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  • Other Trade Perspectives - Unreal Blog
    compromise The activities of the trading floor can be viewed from different angles Each perspective has its role in how the bank works From the viewpoint of traders the trading activity looks asset class centric Typically associated with a particular trading desks based on asset classes their favorite view cuts across models and products To traders all products and models are merely tools to make profit IT department views the trading world from a completely different perspective Theirs is a system centric view where the same product using the same model appearing in two different systems is basically two completely different beasts This view is not particularly appreciated by traders quants or quant developers One view that the whole bank appreciates is the view of the senior management which is narrowly focussed on the bottom line The big bosses can prioritise things whether products asset classes or systems in terms of the money they bring to the shareholders Models and trades are typically not visible from their view from the top unless of course rogue traders lose a lot of money on a particular product or by using a particular model When the trade reaches the Market Risk Management there is a subtle change in the perspective from a trade level view to a portfolio or book level view Though mathematically trivial after all the difference is only a matter of aggregation this change has implications in the system design The trading platform has to maintain a robust hierarchical portfolio structure so that various dicing and slicing as required in the later stages of the trade lifecycle can be handled with natural ease When it comes to Finance and their notions of cost centers the trade is pretty much out of the booking system Still they manage trading desks and

    Original URL path: http://www.thulasidas.com/other-trade-perspectives/ (2016-02-16)
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  • Middle Office - Unreal Blog
    2013 manoj The perspective employed by the Middle Office team is an interesting one Their work paradigm is that of queues running in a first in first out mode As shown in the picture below they think of trades as being part of validation and verification queues When a new trade is booked it gets pushed into the validation queue from one end The Middle Office staff attacks the queue from the other end accepting or rejecting each entry The ones deemed good get into a second verification queue The bad ones are returned to the trading desks for modifications in the trade entries or possible cancellations A similar paradigm is employed in dealing with market operations such as fixing rates generating cash flow etc Market operations have their own two stage queues Note that the whole flow is to be facilitated by the trading platform which should have the capability to render different views It presents a queue based view of the data to the middle office staff and a report based view to the Market Risk Management team for instance or a trade centric view to most of the other teams It is important to each team to have a basic grasp and healthy respect for the work paradigm of the other so that they can communicate efficiently with each other It is no good ignoring the trade perspectives of the rest of the bank After all such trade perspectives evolved naturally out of years and years of trial and error Share this Click to share on Reddit Opens in new window Click to share on Voat Opens in new window Click to share on Facebook Opens in new window Click to share on Twitter Opens in new window Click to share on LinkedIn Opens in new window

    Original URL path: http://www.thulasidas.com/middle-office-2/ (2016-02-16)
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  • Quant Developers - Unreal Blog
    to take the pricing models the output of the quant effort and make them deployable and accessible to the traders sales teams and the middle and back offices Their primary unit of work is a product because when the product definition changes regardless of whether it uses a new or an existing pricing model they have to integrate it into the system Even if it is merely a product variant they have to implement all the infrastructure and take care of the approval processes for its downstream handling For this reason the work paradigm that makes most sense to a quantitative developer is product centric Compared to the quants the quantitative developers are closer to the day to day activities on Front Office and Middle Office They view the trades identified by unique IDs as instantiations of products Once booked they end up in the trading platform database as distinct objects with attributes defined in trade inputs In addition to trade input they use market data feeds to price a product in the form of a trade The trading platform comes with a pricing interface which combines trade information and market data It also runs in what they call batch mode regularly at a given time of the day to compute prices and sensitivities of all trades Since it is the trading platform that performs the batch job the quantitative developers may take care of the associated resources like the grid computing platforms market data feeds trade databases etc In this respect their product centric perspective may get diffused into a trade centric view Share this Click to share on Reddit Opens in new window Click to share on Voat Opens in new window Click to share on Facebook Opens in new window Click to share on Twitter Opens in

    Original URL path: http://www.thulasidas.com/quant-developers/ (2016-02-16)
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  • Quants - Unreal Blog
