front Office. But before it gets anywhere near a production system, the pricing model needs to be validated, typically by the analytics team in the Middle Office risk management group. Once validated, the product goes through a tortuous approval process that may take weeks or months, and then a formal deployment process, which may again take weeks or months. When that process is completed, the product is available for trading in the trading platform.

Once available, the product can be instantiated as a trade. Each trade instance goes through its own validation and approval process. The trade request may originate from the sales or structuring team in Front Office. They will also prepare the term sheet and other legal documents. Once these tasks are completed, a trade is booked into the trading platform.

Per-trade process

These inception events are depicted in the second slide above. One of the crucial steps in the approval process is the credit control. As we described earlier, the credit risk management team uses a variety of tools to assess the risks involved. With their approval, and with the traders understanding of the market price of the product, a product available in the trading platform becomes a trade in the database. And the lifecycling fun begins.

Life of a Trade

With the last post, we have reached the end of the second section on the static structure of the bank involved in trading activities. But a trade by itself is a dynamic entity. In this third section, we will look at the evolution of a trade, and see how it flows back and forth between the various business units we described in the last section. We will make the this section and the next into a new series of posts because the first series (on How Does a Bank Work?) has become a bit too long.

Back Office and Finance

As with most dynamic entities, trades also have the three lifecycle stages of inception, existence and termination. What we need to understand clearly is what the processes are around these general stages. What are the business units involved at each of these stages? What do they do? And how do they do it?

Trade lifecycle

We will see that from our perspective, the lifecycle interactions are all mediated by the trading platform. It is not so much because everything is contained within the trading platform, but because we are interested only in that limited set of processes that are. In some sense, the last section was about the physical, spatial description of the bank, and this section is going to be on the temporal evolution and dynamics of how things work on that structure.


Before leaving India in the late eighties, I could speak a bit of Hindi as my third language. English was the second language, and Malayalam my mother tongue. I wasn’t fluent in Hindi by any stretch of imagination, but I could speak it well enough to get rid of a door-to-door salesman, for instance.

This is exactly what my father (a confirmed Hindi-phobe) asked me to do during one of my visits home when a persistent, Hindi-speaking sari salesman was hovering over our front porch. By that time, I had spent over six years in the US (and considered my English very good) and a couple of years in France (enough to know that “very good English” was no big deal). So to get rid of the sari-wala, I started to talk to him in Hindi, and the strangest thing happened — it was all French that was coming out. Not my mother tongue, not my second or third language, but French! In short, there was very confused sari salesman roaming the streets that day.

True, there is some similarity between Hindi and French, for instance, in the sounds of interrogative words, and the silly masculine-feminine genders of neutral objects. But I don’t think that was what was causing the outpouring of Frenchness. It felt as though French had replaced Hindi in my brain. Whatever brain cells of mine that were wired up to speak Hindi (badly, I might add) were being rewired a la franciaise! Some strange resource allocation mechanism was recycling my brain cells without my knowledge or consent. I think this French invasion in my brain continued unabated and assimilated a chunk of my English cells as well. The end result was that my English got all messed up, and my French never got good enough. I do feel a bit sorry for my confused brain cells. Karma, I guess — I shouldn’t have confused the sari salesman.

Though spoken in jest, I think what I said is true — the languages that you speak occupy distinct sections of your brain. A friend of mine is a French-American girl from the graduate years. She has no discernable accent in her Americanese. Once she visited me in France, and I found that whenever she used an English word while speaking French, she had a distinct French accent. It was as though the English words came out of the French section of her brain.

Of course, languages can be a tool in the hands of the creative. My officemate in France was a smart English chap who steadfastly refused to learn any French at all, and actively resisted any signs of French assimilation. He never uttered a French word if he could help it. But then, one summer, two English interns showed up. My officemate was asked to mentor them. When these two girls came to our office to meet him, this guy suddenly turned bilingual and started saying something like, “Ce qu’on fait ici.. Oh, sorry, I forgot that you didn’t speak French!”

