Tag Archives: wilmott

My columns published in the Wilmott Magazine – a well-known publication targeted at quantitative finance professionals.

Hidup Perdagangan yang

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 (pada Bagaimana Adakah Kerja Bank?) 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.

Ringkasan – Struktur 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

Dari perspektif ini, 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. Tambahan pula, as we shall see in future posts, the trading platform defines the trade workflow and lifecycle management. Oleh itu, 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.

Pejabat Kembali, Kewangan 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). Dalam mana-mana, 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, misalnya. 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. Saya cuba, dalam hanya, 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. Beliau berkata, “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 (selepas semua, 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. Malah, 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.

Kadar dan Penilaian

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, turun naik, 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.

Pengurusan Risiko Pasaran dan Analisis

If you play in the market, you run the risk that it may move against you. This risk is, sudah tentu, market risk and we have a Middle Office team to manage it. Market Risk Management (MRM) ensures that the risk limits on the volumes and types of products traded are set in accordance with the risk appetite prescribed by the senior management. It also ensures, through regular processing and monitoring, that these limits are adhered to.


What is monitored are risk measures such as the Greeks and Value at Risk (VaR). The Greeks are the first and second order derivatives of the price of a security with respect to various market variables such as the price of the underlying, interest rates, volatility as well as trade specific entities like the time to maturity. The VaR is a statistical end point measure estimating the amount of loss at a given confidence level in the case of an adverse market movements, and is typically computed using the historical market movements over the past year or so. These risk measures are aggregated, sliced and diced in various ways to make it easy to monitor them, and reported to senior management, risk control committees, trading desks etc. The MRM team is also responsible for reporting to regulatory agencies, both in the form of regular compliance reports as well as ad hoc reports in response to drastic market moves.

Quants can find opportunities in the Analytics team embedded within MRM. This team is in charge of pricing model validation, which is the process of ensuring that the mathematical models deployed in trading systems and other valuations engines are both appropriate and correctly implemented. There is a significant overlap between the work that MRM analytics quants do and their Front Office counter parts (whom we called pricing or model quants). The Analytics team also takes care of any other quantitative tools needed in MRM or risk management in general. Such tools could include potential future exposures (PFE) for credit risk management, liquidity modelling for Assets and Liability (AML) dan lain-lain.

Pengurusan Risiko Kredit

Pengurusan risiko adalah satu fungsi kritikal pejabat Tengah. Risiko kredit adalah risiko di mana seseorang yang berhutang wang anda mungkin tidak mampu atau bersedia untuk menghormati kewajipan mereka. Dalam erti kata lain, mereka lalai atas kewajipan kredit mereka. Risiko ini diuruskan dengan bank yang menggunakan pelbagai alat statistik.

Middle Office

Apabila bank mengeluarkan anda kad kredit, ia mengambil risiko kredit yang anda tidak boleh membayar. Anda membayar kadar faedah yang insanely tinggi atas baki belum jelas tepat kerana risiko kredit ini. Risiko ini tidak bercagar. A gadai janji atau pinjaman kereta, sebaliknya, dijamin oleh ekuiti harta anda, dan anda membayar faedah yang jauh lebih rendah kerana cagaran.

Pasukan Pejabat Tengah Pengurusan Risiko Kredit (CRM) beroperasi menggunakan yang sama dua paradigma. Banyak cara yang sama seperti anda mempunyai had kredit pada kad kredit anda atau kemudahan kredit, setiap rakan niaga yang bank perdagangan dengan mempunyai had kredit tertentu berdasarkan penarafan kredit mereka sebagaimana yang disiarkan oleh agensi penarafan kredit seperti Moody atau Standard & Teruk. Masalah dengan mod ini menguruskan risiko kredit adalah bahawa bank itu tidak mempunyai cara untuk mengetahui berapa banyak kredit dimuatkan terhadap Kedudukan rakan niaga di bank-bank lain. Ia juga tidak mempunyai cara untuk mengetahui berapa banyak kad kredit anda mempunyai. Di Singapura, pihak berkuasa kawal selia, TETAPI, cuba untuk mengurangkan risiko orang akan bust akan memerlukan bahawa had kredit dua kali ganda gaji bulanan mereka. Bt mereka boleh mendapatkan kad kredit sebanyak mana yang mereka mahu dari bank-bank yang berbeza terhadap had yang sama, berkesan membatalkan niat baik di sebalik keperluan.

Ini muatan yang berlebihan terhadap penarafan kredit dielakkan apabila risiko diuruskan menggunakan cagaran. Sama seperti anda tidak boleh mengambil dua pinjaman gadai janji atas harta yang sama (tidak tanpa ekuiti yang mencukupi, apa-apa cara), pihak dalam perdagangan juga tidak boleh menggunakan cagaran yang sama untuk berbilang perdagangan. Bank dan pihak yang biasanya menggunakan bon sebagai cagaran dan fizikal mereka semasa bertukar-tukar transaksi bercagar.

Sebelum peniaga Front Office boleh membuat suatu perjanjian perdagangan dengan rakan niaga, mereka perlu mendapatkan kelulusan daripada pengawal kredit yang akan menilai pendedahan dan menyemaknya dengan had yang telah ditetapkan. Penilaian pendedahan menggunakan teknik seperti pendedahan potensi masa depan (PFE) berdasarkan bilangan besar simulasi pasaran masa depan yang berpotensi.

Selain daripada risiko kegagalan pihak semasa hidup perdagangan yang, Profesional CRM bimbang tentang potensi untuk lalai dalam kelewatan dalam penyelesaian — selepas kematangan perdagangan yang (di mana bank adalah wang yang) dan penyelesaian yang. Risiko ini yang dinamakan risiko penyelesaian yang.