    on both academic research and professional peer reviewed publications You take your inputs from them apply your own formidable intelligence to come up with a stochastic pricing model that you think will work exceptionally well for a class of products You will also need the details of the products Your output is of course a pricing model of your own or an implementation of a pricing model from the literature This is your primary work unit In order to make use of this pricing model it will have to be validated Then a set of products using the pricing model will be defined and submitted for approval Once approved with the help of trade inputs and market data each of the products can be priced and booked into the trading platform But such activities are outside the sphere of interest and influence of the quant To them how a product is instantiated into a trade is pretty irrelevant and trivial It is merely a question of specifying the trade and market inputs to the pricing model Even how various products are derived is mechanical and all the real work is done in the pricing model This perspective though accurate and functional for a quant is pretty far removed from the view of the rest of the bank which is why quants sometimes have the dubious reputation of being out of touch with the industry The point is not so much that they have to change their perspective but they should appreciate that there are other equally valid perspectives held by other business units they interact with and make an effort to know them Share this Click to share on Reddit Opens in new window Click to share on Voat Opens in new window Click to share on Facebook Opens in

    Original URL path: http://www.thulasidas.com/quants/ (2016-02-16)
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  • Trade Perspectives - Unreal Blog
    posts we will see how the quants quantitative developers and the middle office professionals and the rest see trades and trading activity Their views are important and need to be accommodated in the design philosophy of any trading platform Where do these perspectives come from and why do we need to know about them Trade perspectives are based on the work paradigm specific to each business unit Because of what aspect of the trading activity a group focuses on they evolve a paradigm or a mental model that works best for them In order to understand let s take a look at how we work with a modern personal computer The paradigm we are presented with is one of a desk and a filing cabinet So we have a desktop folders and files They have become so natural for us now that we cannot imagine another way of interacting with a computer at all The Internet on the other hand is built on a paradigm of something that hovers over us which is why we down load stuff from it and up load stuff into it But the programmers and architects who develop such paradigms often do work with different and less known paradigms as well for instance we have ports and sockets and streams and so on If we do not appreciate the work paradigm we will find the jargon that comes with it mysterious and incomprehensible This is especially true if we are to work on projects that cut across multiple business units with differing paradigms To illustrate it further with an example from our trading world let s look at how we identify a trade The quants really do not care about the trade identification number for them it is the pricing model that is the basic unit that they work with The quantitative developer on the other hand would like the identifier to be something unique per trade A structurer would like to have one identifying reference for the trade with possible sub IDs for the individual sub trades that make up a structure While this requirement is easy enough to implement the software architecture also has to cater to trade cancellation and amendment requirements from Front Office and Middle Office What happens when a structure is modified or canceled How do we find and deal withall the related trades This problem will almost invariably ends up requiring a link ID in the database Trade number amendments on a live deal create problem for documentation and operations staff as well who might demand another immutable external reference number attached each trade Audit will require integrity and indelibility on everything demanding database record duplication As we can see the perspectives and work paradigms of each business unit translate to often conflicting requirements on the program design at a fundamental level It is for this reason that we will take close look at the trade perspectives in the following posts of this series Share this Click to share

    Original URL path: http://www.thulasidas.com/trade-perspectives/ (2016-02-16)
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  • Summary - Life of a Trade - Unreal Blog
    How Does a Bank Work Available as an eBook Buy it now August 16 2013 manoj With that we have come to the end of our discussion on trade lifecycle We talked about pre trade activities such as the quant work on pricing model and its validation by an independent team On a per trade basis we have the sales and credit check activities Once a trade is initiated it goes through the initial validation work by Middle Office followed by regular processing by a large number of teams such as Market Risk Management for limits monitoring and reporting Product Control for valuation checks and reserve calculations and trading desks for hedge rebalancing and risk management During the termination phase of the life of a trade it is the back office teams that are active in settlements and reporting As we saw most of the activities especially during the inception and up to the termination of a trade the trading platform plays a crucial role in mediating the processes and conveying the trade from one business unit to the next But these different business units work with their own entrenched work paradigms and their perspective on what a trade is or what their work involves can be radically different from one another Since the trading platform cuts across multiple teams it has to cater to these differing perspectives which is the last section of this series starting the next post Share this Click to share on Reddit Opens in new window Click to share on Voat Opens in new window Click to share on Facebook Opens in new window Click to share on Twitter Opens in new window Click to share on LinkedIn Opens in new window Click to share on Google Opens in new window Click to share on

    Original URL path: http://www.thulasidas.com/summary-life-of-a-trade/ (2016-02-16)
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  • Quantitative Finance Archives - Page 8 of 8 - Unreal Blog