Summary – Structure of a Bank

We have now completed our discussion on the general structure of a typical investment bank trading arm. We went through the Front-Middle-Back Office divisions and the functional and business units contained within. Note that we looked only at those units that have a bearing on trading and quantitative development activities. Note also that this structure is fluid and may be implemented with different names and hierarchies in different banks depending on their corporate strategies and focus. We presented the trading platform as the enabler or backdrop of most of these activities of the global treasury (where exotics trading activities take place) and the associated business units (that handle various aspects of the trade workflow) mainly because we are looking at the whole thing from the quantitative development perspective.

Back Office and Finance

From this perspective, you see the trading platform as the most important tool (or collection of tools) in the bank. It mediates almost all the interactions among the various business units. Furthermore, as we shall see in future posts, the trading platform defines the trade workflow and lifecycle management. Therefore, it will also become important for the quantitative developers to understand how these business units view trades and the trade booking and management process. Their trade perspectives will have to influence the design of the trading platform.

Am I Pretentious?

I was chatting with an old friend of mine, and he told me that he never felt inclined to read anything I wrote. Naturally, I was a little miffed. I mean, I pour my heart and soul into my books, columns and these posts here, and people don’t even feel inclined to read it? Why would that be? My friend, helpful as always, explained that it was because I sounded pretentious. My first reaction, of course, was to get offended and say all kinds of nasty things about him. But one has to learn to make use of criticism. After all, if I sound pretentious to somebody, there is no use pointing out that I am not really pretentious because what I sound like and look like and feel like is really what I am to that somebody. That is one of the underlying themes of my first book. Well, not quite, but close enough.

Why do I sound pretentious? And what does that even mean? Those are the questions that I shall analyze today. You see, I take these things very seriously.

A few years ago, during my research years here in Singapore, I met this professor from the US. He was originally from China and had gone to the states as a graduate student. Typically, such first generation Chinese emigrants don’t speak very good English. But this guy spoke extremely well. To my untrained ears, he sounded pretty much identical to an American and I was impressed. Later on, I was sharing my admiration with a Chinese colleague of mine. He wasn’t impressed at all, and said, “This guy is a phoney, he shouldn’t try to sound like an American, he should be speaking like a Chinese who learned English.” I was baffled and asked him, “If I learn Chinese, should I try to sound like you, or try to hang on to my natural accent?” He said that was totally different — one is about being pretentious, the other is about being a good student of a foreign tongue.

When you call someone pretentious, what you are saying is this, “I know what you are. Based on my knowledge, you should be saying and doing certain things, in a certain way. But you are saying or doing something else to impress me or others, pretending to be somebody better or more sophisticated than you really are.”

The implicit assumption behind this accusation is that you know the person. But it is very difficult to know people. Even those who are very close to you. Even yourself. There is only so far you can see within yourself that your knowledge even of yourself is always going to be incomplete. When it comes to casual friends, the chasm between what you think you know and what is really the case could be staggering.

In my case, I think my friend found my writing style a bit pompous perhaps. For example, I usually write “perhaps” instead of “may be.” When I speak, I say “may be” like everybody else. Besides, when it comes to speaking, I’m a stuttering, stammering mess with no voice projection or modulation to save my life. But my writing skills are good enough to land me book commissions and column requests. So, was my friend assuming that I shouldn’t be writing well, based on what he knew about how I spoke? Perhaps. I mean, may be.

However, (I really should start saying “but” instead of “however”) there are a couple of things wrong with that assumption. Everyone of us is a complex collage of multiple personas happily cohabiting in one human body. Kindness and cruelty, nobility and pettiness, humility and pompousness, generous actions and base desires can all co-exist in one person and shine through under the right circumstances. So can my weak articulation and impressive (albeit slightly pretentious) prose.

More importantly, people change over time. About fifteen years ago, I spoke fluent French. So if I preferred conversing with a French friend in his tongue, was I being pretentious given that I couldn’t do it five years before that time? Ok, in that case I really was, but a few years before that, I didn’t speak English either. People change. Their skills change. Their abilities change. Their affinities and interests change. You cannot size up a person at any one point in time and assume that any deviation from your measure is a sign of pretentiousness.

In short, my friend was an ass to have called me pretentious. There, I said it. I have to admit — it felt good.

Back Office, Finance et al

From the quant and quantitative development perspective, Back Office is a distant entity. Their role is vital in the trade lifecycle, as we shall see later, but they are outside the sphere of influence of the quants and developers.

