Category Archives: Work and Life

My thoughts on corporate life, work-life balance or the lack thereof and so on.

Life and Death, Philosophy, Physics

Why Do We Drink?

We get in trouble or at least embarrass ourselves once in a while because of our drinking. Why do we still do it? Ok, it is fun to have a drink or two at a party — it gives you a buzz, loosens your tongue, breaks the ice etc. But most of us go way beyond that. We almost always end up regretting it the next morning. But we still do it.

Alcohol actually tastes bad, and we have to add all kinds of sodas and fruit juices to mask it. It is a depressant, so if we drink it when we are sad, it makes us sadder. It is toxic to our liver, kills our brain cells and makes us do silly things like puke and generally make an ass of ourselves. But, by and large, most people who can get their hands on it, drink it.

I am not talking about alcoholics who have trouble controlling their urges (although I believe most of us are budding alcoholics). I am not even talking about why we start drinking — that could be because of peer pressure, teenage dares, curiosity etc. I’m talking about those of us who continue drinking long after that sweet buzz that alcohol used to give us is history.

I do have a theory why we drink. But I have to warn you — my theory is a bit looney, even by the generous standards of this Unreal Blog. I think we drink because it alters our sense of reality. You see, although we don’t usually articulate it or even consciously know it, we feel that there is something wrong with the physical reality we find ourselves in. It is like a tenuous veil surrounding us that disappears the moment we look at it, but undulates beyond the periphery of our vision giving us fleeing glimpses of its existence in our unguarded moments. Perhaps, if we can let our guard down, may be we can catch it. This vain and unconscious hope is probably behind our doomed attractions toward alcohol and other hallucinants.

Although the veil of reality is tenuous, its grip on us is anything but. Its laws dictate our every movement and action, and literally pull us down and keep us grounded. I think our minds, unwilling to be subjugated to any physical laws, rebel against them. Could this be behind our teenagers’ infatuation with Stephenie Meyer’s vampire stories and Harry Potter’s magic? Isn’t this why we love our superheroes from our childhood days? Do we not actually feel a bit liberated when Neo (The One in Matrix) shows that physical rules don’t apply to him? Why do you think what we worship are the miracles and the supernatural?

Well, may be I am just trying to find philosophical reasons to get sozzled. Honestly, I’m feeling a bit thirsty.

Corporate Life

Capitalism vs. Corporatism

During a recent conversation with him, this client of mine used the word “corporatist” to describe his country (US of A). He said twenty years ago, they were a capitalist country, not a corporatist one. Now, this is a kind of fine distinction that I’d love to talk about. To me, it was a surprising and illuminating distinction, one that cleanly dissects and clears up the economic confusion of our times. And I had to write about it.

Everybody knows what capitalism is. It is the market-driven, private-ownership-centric economic system where selfish motives bring about collective happiness, according to Adam Smith. This way of life has been accepted as the “good” system, and stands in stark contrast with the collective, community-owned economic system with notions of robust social redistribution of wealth — communism or socialism. Although the latter does sound like a better and more moral ideal, at least in principle, it never did pan out that way.

Corporatism is not as well-known as capitalism. At least, I didn’t know that such a word existed. But the moment I heard it, I could guess what it meant. It points to the end product of unbridled capitalism, one with no government control, or even moral hangups. In my view, it happens this way — once you have private ownership, some people get richer than the rest. There is nothing wrong with that; in fact, it is a mathematical certainty. But then, money gives those lucky guys more power, and access to ways in which they can make more money. For instance, they can influence the political system, and through it the fiscal and taxation policies. Also, private ownerships can be pooled together to form economic organisms that can sustain themselves. These organisms are, of course, corporate bodies. They exert power through their collective wealth to an even greater extent than the good old capitalists.

A curious thing happens when capitalists (simple rich folks, that is) get sidelined by corporations. The money and power get separated in a strange way. The board members and CEOs who control the corporate bodies end up wielding power, instead of the owners. They are entrusted with the task of guarding and growing the capital. They find novel strategies to do this, like taking advantage of tax loopholes and tax havens, and engaging in unsavory business practices (like mixing any damn white powder with baby food, for instance). As long as they succeed in their remit of growing the capital, they seem to absolve themselves of the moral implications of their actions. For their services, they pay themselves handsome rewards. Note that the corporatists (the operators) pay themselves; it is not as though the capitalists (the owners) pay them, wherein lies the separation of power and money.

