The structure of Middle Office in a typical bank is depicted in the slide below. The functional units within Middle Office work hand in hand with those in Front Office to handle the inception approvals and regular processing of trades.
Middle Office is different from Front OFfice in that it has little interaction with the external world. Its primary (and perhaps only) customers are the Front Office traders and teams. As usual, most of the interactions among the teams within Middle Office and Front Office take place via the trading platform, which acts like the boundary interface between the two Offices, as shown in the slide.
In later posts, we will go through the functions of each of the business units described as a box in the picture. For now, as a general summary, we can see that the Middle Office functions are of two kinds: those related to trade approvals based on projected risks and limits, and those related to regular trade monitoring. But these functions are vast in their scope, and require large systems, data flows and an army of professionals to carry them out. They are organized under the business units with names like Product Control, Trade Control (or Treasury or Business Control) Unit, Market, Credit and Operational Risk Management), Limits Monitoring, Rates Management, Compliance and Regulatory Reporting, Analytics, Asset and Liability Management etc. Again, keep in mind that this description of Middle Office is from the perspective of quantitative development relevant to structured products trading.
Richard Feynman used to employ the game of chess as a metaphor for the pursuit of physics. Physicists are like uninitiated spectators at a chess match, and they are trying figure out the rules of the game. (He also used sex, but that’s another story.) They observe the moves and try figure out the rules that govern them. Most of the easy ones are soon discovered, but the infrequent and complex ones (such as castling, to use Feynman’s example) are harder to decipher. The chess board is the universe and the players are presumably the Gods. So when Albert Einstein’s said that he wanted to know God’s thoughts, and that the rest were details, he probably meant he wanted to know the rules and the strategies based on them. Not the actual pattern on the board at any point in time, which was a mere detail.
A remarkable Indian writer and thinker, O. V. Vijayan, also used the metaphor of a chess game to describe the armed strife between India and her sibling neighbor. He said that our too countries were mere pawns in a grand chess game between giant players of the cold war. The players have stopped playing at some point, but the pawns still fight on. What made it eerie (in a Dr. Strangelove sort of way) is the fact that the pawns had huge armies and nuclear weapons. When I first read this article by O. V. Vijayan, his clarity of perspective impressed me tremendously because I knew how difficult it was to see these things even-handedly without the advantage of being outside the country — the media and their public relations tricks make it very difficult, if not impossible. It is all very obvious from the outside, but it takes a genius to see it from within. But O. V. Vijayan’s genius had impressed me even before that, and I have a short story and a thought snippet by him translated and posted on this blog.
Chess is a good metaphor for almost everything in life, with its clear and unbending rules. But it is not the rules themselves that I want to focus on; it is the topology or the pattern that the rules generate. Even before we start a game, we know that there will be an outcome — it is going to be a win, loss or a draw. 1-0, 0-1 or 0.5-0.5. How the game will evolve and who will win is all unknown, but that it will evolve from an opening of four neat rows through a messy mid game and a clear endgame is pretty much given. The topology is pre-ordained by the rules of the game.
A similar set of rules and a consequent topology exists in the corporate world as well. That is the topic of the next post.
If Quantitative Developers look like the heart of everything that goes on in the Front Office (according to the following slide, that is), there is a good reason for it. This series is written from the perspective of Quantitative Development. After all, the series, the talk, and the book are all titled “Principles of Quantitative Development.” From that vantage point, sure, we are at the center of the universe.
To be fair, 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. Besides, 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.
If you have migrated multiple times in your life, you may have noticed a strange thing. The first time you end up in a new place, most people around you look positively weird. Ugly even. But slowly, after a year or two, you begin to find them more attractive. This effect is more pronounced if the places you are migrating from and to have different racial predominance. For example, if you migrate from the US to Japan, or from India to China. As usual, I have a theory about this strange phenomenon. Well, actually, it is more than a theory. Let me begin at the beginning.
About fifteen years ago, I visited a Japanese research institute that did all kinds of strange studies. One of the researchers there showed me his study on averaging facial features. For this study, he took a large number of Japanese faces, and averaged them (which meant he normalized the image size and orientation, digitally took the mean on a pixel-by-pixel basis). So he had an average Japanese male face and an average Japanese female face. He even created a set of hybrids by making linear combinations of the two with different weighting factors. He then showed the results to a large number of people and recorded their preference in terms of the attractiveness of the face. The strange thing was that the average face looked more pleasant and attractive to the Japanese eye than any one of the individual ones. In fact, the most attractive male face was the one that had a bit of female features in it. That is to say, it was the one with 90% average male and 10% average female (or some such combination, I don’t remember the exact weights).
