Here’s a guest post from Jim Wallace. Jim noticed in one of my former blog posts that I used to teach physics. He thought I’d be interested in this summary of a BBC Radio item about mathematics in finance.

London has become an international centre for the world’s most talented mathematicians, who try to make fortunes writing financial models and trading algorithms for hedge funds and investment banks.

These mathematicians are employed as quants (Quantitative Analysts).

William Hooper says he fell in love with mathematics at university. He then came up with an idea to apply his skills to foreign exchange deals.

He analyses forex data from the previous 12 months and writes computer models to identify and quantify relationships in the data. He then writes an algorithm to make profitable forex trades based on the relationships.

Provided the algorithm is running profitably, William spends his time attempting to make it more profitable. In practice he says he has plenty of time for vacations and visits the gym – it’s a nice way to trade.

Although he would not directly say how much he was paid, William said that the general rule is that quants are paid about 20 percent of the profit they make. Typical algorithmic traders make annual profits for their banks/funds of $10 to $20 million.

William said his own model doesn’t make astronomical amounts of money – some can make sums of the order of a billion dollars per annum. These, however, are riskier models than can lose two billion the year after they have made a billion.

David Harding – who runs the hedge fund Winton Capital Management – studied theoretical physics at Cambridge. Winton trades world wide futures markets using a proprietary model based on a statistical model of market behaviour.

David Harding entered the financial sector in the early nineteen eighties, when few people thought there was any special place for mathematics in trading. That soon began to change and by the mid-nineteen eighties, increasing numbers of mathematicians and scientists were moving into trading and investing.

He says Winton Capital employs some very “improbable” types of people – people who are lacking in social skills but are very focussed researchers. Winton requires that people are clever and obsessively interested in researching areas of interest to the firm.

The lack of social skills will not suit all firms however. Many banks need mathematicians who are able to communicate their ideas to less numerate colleagues.

You can listen to the interview here:

http://news.bbc.co.uk/player/nol/newsid_7090000/newsid_7099200/7099200.stm?bw=nb&mp=wm&news=1&ms3=6&ms_javascript=true&bbcws=2

Jim Wallace