When you bring in the financial system whose primary function is capital management, the separation of power, money and morality takes on a new dimension. So banks, with no intrinsic economic value of their own, turn out to be too big to fail, and the system rearranges itself in such way that even when they do fail, it is the people farthest removed from power and money are the ones who pay for it. The high-flying bankers and senior managers get golden parachutes because they have both power and money. The trickle-down economy envisioned in pure capitalism (an optimistic vision to begin with) only trickles through channels drawn by the corporate overlords.

These unfair trickles did not bother us (the middle class) for a long time because they were not all trickling away from us. Now that they have started to, we are beginning to sit up and protest. I sympathize with my American client. Now that the corporatists are after our little trickles, we hate corporatism.

Life and Death, Topical

Why did Federer Lose?

I am a Federer fan. His inevitable decline has been a source of grief for me. When it comes to shot selection, imagination and pure magical talent, there isn’t another tennis player who could ever hold a candle to him. Why did he have to go and lose in the second round of Wimbledon? It damn near broke my heart.

Roger FedererOk, we all know the answer. He is getting too old. But he is only 31, and has to be in terrific shape. I am pushing fifty and can still put in a couple of hours of vigorous badminton. Sure, weekend badminton is no world class tennis, and the effects of aging are very different. Still…, I wish he would stick around a bit longer.

A few months ago, I listened to a series of interesting lectures on the effects of aging on our perception and sensory processes. One thing new that I learned there was that we all have a sixth sense, in addition to sight, hearing, touch, taste and smell. It is the kinesthetic, muscle feedback, which is the sense that allows you to apply just the right amount of pressure, for instance, when braking your car, or holding a baby. You may lose this sense when you get angry and break the glass you are holding, if we are to believe Hollywood movies. In certain games, this sense can make an enormous difference. I had a friend who was a pool shark. He once told me that at the top of his game, he could feel the tiny nicks and scratches on the cue ball through the cue stick in his hand. When I knew him, he was well past his prime, but he could still call shots like bank off the point of the side pocket, and double kiss into the corner pocket. And make them. So I believe him and Eddie Felson (The Hustler) when he says the cue stick, when he holds it, has nerves. I bet Federer could feel the seams of the tennis ball and the amount of spin he was putting on them through the strings and the grip of his racket.

Age blunts the sharpness of all of your senses. The most obvious is your sight. In your forties, you have to hold your smart phone farther and farther away from your face to read the tiny screen. At some point, your hand is not long enough and you end up using reading glasses — reluctantly at first, but more readily as the years roll by and the images get blurrier. Apparently you lose your sensitivity to high pitched sound as well. So teenagers can download ringtones that their parents and teachers are deaf to. But the first sense to go is the muscle feedback, which begins to decline in your teens. This, apparently, is the reason why the Olympic gymnasts are all teenagers. By the time they are in their twenties, this sense of theirs is already too weak to keep them competitive at that level. I guess it is this sense that has deserted Roger Federer as well.

Frederer’s brand of tennis with its finesse and artistry demanded more of this sense. His opponents tend to hit flatter and harder. I read somewhere that they use stiffer rackets for this purpose, and can hold Federer behind the baseline. The champion stubbornly refuses to switch to this style and this kind of rackets. May be he is getting a bit too old. Reminds me of Bjorn Borg, when he attempted a mini come-back with his wooden racket.

Books, Corporate Life, Quantitative Finance

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.

Humor, Parenting, Philosophy, Physics, Work and Life

Deferred Satisfaction

The mother was getting annoyed that her teenaged son was wasting time watching TV.
“Son, don’t waste your time watching TV. You should be studying,” she advised.
“Why?” quipped the son, as teenagers usually do.
“Well, if you study hard, you will get good grades.”
“Yeah, so?”
“Then, you can get into a good school.”
“Why should I?”
“That way, you can hope to get a good job.”
“Why? What do I want with a good job?”
“Well, you can make a lot of money that way.”
“Why do I want money?”
“If you have enough money, you can sit back and relax. Watch TV whenever you want to.”
“Well, I’m doing it right now!”