The researcher went one step further, and created an average caucasian face as well. He then took the difference between that and an average Japanese face, and then superimposed the difference on an average face with exaggerated weights. The result was a grotesque caricature, which he postulated, was probably the way a Japanese person would see a caucasian for the first time.
This reminded me of the time when I visited my housemate’s farm in a small town in Pennsylvania – a town so small that the street in front the farm was named after him! I went with his parents to the local grocery store, and there was this little girl sitting in a shopping cart who went wide-eyed when she saw me. She couldn’t take her eyes off me after that. May be, seeing an Indian face for the first time in her life, she saw a similar caricature and got scared.
Anyway, my conjecture is that an averaging similar to what the Japanese researcher did happens in all of us when we migrate. First our minds see grotesque and exaggerated difference caricatures between the faces we encounter and the ones we were used to, in our previous land. Soon, our baseline average changes as we get more used to the faces around us. And the difference between what we see and our baseline ceases to be big, and we end up liking the faces more and more as they move progressively closer to the average, normal face.
Here are the average male and female faces by race or country. Notice how each one of them is a remarkably handsome or beautiful specimen. If you find some of them not so remarkable, you should move to that country and spend a few years there so that they also become remarkable! And, if you find the faces from a particular country especially attractive, with no prolonged expsosure to such faces, I would like to hear your thoughts. Please leave your comments.
[I couldn’t trace the original sources of these images. If you know them, please let me know — I would like to get copyright permissions and add attributions.]
There is more to this story than I outlined here. May be I will add my take on it as a comment below. However, the moral of the story is that if you consider yourself average, you are probably more attractive than you think you are. Than again, what do I know, I’m just an average guy. 🙂
If you found this post interesting, you may also enjoy:
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, sales, structuring, quants, quantitative developers etc. After all, they make the profits. And consequently, 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 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, for instance, 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.
After publishing my secrets on losing weight in my late forties, one question I got asked most was how I fought hunger. The question is straightforward. If you ate only 200 calories worth of fruits for lunch, wouldn’t you feel hungry in an hour or two? Yes, you would. What you then do is to take a snack of say 100 calories — a banana, for instance, or 10 cashew nuts (yes, you do need to count them). Trust me, it gets easier. Another way to fight hunger is to drink a lot of water. You need water anyway. Personally, I am not very font of tap water; I like Perrier. (I know, snobbish, right?) When I run out of Perrier, I can take tap water with ice as well. What is most important is to try to stay away from all other forms of beverages, even the light or zero-cal variety, and even the healthy fresh-juice kind. They all have calories.
Growing Old is Not for Sissies
More important than any of these tips and tricks is to develop an ability to listen to your body. If you suddenly find yourself craving for something like a juicy steak or lamb chops, it may be that your body is telling you that it is running low on proteins. You’d better do something about it. On the other hand, if you feel like a snack when you have a truckload of work to get through, it may be that you are trying to procrastinate. You have to develop an ability to know the difference. If you are trying to get away from work, don’t use a snack as an excuse; just take a break, a short power nap or whatever rocks your boat. Don’t use food as a filler. If you really need to use anything as a filler, use exercise as one!
Losing fat and getting in shape is a dynamic process. You have to modulate your exercise and diet regime as you make progress. In the beginning, it may be important to just lose weight. Apart from the obvious medical and self-image-related benefits, it gives you an added advantage in exercising itself. In my case, after I lost 10 kilos (20 lb.), I found it a lot easier to do the 100+ pushups, and said goodbye to that knee pain after a vigorous session of badminton. Losing weight when you are overweight does mean tons of cardio (running, swimming, treadmill, cross trainer etc.) and a strict diet. But you cannot keep losing weight at a steady, fairly drastic rate of a kilo a week and then suddenly stop at your target. You have to kind of soft land when you reach your target. That means less cardio, and perhaps a different kind of diet.