Pejabat Tengah

Struktur Pejabat Tengah dalam bank biasa digambarkan di dalam slaid di bawah. Unit-unit yang berfungsi di dalam Pejabat Tengah bekerjasama dengan orang-orang di Pejabat Barisan untuk mengendalikan kelulusan penubuhannya dan pemprosesan tetap dagangan.

Middle Office

Pejabat Tengah adalah berbeza daripada Barisan pejabat kerana ia mempunyai sedikit interaksi dengan dunia luar. Utamanya (dan mungkin hanya) pelanggan peniaga Pejabat depan dan pasukan. Seperti biasa, kebanyakan interaksi antara pasukan dalam Pejabat Tengah dan Pejabat Barisan berlaku melalui platform dagangan, yang bertindak seperti antara muka sempadan antara kedua-dua Pejabat, seperti yang ditunjukkan dalam slaid.

Dalam jawatan kemudian, kita akan melalui fungsi setiap unit perniagaan digambarkan sebagai kotak dalam gambar. Buat masa, sebagai rumusan umum, kita dapat melihat bahawa fungsi Pejabat Tengah terdiri daripada dua jenis: yang berkaitan dengan kelulusan perdagangan berdasarkan risiko dan had diunjurkan, dan orang-orang yang berkaitan dengan pemantauan perdagangan biasa. Tetapi fungsi-fungsi ini adalah luas dalam skop, dan memerlukan sistem yang besar, aliran data dan tentera profesional untuk membawa mereka keluar. Mereka dianjurkan di bawah unit-unit perniagaan dengan nama-nama seperti Kawalan Produk, Kawalan Perdagangan (atau Perbendaharaan atau Kawalan Perniagaan) Unit, Pasaran, Kredit dan Pengurusan Risiko Operasi), Had Pemantauan, Pengurusan Kadar, Pematuhan dan Pelaporan Kawal Selia, Analytics, Aset dan Liabiliti Pengurusan dan lain-lain. Lagi, ingat bahawa huraian ini Pejabat Tengah adalah dari perspektif pembangunan kuantitatif yang berkaitan dengan perdagangan produk berstruktur.

Pembangun Kuantitatif

If Quantitative Developers look like the heart of everything that goes on in the Front Office (according to the following slide, yang), there is a good reason for it. This series is written from the perspective of Quantitative Development. Lagipun, the series, the talk, and the book are all titled “Principles of Quantitative Development.” From that vantage point, memastikan, we are at the center of the universe.

Quantitative Developers

Untuk berlaku adil, in structured products trading, quantitative development and quantitative mathematics play a crucial role. As we will see in later posts, almost all the aspects of trade lifecycle management are mediated by the end product of these quantitative professionals, which is the trading platform. Crucially, the trading platform defines the interface between Front Office and Middle Office. Within Front Office, quantitative developers act as the conduit of integrating the pricing models developed by quants into the platform, thereby making them accessible for profit making by trading desks. Because of this buffering role that the quantitative developers play, they have to field almost all of the support requests from trading desks and sales personnel in Front Office, as well as from anyone who uses the trading platform.

In the corporate organization, quantitative developers may find themselves under the information technology department, supporting the trading platform from afar. From a career perspective, this organization is less than ideal for them because IT is a cost center, not a profit generator and the compensation and remuneration schemes reflect that fact. Selain, IT tends to be considered as being outside the core business of the bank. Far better for them would be to find themselves embedded within the Front Office setting, where the quantitative developers can offer direct support to the stakeholders from within and enjoy the prominence and prestige that comes with the critical role of managing the vital in-house trading platform.

Meja perdagangan

At the heart of Front Office are the trading desks. In terms of prestige and power, they really are the reason for the whole infrastructure of Front Office, including economists, jualan, penstrukturan, quants, quantitative developers etc. Lagipun, they make the profits. Dan seterusnya, the vocal and volatile traders hold enormous sway. At their beck and call, quantitative developers provide instant service on trading platform issues; quants develop pricing models based on their requirements.

Trading Desks

Trading desks interact with the external world of brokers and counterparties. They take their input on market moves from highly responsive market data providers and base their positional views on staff economists. They have an army of trading assistants (junior traders themselves) who help them book and monitor their trades with the help of risk management professionals associated with the desks.

Their interaction with the rest of the bank is mainly mediated by the trading platform. When the book a trade, misalnya, it goes into the trading platform and ends up with some middle office professional who will decide whether to accept it or bounce it back for further modifications. Various risk management staff from the middle office also will take a hard look at the trade, as we shall see later in the trade lifecycle.

The desk risk management team get their cues also from the Middle Office risk management, in terms of approved limits and daily marked-to-market and sensitivity reports. All these channels of communication need to be facilitated in the trading platform.

Jualan dan Penstrukturan

Those in sales tend to be personable, extroverted and persuasive people. A good salesman can sell a refrigerator to an eskimo, I’m told. IN the context of the front office in the global treasury or global markets, sales people are tasked with sniffing out trading needs from their customers and offer compelling products from the trading and structuring desks to fulfill them.


The life of a sales professional is a tough one. They need to meet progressively more aggressive targets in sales volumes to stay in the game. The moment they meet the target one year, it jumps the next year to an even more unattainable level. The sales staff, therefor, find themselves under constant (or even increasing) tekanan. Knowledge of mathematical finance, while useful, is not a pre-requisite for sales jobs. Malah, mathematically inclined folks tend to be reserved and introverted, and tend not to have the qualities that make for a good salesman. Dalam erti kata lain, if you are a quant, your most ideal role is not in sales, although the structuring side may offer some interesting opportunities.