What the mother is advocating, of course, is the wise principle of deferred satisfaction. It doesn’t matter if you have to do something slightly unpleasant now, as long as you get rewarded for it later in life. This principle is so much a part of our moral fabric that we take it for granted, never questioning its wisdom. Because of our trust in it, we obediently take bitter medicines when we fall sick, knowing that we will feel better later on. We silently submit ourselves to jabs, root-canals, colonoscopies and other atrocities done to our persons because we have learned to tolerate unpleasantnesses in anticipation of future rewards. We even work like a dog at jobs so loathesome that they really have to pay us a pretty penny to stick it out.

Before I discredit myself, let me make it very clear that I do believe in the wisdom of deferred satisfaction. I just want to take a closer look because my belief, or the belief of seven billion people for that matter, is still no proof of the logical rightness of any principle.

The way we lead our lives these days is based on what they call hedonism. I know that the word has a negative connotation, but that is not the sense in which I am using it here. Hedonism is the principle that any decision we take in life is based on how much pain and pleasure it is going to create. If there is an excess of pleasure over pain, then it is the right decision. Although we are not considering it, the case where the recipients of the pain and pleasure are distinct individuals, nobility or selfishness is involved in the decision. So the aim of a good life is to maximize this excess of pleasure over pain. Viewed in this context, the principle of delayed satisfaction makes sense — it is one good strategy to maximize the excess.

But we have to be careful about how much to delay the satisfaction. Clearly, if we wait for too long, all the satisfaction credit we accumulate will go wasted because we may die before we have a chance to draw upon it. This realization may be behind the mantra “live in the present moment.”

Where hedonism falls short is in the fact that it fails to consider the quality of the pleasure. That is where it gets its bad connotation from. For instance, a ponzi scheme master like Madoff probably made the right decisions because they enjoyed long periods of luxurious opulence at the cost of a relatively short durations of pain in prison.

What is needed, perhaps, is another measure of the rightness of our choices. I think it is in the intrinsic quality of the choice itself. We do something because we know that it is good.

I am, of course, touching upon the vast branch of philosophy they call ethics. It is not possible to summarize it in a couple of blog posts. Nor am I qualified enough to do so. Michael Sandel, on the other hand, is eminently qualified, and you should check out his online course Justice: What is the Right Thing to Do? if interested. I just want to share my thought that there is something like the intrinsic quality of a way of life, or of choices and decisions. We all know it because it comes before our intellectual analysis. We do the right thing not so much because it gives us an excess of pleasure over pain, but we know what the right thing is and have an innate need to do it.

That, at least, is the theory. But, of late, I’m beginning to wonder whether the whole right-wrong, good-evil distinction is an elaborate ruse to keep some simple-minded folks in check, while the smarter ones keep enjoying totally hedonistic (using it with all the pejorative connotation now) pleasures of life. Why should I be good while the rest of them seem to be reveling in wall-to-wall fun? Is it my decaying internal quality talking, or am I just getting a bit smarter? I think what is confusing me, and probably you as well, is the small distance between pleasure and happiness. Doing the right thing results in happiness. Eating a good lunch results in pleasure. When Richard Feynman wrote about The Pleasure of Finding Things Out, he was probably talking about happiness. When I read that book, what I’m experiencing is probably closer to mere pleasure. Watching TV is probably pleasure. Writing this post, on the other hand, is probably closer to happiness. At least, I hope so.

To come back my little story above, what could the mother say to her TV-watching son to impress upon him the wisdom of deferred satisfaction? Well, just about the only thing I can think of is the argument from hedonism saying that if the son wastes his time now watching TV, there is a very real possibility that he may not be able to afford a TV later on in life. Perhaps intrinsically good parents won’t let their children grow up into a TV-less adulthood. I suspect I would, because I believe in the intrinsic goodness of taking responsibility for one’s actions and consequences. Does that make me a bad parent? Is it the right thing to do? Need we ask anyone to tell us these things?

Books, Corporate Life, Quantitative Finance

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.

Books, Corporate Life, Quantitative Finance

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.

Books, Corporate Life, Quantitative Finance

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.

Corporate Life, Philosophy, Physics, Quantitative Finance

My Life, My Way

After almost eight years in banking, I have finally called it quits. Over the last three of those years, I had been telling people that I was leaving. And I think people had stopped taking me seriously. My wife certainly did, and it came as a major shock to her. But despite her studied opposition, I managed to pull it off. In fact, it is not just banking that I left, I have actually retired. Most of my friends greeted the news of my retirement with a mixture of envy and disbelief. The power to surprise — it is nice to still have that power.