One thing you may notice as you lose weight is that you are losing muscles as well. My web research seems to indicate that it is most likely an illusion, although too much cardio and too strict a diet can make you lose muscles too. Apparently, that happens only at near-starvation levels. But it is a good idea to ramp up your resistance training as get closer to your target weight because what you want to lose is fat, not weight in the form of muscles. Right now, my exercise time is roughly 50% cardio and 50% strength training. I plan to make it progressively more strength, perhaps up to 70%. But it used to be almost 90% cardio in the beginning of the year. The best form of cardio for me is what they call high intensity interval training (HIIT). In this mode, after a short warm up (of two minutes), you go flat-out for 30 seconds and then slow down for a minute, and repeat the cycle. Flat-out in my case means I get my heart rate up to what they consider the maximum (which is 220 minus your age). So I oscillate between the heart rates of 170 for 30 seconds and 140 for a minute. I think this is a pretty drastic cardio regime; I could do it because I have always had some level of exercise ever since I was a teenager. Your fitness levels may call for a different regime. So please be careful if you decide to take up this HIIT formula. If you have any doubts at all, please talk to your doctor first.
Finally, what about those six packs? Are you ever going to get those? The honest answer is, it is unlikely, especially if you are a man. If you are woman, and you really want the six pack, it may be easier for you. Let me explain. We all have good abs muscles. It is just that we have layers of fat covering them. It reminds me of that time twenty years ago, when I was trying to get my then housemate in Ithaca, NY to join me on a long bike ride. This big fellow (over 250 lb.) wasn’t budging, and I tried to egg him on, “C’mon Roger. It will be a fun work out! Get the body you always wanted.” His sleepy reply from the couch was to the point, “I got the body I want. And then some!” That extra “some” is the problem hiding your six-packs. In order to begin to see them, you need to bring your body fat level to less than 10%, or less than 20% if you are a woman. Given that the body fat level for a reasonably inactive, but healthy, man is about 30% (and 40% for woman), the target level for a six pack is pretty far off. My own body fat percentage, according to my last medical, was over 35%. Now it may have come under 30%, but still pretty fricking far from okay (to paraphrase Marsellus of Pulp Fiction).
Having said that, I will try to get there because I like impossible odds and lost causes; I always did. Here is the plan: first thing to realize is that there is no such thing as a “targeted” fat loss. You cannot lose fat just from your tummy. And there is no way you can do countless crunches and get a six pack, which is why you don’t see a six pack on a guy with puny, pencil-like limbs. It is an all-or-nothing deal, part of a package. You have to do a lot of strength training on your major muscle groups (legs, back, chest, hands etc.), which will then act as fat burning machines getting you closer to your target of low body fat percentage. This is precisely what I plan to do for the rest of the year.
I think I will have one more post on this series, describing some exercises that I consider good, and sharing some tips. And describing the results of my protein shake experiment, which I am getting into this week. I don’t want to make this blog anything like a lose-weight, build-body, live-strong kind of site because I am just not qualified enough to talk too much about these things. This fitness craze of mine is perhaps only a passing fancy. Then again, my life has been a series of passing fancies, which I guess is as good a way to live it as any. Probably even better than most.
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) pressure. Knowledge of mathematical finance, while useful, is not a pre-requisite for sales jobs. In fact, mathematically inclined folks tend to be reserved and introverted, and tend not to have the qualities that make for a good salesman. In other words, if you are a quant, your most ideal role is not in sales, although the structuring side may offer some interesting opportunities.
I got in trouble for asking this question once. The person I asked the question got angry because she felt that it was too personal. So I am not going to ask you whether you believe in God. Don’t tell me — I will tell you! I will also tell you a bit more about your personality later in this post.
Ok, here is the deal. You take the quiz below. It has over 40 true-or-false questions about your habits and mannerisms. Once you answer them, I will tell you whether you believe in God, and if so, how much. If you get bored after say 20 questions or so, it is okay, you can quit the quiz and get the Rate. But the more questions you answer, the more accurate my guess about your faith is going to be.