    we think of space as real as the basis of our reality It takes more than this short column to shake our belief in it That s why I wrote my book The Unreal Universe To me the unreal nature of what we consider reality is more than a constant contemplation It is a source of a Zen like immunity against stress and other worldly worries Yes stress is the cost exacted by the corporate chain of command It is a cost most of us happily pay for the rewards are abundantly clear But we have to be aware of the risks associated with the rewards both in accepting them and in declining them Columns wilmott Columns Quantitative Finance The Wilmott Magazine Quant Talent Management March 1 2008 manoj The trouble with quants is that it is hard to keep them anchored to their moorings Their talent is in high demand for a variety of reasons The primary reason is the increasing sophistication of the banking clients who demand increasingly more structured products with specific hedging and speculative motives Servicing their demand calls for a small army of quants supporting the trading desks and systems Since structured products are a major profit engine on the trading floor of most banks this demand represents a strong pull factor for quants from competing institutions There is nothing much most financial institutions can do about this pull factor except to pull them back in with offers they can t refuse But we can try to eliminate the push factors that are hard to identify These push factors are often hidden in the culture ethics and the way things get done in institutions They are therefore specific to the geographical location and the social settings where the banks operate Performance Appraisal Who Needs It Performance appraisal is a tool for talent retention if used wisely But if misused it can become a push factor Are there alternatives that will aid in retaining and promoting talent As it stands now we go through this ordeal of performance appraisal at least once every year Our career progression bonus and salary depend on it So we spend sleepless nights agonizing over it In addition to the appraisal we also get our key performance indicators or KPIs for next year These are the commandments we have to live by for the rest of the year The whole experience of it is so unpleasant that we say to ourselves that life as an employee sucks The bosses fare hardly better though They have to worry about their own appraisals by bigger bosses On top of that they have to craft the KPI commandments for us as well a job pretty darned difficult to delegate In all likelihood they say to themselves that their life as a boss sucks Given that nobody is thrilled about the performance appraisal exercise why do we do it Who needs it The objective behind performance appraisal is noble It strives to reward good performance and punish poor shows the old carrot and stick management paradigm This objective is easily met in a small organization without the need for a formal appraisal process Small business owners know who to keep and who to sack But in a big corporate body with thousands of employees how do you design a fair and consistent compensation scheme The solution of course is to pay a small fortune to consultants who design appraisal forms and define a uniform process too uniform perhaps Such verbose forms and inflexible processes come with inherent problems One problem is that the focus shifts from the original objective carrot and stick to fairness and consistency one size fits all Mind you most bosses know who to reward and who to admonish But the HR department wants the bosses to follow a uniform process thereby increasing everybody s workload Another more insidious problem with this consultancy driven approach is that it is necessarily geared towards mediocrity When you design an appraisal process to cater to everybody the best you can hope to achieve is to improve the average performance level by a bit Following such a process the CERN scientist who invented the World Wide Web would have fared badly for he did not concentrate on his KPIs and wasted all his time thinking about file transfers CERN is a place that consistently produces Nobel laureates How does it do it Certainly not by following processes that are designed to make incremental improvements at the average level The trick is to be a center for excellence which attracts geniuses Of course it is not fair to compare an average bank with CERN But we have to realize that the verbose forms which focus on averages and promote mediocrity are a poor tool for innovation management especially when we are trying to retain and encourage excellence in quant talent A viable alternative to standardized and regimented appraisal processes is to align employee objectives with those of the institutions and leave performance and reward management to bosses With some luck this approach may retain fringe geniuses and promote innovation At the very least it will alleviate some employee anxiety and sleepless nights To Know or Not To Know One peculiar push factor in the Asian context is the lack of respect for technical knowledge Technical knowledge is not always a good thing in the modern Asian workplace Unless you are careful others will take advantage of your expertise and dump their responsibilities on you You may not mind it as long as they respect your expertise But they often hog the credit for your work and present their ability to evade work as people management skills People management is better rewarded than technical expertise This differentiation between experts and middle level managers in terms of rewards is a local Asian phenomenon Here those who present the work seem to get the credit for it regardless of who actually performs it We live in a place and time where articulation is often mistaken for accomplishments In the West technical knowledge is more readily recognized than smooth presentations You don t have to look beyond Bill Gates to appreciate the heights to which technical expertise can take you in the West Of course Gates is more than an expert he is a leader of great vision as well Leaders are different from people managers Leaders provide inspiration and direction They are sorely needed in all organizations big and small Unlike people mangers quants and technical experts are smart cookies They can easily see that if they want to be people