Why is it a surprise really? Why would anyone think that it is insane to walk away from a career like mine? Insanity is in doing the same thing over and over and expecting different results. Millions of people do the same insanely crummy stuff over and over, everyone of them wanting nothing more than to stop doing it, even planning on it only to postpone their plans for one silly reason or another. I guess the force of habit in doing the crummy stuff is greater than the fear of change. There is a gulf between what people say their plans are and what they end up doing, which is the theme of that disturbing movie Revolutionary Road. This gulf is extremely narrow in my case. I set out with a bunch of small targets — to help a few people, to make a modest fortune, to provide reasonable comfort and security to those near. I have achieved them, and now it is time to stop. The trouble with all such targets is that once you get close to them, they look mundane, and nothing is ever enough for most people. Not for me though — I have always been reckless enough to stick to my plans.

One of the early instances of such a reckless action came during my undergraduate years at IIT Madras. I was pretty smart academically, especially in physics. But I wasn’t too good in remembering details like the names of theorems. Once, this eccentric professor of mine at IIT asked me the name of a particular theorem relating the line integral of the electric field around a point and the charge contained within. I think the answer was Green’s theorem, while its 3-D equivalent (surface integral) is called Gauss’s theorem or something. (Sorry, my Wikipedia and Google searches didn’t bring up anything definitive on that.) I answered Gauss’s theorem. The professor looked at me for a long moment with contempt in his eyes and said (in Tamil) something like I needed to get a beating with his slippers. I still remember standing there in my Khakki workshop attire and listening to him, with my face burning with shame and impotent anger. And, although physics was my favorite subject (my first love, in fact, as I keep saying, mostly to annoy my wife), I didn’t go back to any of his lectures after that. I guess even at that young age, I had this disturbing level of recklessness in me. I now know why. It’s is the ingrained conviction that nothing really matters. Nothing ever did, as Meursault the Stranger points out in his last bout of eloquence.

I left banking for a variety of reasons; remuneration wasn’t one of them, but recklessness perhaps was. I had some philosophical misgivings about the rightness of what I was doing at a bank. I suffered from a troubled conscience. Philosophical reasons are strange beasts — they lead to concrete actions, often disturbing ones. Albert Camus (in his collection The Myth of Sisyphus) warned of it while talking about the absurdity of life. Robert Pirsig in his epilog to Zen and the Art of Motorcycle Maintenance also talked about when such musings became psychiatrically dangerous. Michael Sandel is another wise man who, in his famous lectures on Justice: What is the Right Thing to Do? pointed out that philosophy could often color your perspective permanently — you cannot unlearn it to go back, you cannot unthink a thought to become normal again.

Philosophy and recklessness aside, the other primary reason for leaving the job was boredom. The job got so colossally boring. Looking out my window at the traffic 13 floors below was infinitely more rewarding than looking at the work on my three computer screens. And so I spent half my time staring out the window. Of course, my performance dwindled as a result. I guess scuttling the performance is the only way to realistically make oneself leave a high-paying job. There are times when you have have to burn the bridges behind you. Looking back at it now, I cannot really understand why I was so bored. I was a quantitative developer and the job involved developing reports and tools. Coding is what I do for fun at home. That and writing, of course. May be the boredom came from the fact that there was no serious intellectual content in it. There was none in the tasks, nor in the company of the throngs of ambitious colleagues. Walking into the workplace every morning, looking at all the highly paid people walking around with impressive demeanors of doing something important, I used to feel almost sad. How important could their bean-counting ever be?

Then again, how important could this blogging be? We get back to Meursault’s tirade – rien n’avait d’importance. Perhaps I was wrong to have thrown it away, as all of them keep telling me. Perhaps those important-looking colleagues were really important, and I was the one in the wrong to have retired. That also matters little; that also has little importance, as Meursault and my alter ego would see it.

What next is the question that keeps coming up. I am tempted to give the same tongue-in-cheek answer as Larry Darrell in The Razor’s Edge — Loaf! My kind of loafing would involve a lot of thinking, a lot of studying, and hard work. There is so much to know, and so little time left to learn.

Photo by kenteegardin

Books, Corporate Life, Quantitative Finance, Uncategorized

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.