[ezquiz]
q: When you walk into a theater, classroom, or auditorium (and assuming that there are no other influential factors), you tend to sit on the right side.
a: false
q: When taking a test, you prefer an objective style of questions (true/false, multiple choice, matching) rather than subjective (essays).
q: You often have hunches.
a: false
q: When you do have hunches, you follow them.
a: false
q: You have a place for everything and keep everything in its place.
q: When you are learning a dance step, it is easy for you to learn by imitating the teacher and getting the feel of the music.
a: false
q: When you are learning a dance step, it easier for you to learn the sequence of movements and talk your way through the steps.
q: You prefer to keep the same arrangement of your furniture; you don’t like to move occasionally.
q: You can tell approximately how much time passed without a watch.
q: It is easier for you to understand algebra than geometry (speaking in strictly relative terms).
q: It easier for you to remember people’s faces rather than their names.
a: false
q: When given the topic “school”, you would prefer to express your feelings through writing rather than drawings.
q: When some one is talking to you, you respond to the word meaning, rather than the person’s word pitch and feelings.
q: When speaking, you use few gestures. (i.e., you very seldom your hands when you talk.)
q: Your desk or your work area is neat and organized.
q: It is easier for you to read to grasp the main ideas rather than specific details.
a: false
q: You do your best thinking sitting erect, rather than lying down.
q: You feel more comfortable saying/doing well-reasoned things rather than humorous things.
q: In math, you can explain how you got the answer.
q: You always wear a watch.
q: You keep a journal.
q: You believe there is a right and a wrong way to do everything.
q: You have difficulty following clear step-by-step directions.
a: false
q: The expression “Life is just a bowl of cherries” makes no sense to you.
q: You like it when people stick to their schedule.
q: If somebody asked you for directions to get somewhere, you would give clear step-by-step instructions rather than draw a map.
q: If you lost something, you would try to remember where you saw it or used it last rather than look for it everywhere.
q: If you don’t know which way to turn, you would think taking a chance (tossing a coin, for example) is as good as going with your instincts.
q: You are pretty good at math.
q: If you had to assemble something, you’d read the directions first.
q: You are almost always on time getting places.
q: You set goals for yourself so that you don’t slack off.
q: When somebody asks you a question, you turn your head to the left.
a: false
q: If you have a tough decision to make, you write down the pros and the cons.
q: You would make a good detective.
q: You are musically inclined.
a: false
q: You believe there are two sides to every story.
a: false
q: You keep a to-do list.
q: You feel comfortable expressing yourself with words (writing), rather than pictures and colors (drawing).
q: Before you take a stand on an issue, you get all the facts.
q: You often lose track of time.
a: false
q: If you forgot someone’s name, you would go through the alphabet until you remembered it.
q: When you are confused, you usually try to figure it out rather than go with your gut instinct.
q: You have considered becoming a lawyer, journalist, or doctor (but not a poet, a politician, an architect, or a dancer).
[/ezquiz]
Once you have your Score (or Rate, if you didn’t finish the quiz), click on the button corresponding to it.
You believe there is no God. You are an atheist, and cannot quite understand why anybody would want to believe in a God.
You don’t know whether there is a God. Moreover, you believe you can’t know. You are agnostic.
You believe there is a supreme being, a higher power or a life force, but not necessarily something that is hung up on human morality, and certainly not something that looks human (Freethinking)
You believe in God. There is a God, good and moral, angry when we sin, and watching over us. But, not necessarily in the anthropomorphic form or shape as described in the scriptures.
You believe in God. There is a God as given in the scriptures, heaven and hell (or reincarnation, Karma, etc.) Perhaps all religions point to the same God.
You believe that there is only one God as given in your own scriptures. All other Gods are false. Or at least, people following other Gods are most likely mistaken.
Here is how it works. There is a division of labor going on in our brain, according to the theory of hemispheric specialization of brain functions. In this theory, the left hemisphere of the brain is considered the origin of logical and analytical thinking, and the right hemisphere is the origin of creative and intuitive thinking. The so-called left-brain person is thought to be linear, logical, analytical, and unemotional; and the right-brained person is thought to be spatial, creative, mystical, intuitive, and emotional.
This notion of hemispheric specialization raises an interesting question: is atheism related to the logical hemisphere? Are atheists less emotional? I think so, and this test is based on that belief. The quiz tests whether you are “left-brain” person. If you score high, your left-brain is dominant, and you are likely to be more analytical and logical than intuitive or creative. And, according to my conjecture, you are likely to be an atheist. Did it work for you?
Well, even if it didn’t, now you know whether you are analytical or intuitive. Please leave a comment to let me know how it worked.
Economists have too many hands. On the one hand, they may feel that oil prices are going to go up because of increased demand from emerging giants like India and China. On the other hand, there is a global slowdown, and the overall demand is likely to fall, putting downward pressure on the prices. Then again, the rampant corruption and inherent deficiencies in markets like India might push the prices high. On another hand, price-driven improvements on the supply-side (like better production techniques) may eventually push the prices down. My ex-boss, an economist himself, once told me that he wished he could chop off some of these hands!