managers they can get started with a tie and a good haircut If the pickings are rich why wouldn t they This Asian differentiation between quants and managers therefore makes for a strong push factor for some quants who find it worthwhile to hide their technical skills get that haircut grab that tie and become a people manager Of course it comes down to your personal choice between fulfilment and satisfaction originating from technical authority on the one hand and convenience and promotions arising from people skills on the other I wonder whether we have already made our choices even in our personal lives We find fathers who cannot get the hang of changing diapers household chores Is it likely that men cannot figure out washing machines and microwaves although they can operate complicated machinery at work We also find ladies who cannot balance their accounts and estimate their spending Is it really a mathematical impairment or a matter of convenience At times the lack of knowledge is as potent a weapon as its abundance How Much is Talent Worth Banks deal in money Our profession in finance teaches us that we can put a dollar value to everything in life Talent retention is no different After taking care of as much of the push factors as we can the next question is fairly simple How much does it take to retain talent My city state of Singapore suffers from a special disadvantage when it comes to talent management We need foreign talent It is nothing to feel bad about It is a statistical fact of life For every top Singaporean in any field be it finance science medicine sports or whatever we will find about 500 professionals of equal calibre in China and India Not because we are 500 times less talented just that they have 500 times more people Coupled with overwhelming statistical supremacy certain countries have special superiority in their chosen or accidental specializations We expect to find more hardware experts in China more software gurus in India more badminton players in Indonesia more entrepreneurial spirit and managerial expertise in the west We need such experts so we hire them But how much should we pay them That s where economics comes in demand and supply We offer attractive expatriate packages that the talents would bite I was on an expatriate package when I came to Singapore as a foreign talent It was a fairly generous package but cleverly worded so that if I became a local talent I would lose out quite a bit I did become local a few years later and my compensation diminished as a consequence My talent did not change just the label from foreign to local This experience made me think a bit about the value of talent and the value of labels The local quant talents too are beginning to take note of the asymmetric compensation structure associated with labels This asymmetry and the consequent erosion of loyalty introduce another push factor for the local quant talents as if one was needed The solution to this problem is not a stricter enforcement of the confidentiality of salaries but a more transparent compensation scheme free of anomalies that can be misconstrued as unfair practices Otherwise we may see an increasing number of Asian nationals using Singapore based banks as a stepping stone to greener pastures Worse we may see as indeed we do these days locals seeking level playing fields elsewhere We need to hire the much needed talent whatever it costs but let s not mistake labels for talent Handling Goodbyes Losing talent is an inevitable part of managing it What do you do when your key quant hands in the dreaded letter It is your worst nightmare as a manager Once the dust settles and the panic subsides you should ask yourself what next Because of all the pull and push factors discussed so far quant staff retention is a challenge New job offers are becoming increasingly more irresistible At some stage someone you work closely with be it your staff your boss or a fellow team member is going to say goodbye Handling resignations with tact and grace is no longer merely a desirable quality but an essential corporate skill today We do have some general strategies to deal with resignations The first step is to assess the motivation behind the career choice Is it money If so a counter offer is usually successful Counter offers both making them and taking them are considered ineffective and in poor taste At least executive search firms insist that they are But then they would say that wouldn t they If the motivation behind the resignation is the nature of the current or future job and its challenges a lateral movement or reassignment possibly combined with a counter offer can be effective If everything fails then it is time to bid goodbye amicably It is vitally important to maintain this amicability a fact often lost on bosses and HR departments Understandably so because by the time the counter offer negotiations fail there is enough bitterness on both sides to sour the relationship Brush those wounded feelings aside and smile through your pain for your paths may cross again You may rehire the same person Or you may end up working with him her on the other side Salvage whatever little you can for the sake of positive networking The level of amicability depends on corporate culture Some organizations are so cordial with deserting employees that they almost encourage desertion Others treat the traitors as the army used to with the help of a firing squad Both these extremes come with their associated perils If you are too cordial your employees may treat your organization as a stepping stone concentrating on acquiring only transferable skills On the other extreme if you develop a reputation for severe exit barriers in an attempt to discourage potential traitors you may also find it hard to recruit top talent The right approach lies somewhere in between like most good things in life It is a cultural choice that an organization has to make But regardless of where the balance is found resignation is here to stay and people will change jobs Change as the much overused clichà puts it is the only constant Summing Up In a global market that demands ever more customization and structuring there is an unbearable amount of pull factor for good quants Quant talent management acquisition and retention is