Back Office and Finance

Back Office concerns itself mainly with trade settlements and accounting. Upon maturity, each trade generates a settlement trigger usually with the help of a vended trading or settlement platform, which will be picked up and acted upon by the Back Office professionals. They also take care of cash and collateral management.

Finance functions are closely related to Back Office operations. Among a host of accounting related operations, they have one critically important task, which is to produce annual reports. These reports get publicly scrutinized and determine everything from the stock price to performance bonuses, salary levels etc. Finance professionals may require quant and analytic help for certain tasks. In one of my previous roles, I was asked to estimate the fair market value of the employee stock options (ESOP) for the purpose of accounting for them in the annual reports.

The process of pricing ESOP is similar to (although a bit more complicated than) normal call option pricing. Among other things, you need the volatility of the underlying stock in order to calculate the price. I used the standard exponentially weighted moving average method to estimate it from the published stock prices over the previous two years or so to compute it because that was all the data I had access to. Before that time, there was some corporate action and stock ticker name had changed (or did not exist, I don’t remember which). In any case, I knew that the impact of adding more data prior to that date would be negligible because of the exponentially diminishing weights; it would be much less that the round off error in quoting the price to four decimal places, for instance. But the accountant who was asked to look at the computation was upset. She came to me with her rulebook and referred me to page 57, paragraph 2, where it was specified that I was supposed to use ten years for the EWMA computation. I tried, in vain, to explain to her that I couldn’t. She kept saying, “Yeah, but page 57, para 2….” I went on to explain why it didn’t really make any difference. She said, “Yeah, but page 57, para 2….”

Accountants and Finance professionals can be that way. They can be a bit “technical” about such things. In hindsight, I guess I was being naive. I could have just used a series of zeros to back-populate the missing eight years of data (after all, if the ticker price was not quoted, it is zero), and redone my ESOP valuation, which would have given an ESOP price identical to what I computed earlier, but this time satisfying both Finance and the quants.

IT and other support

A team which quantitative developers work closely with is Information Technology. They are charged with the IT infrastructure, security, networking, procurement, licensing and everything else related to computing. In fact, quantitative development is, as I portrayed it earlier, a middle layer between IT and pure mathematical work. So it is possible for quantitative developers to find themselves under the IT hierarchy, although it doesn’t work to their advantage. Information Technology is a cost center, as are all other Middle and Back Office functions, while Front Office units connected to trading are profit centers. Profit generators get compensated far better than others, and it is better to be associated with them than IT.

Rates and Valuation

Marking trades to market requires up-to-date market data. There are two types of market data required for pricing — one is the live spot rates, volatilities, interest rates etc. This type of data is collectively called rates. The second type is the kind that goes into defining the products being traded, or the characteristics of the rates. These include definitions of interest rate pillars, bond coupon dates and rates etc. This second type is considered static data.

Valuation and Product Control

The rates management team is in charge of the first type data. They ensure that the live data providers are consistent with each other and that the data itself is accurate. They do this by applying various automated tests and limits to the incoming rates to flag any suspicious movement or inconsistency. Once approved by the team, the data gets consumed by the trading platform. The rates management is a critical role, and the market data is often stored and served in dedicated databases and services. Because of the technicalities involved, this team works closely with the information technology professionals.

The static data is typically managed by a separate team independent of rates management. They go by various names, Treasury Control being one of them. They set up traded products and rates pillars and so on. In some banks, they may also be responsible for trade input data validation.

Two other important functions of Middle Office are valuation and product controls. These functions are pretty far removed from quantitative development and trading platform. These teams ensure that the trade valuations and P/L movements are consistent with market movements. Valuation Control takes a close look at pricing and P/L mostly at trade level while Product Control worries about P/L explanation typically at portfolio level. Since we have the Greeks (rates of change of product prices with respect to market quantities and time), we can compute and predict the change in the prices (or P/L movements) using Taylor series expansion. If the independently computed prices (using actual market rates) are at odds with the predicted ones, it points to an internal inconsistency and should trigger a detailed investigation.

Product Control may also help Finance and Human Resource with valuation reserves process, which estimates the level of exaggeration in the profit expectations of ebullient traders. Since traders’ compensation is tied to the profit they generate, this process of assigning reserves against profit is essential in ensuring equitable performance rewards.