But seriously, economists are the mouthpieces of the bank. When you see someone from an investment bank on TV making an intelligent observation about the market outlook, it is likely to be a staff economist. If you manage to navigate through the jumble of hands, you will hear what the bank wants to say to the world.
That is precisely why you have to pay close attention and try to read between the lines. You are listening to what the bank wants you to hear. When you listen to a Morgan-Stanley economist assert that Facebook is the best thing since sliced bread, should you trust him, given that they were the investment bank behind Facebook IPO? Of course, the lingo you will hear from the economist would be a lot nicer, subtler and more convincing than I can muster. But you should still ask yourself, “Is there a hidden agenda?”
Economists may seek to influence the market; they also distill and condense their take on the market and share it with the traders and executives so that they can formulate and fine-tune their tactics and strategies. Thus, they play an important role in the directional views that banks take when navigating the tricky waters of trading and speculating.
Once a favorite uncle of mine gave me a pen. This uncle was a soldier in the Indian Army at that time. Soldiers used to come home for a couple of months every year or so, and give gifts to everybody in the extended family. There was a sense of entitlement about the whole thing, and it never occurred to the gift takers that they could perhaps give something back as well. During the past couple of decades, things changed. The gift takers would flock around the rich “Gulf Malayalees” (Keralite migrant workers in the Middle-East) thereby severely diminishing the social standing of the poor soldiers.
Anyway, this pen that I got from my uncle was a handsome matte-gold specimen of a brand called Crest, possibly smuggled over the Chinese border at the foothills of the Himalayas and procured by my uncle. I was pretty proud of this prized possession of mine, as I guess I have been of all my possessions in later years. But the pen didn’t last that long — it got stolen by an older boy with whom I had to share a desk during a test in the summer of 1977.
I was devastated by the loss. More than that, I was terrified of letting my mother know for I knew that she wasn’t going to take kindly to it. I guess I should have been more careful and kept the pen on my person at all times. Sure enough, my mom was livid with anger at the loss of this gift from her brother. A proponent of tough love, she told me to go find the pen, and not to return without it. Now, that was a dangerous move. What my mom didn’t appreciate was that I took most directives literally. I still do. It was already late in the evening when I set out on my hopeless errant, and it was unlikely that I would have returned at all since I wasn’t supposed to, not without the pen.
My dad got home a couple of hours later, and was shocked at the turn of events. He certainly didn’t believe in tough love, far from it. Or perhaps he had a sense of my literal disposition, having been a victim of it earlier. Anyway, he came looking for me and found me wandering aimlessly around my locked up school some ten kilometer from home.
Parenting is a balancing act. You have to exercise tough love, lest your child should not be prepared for the harsh world later on in life. You have to show love and affection as well so that your child may feel emotionally secure. You have to provide for your your child without being overindulgent, or you would end up spoiling them. You have to give them freedom and space to grow, but you shouldn’t become detached and uncaring. Tuning your behavior to the right pitch on so many dimensions is what makes parenting a difficult art to master. What makes it really scary is the fact that you get only one shot at it. If you get it wrong, the ripples of your errors may last a lot longer than you can imagine. Once when I got upset with him, my son (far wiser than his six years then) told me that I had to be careful, for he would be treating his children the way I treated him. But then, we already know this, don’t we?
My mother did prepare me for an unforgiving real world, and my father nurtured enough kindness in me. The combination is perhaps not too bad. But we all would like to do better than our parents. In my case, I use a simple trick to modulate my behavior to and treatment of my children. I try to picture myself at the receiving end of the said treatment. If I should feel uncared for or unfairly treated, the behavior needs fine-tuning.
This trick does not work all the time because it usually comes after the fact. We first act in response to a situation, before we have time to do a rational cost benefit analysis. There must be another way of doing it right. May be it is just a question of developing a lot of patience and kindness. You know, there are times when I wish I could ask my father.
Richard Feynman used to employ the game of chess as a metaphor for the pursuit of physics. Physicists are like uninitiated spectators at a chess match, and they are trying figure out the rules of the game. (He also used 
said that he wanted to know God’s thoughts, and that the rest were details, he probably meant he wanted to know the rules and the strategies based on them. Not the actual pattern on the board at any point in time, which was a mere detail.