almost as challenging as developing quant skills yourself While powerless against the pull factor banks and financial institutions should look into eliminating hidden push factors Develop respect and appreciation for hard to replace talents Invent innovative performance measurement metrics Introduce fair and transparent compensation schemes When it all fails and the talent you so long to retain leaves handle it with tact and grace At some point in the future you may have to hire them Or worse you may want to get hired by them Columns quantitative finance wilmott Columns Quantitative Finance The Wilmott Magazine Benford and Your Taxes January 1 2008 manoj Nothing is certain but death and taxes they say On the death front we are making some inroads with all our medical marvels at least in postponing it if not actually avoiding it But when it comes to taxes we have no defense other than a bit of creativity in our tax returns Let s say Uncle Sam thinks you owe him 75k In your honest opinion the fair figure is about the 50k mark So you comb through your tax deductible receipts After countless hours of hard work fyou bring the number down to say 65k As a quant you can estimate the probability of an IRS audit And you can put a number an expectation value in dollars to the pain and suffering that can result from it Let s suppose that you calculate the risk of a tax audit to be about 1 and decide that it is worth the risk to get creative in you deduction claims to the tune of 15k You send in the tax return and sit tight smug in the knowledge that the odds of your getting audited are fairly slim You are in for a big surprise You will get well and truly fooled by randomness and IRS will almost certainly want to take a closer look at your tax return The calculated creativity in tax returns seldom pays off Your calculations of expected pain and suffering are never consistent with the frequency with which IRS audits you The probability of an audit is in fact much higher if you try to inflate your tax deductions You can blame Benford for this skew in probability stacked against your favor Skepticism Benford presented something very counter intuitive in his article 1 in 1938 He asked the question What is the distribution of the first digits in any numeric real life data At first glance the answer seems obvious All digits should have the same probability Why would there be a preference to any one digit in random data Figure 1 The frequency of occurrence of the first digits in the notional amounts of financial transactions The purple curve is the predicted distribution Note that the slight excesses at 1 and 5 above the purple curve are expected because people tend to choose nationals like 1 5 10 50 100 million The excess at 8 is also expected because it is considered a lucky number in Asia Benford showed that the first digit in a naturally occurring number is much more likely to be 1 rather than any other digit In fact each digit has a specific probability of being in the first position The digit 1 has the highest probability the digit 2 is about 40 less likely to be in the first position and so on The digit 9 has the lowest probability of all it is about 6 times less likely to be in the first position When I first heard of this first digit phenomenon from a well informed colleague I thought it was weird I would have naively expected to see roughly same frequency of occurrence for all digits from 1 to 9 So I collected large amount of financial data about 65000 numbers as many as Excel would permit and looked at the first digit I found Benford to be absolutely right as shown in Figure 1 The probability of the first digit is pretty far from uniform as Figure 1 shows The distribution is in fact logarithmic The probability of any digit d is given by log 1 1 d which is the purple curve in Figure 1 This skewed distribution is not an anomaly in the data that I happened to look at It is the rule in any naturally occurring data It is the Benford s law Benford collected a large number of naturally occurring data including population areas of rivers physical constants numbers from newspaper reports and so on and showed that this empirical law is respected Simulation As a quantitative developer I tend to simulate things on a computer with the hope that I may be able to see patterns that will help me understand the problem The first question to be settled in the simulation is to figure

    Original URL path: http://www.thulasidas.com/category/topical/quant-finance/page/8/ (2016-02-16)
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  • Driving in India - Unreal Blog
    usually denied In India the turn signal doesn t mean a thing In fact most things don t mean a thing when it comes to driving There are no rules and no priorities If you come to a four way intersection or a round about nobody has a clue who is supposed to yield and who has the right of way In practice the boldest and the most ephemeral goes first If I m driving it is usually me The whole thing is a lot of fun if you are an adrenalin junkie To be sure Indian streets are the deadliest in the world Everybody you talk to in India has tales of uncles or cousins who perished in car crashes motorbike accidents or by the rash act of standing by the street And it is not merely because we have a lot of uncles and cousins in India Our Indian driving habits are particularly unhealthy and we export them as well When I was a graduate student in the US I used to hear of these horrific accidents involving fellow Indian students Well I had a couple of them myself as well so trust me I m not playing holier than thou here Indian infrastructure is improving by leaps and bounds in the last decade or so But the driving grammar hasn t changed They now do on a four lane highway at 120km hour the same stupid stuff they used to do at 40km hour with catastrophic results And even now they think that seatbelts are for wimps Government regulations related to seatbelts and helmets are unnecessary attacks on our personal liberty apparently Well there is a silver lining If you really want to see one soon all these bad drivers will die off and the same Darwinian

    Original URL path: http://www.thulasidas.com/driving-india/ (2016-02-16)
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