A quantitative analyst is a professional who uses quantitative methods to help companies make business and financial decisions. Investment banks, asset managers, hedge funds, private equity firms and insurance companies all employ quantitative analysts, or "quants," to help them identify profitable investment opportunities and manage risk.
What does a Quantitative Analyst Do?
In the trading world, quantitative analysts are especially in demand. The 21st century has seen an explosion in the popularity of electronic trading based on numerical algorithms. Rather than live traders frenetically pacing the floor of the New York Stock Exchange (NYSE) calling out buy and sell orders, computer software infiltrates various stock exchanges, buying and selling shares when prices hit levels the algorithm has predetermined are profitable. While the computer algorithm does the grunt work, it is quantitative analysts who are the brains behind these algorithms. The best in the business make their employers millions of dollars on a monthly basis simply by programming algorithms that are fast and efficient enough to locate the best trades before the competition.
On the sell side, quantitative analysts help banks value their securities. On the buy side, they identify profitable investment opportunities and measure risk against reward. Outside of the banking world, a quantitative analyst might work for an insurance company helping to develop pricing models and risk evaluation strategies. Some quantitative analysts, rather than crunching actual data to make investing or risk management decisions, work on the back end developing computer software to evaluate financial data. These professionals almost invariably have advanced computer programming backgrounds in addition to mathematics and statistics.
Front Office Quantitative Analysts
Front office quantitative analysts work for companies that sell and trade financial securities. The role of the quantitative analyst at these companies is to identify profitable trades, develop pricing strategies and manage risk efficiently. In the days before electronic trading took off, quantitative analysts typically worked separately from desk traders; the analysts developed the strategies, and the traders executed them. With so much trading done via computer algorithms, the two roles have largely amalgamated. Desk traders rely on navigating computer software to execute trades; making the most of this software requires a level of inherent skill in quantitative analysis.
In the modern trading environment, developing effective trading models via quantitative analysis requires an almost myopic focus on speed. The name of the game is to execute a profitable trade before the competition. Consider an algorithm programmed to execute a buy order when a stock drops to a certain price per share. In electronic trading, a lag always exists between when an order is entered and when it is executed. Fractions of a second matter since a good chance exists that the price drop has also triggered competing algorithms to place buy orders. The ones that execute their buy orders first get the best price; since buying activity pushes up prices, falling behind to a line of competitors means accepting a worse price by the time the trade is executed and losing out on a measure of profit.
Ultimately, front office quantitative analysts perform many roles in financial culture. Like always, their primary focus is on developing profitable investing models that run as efficiently as possible. Beyond working with raw numbers, a modern front office quantitative analyst must be intimately familiar with the trading process itself. Additionally, high-tech computer skills are becoming more in demand for this role by the day.
Risk management is a field of quantitative analysis that has grown in demand and perceived importance since the financial crisis of 2008. For many years, banks took on risks that were way out of proportion with expected returns, the result culminating in one of the scariest periods the market has seen since 1929. In the wake of the crisis, financial institutions have committed to fine-tuning their risk management practices so they can continue to chase big profits without exposing themselves to the losses they endured in 2008.
Risk management analysts develop quantitative models to keep risk in check for their employers. The stress tests conducted on banks to determine their ability to withstand financial crises of varying proportions are often developed and conducted by quantitative analysts who specialize in risk management.
The role of this analyst is to test new and old quantitative models developed by analysts working in various capacities, and determine their validity. This is sort of a jack-of-all-trades role, since model validation requires a working knowledge of many facets of quantitative analysis but does not necessitate expertise with any one. Quantitative analysis is like many industries in that specialized expertise tends to be rewarded with higher pay. As such, analysts who work in model validation often report lower salaries than their peers in the front office.
A quantitative analyst, first and foremost, must be an expert with numbers. This is not a career for those who struggle with math. Even slightly above-average quantitative skills are probably insufficient to really shine in this profession; quantitative analysis is a career for math whizzes.
Advanced computer skills are becoming more important every year for quantitative analysts. This is a function of the rapid shift in the trading world toward electronic and high-frequency trading based on algorithms. These algorithms are programmed into computer software, which enters and executes the trades. Quantitative analysts who can develop algorithms that spot the best trades and get to them before the competition never lack for high-paying career opportunities in the current trading industry.
Though quantitative analysts work across many industries, they are disproportionately concentrated in large banking and investment centers. Like all jobs in this realm, quantitative analysis tends to require a lot of hours and rarely offers the best work/life balance. To take on this career requires an unflappable work ethic and an ironclad commitment to putting in the time needed to be successful.
As of 2015, the median annual salary for a quantitative analyst is $83,684. The median range, meaning the 25th to 75th percentile, is roughly $66,000 to $100,000. Where a new analyst falls within this range depends on his geographic location, his employer, and his skills and experience. The upside potential for this career is huge where income is concerned. The top quantitative analysts on Wall Street make several hundred thousand dollars per year.
The job outlook for quantitative analysts is strong. The U.S. Bureau of Labor Statistics (BLS) lumps quantitative analysis under the broader umbrella of financial analysis, a field it projects to grow by at least 16% between 2012 and 2022.