Archive for the ‘Featured News’ Category

Baruch MFE Program – First Place in the 2015 IAQF Academic Case Competition

Thursday, June 11th, 2015

Baruch MFE IAQF team

The Baruch MFE team won the Fourth Annual International Association of Financial Engineers (IAFE) Academic Student Competition.

In a competition of 25 teams from 17 programs, Baruch MFE students researched and wrote a paper on developing a product which can be used to reduce the risk in defined benefit pension plans.

The Baruch MFE team was led by team captain Scott Hounsell, who is doing an internship with Alphadine Capital Management. Team members included Yifan Cui, Bank of America Merrill Lynch; Chao Feng, Morgan Stanley; Yun Peng, Goldman Sachs; Sam Pfeiffer, Morgan Stanley; and Haotian Wu, JP Morgan.

Congratulations to our students, as well as to Professor Andrew Lesniewski, who guided our students. This was truly the success of the entire Baruch MFE community, and special thanks are owed to Bob Spruill (Baruch MFE’07), Kun Ji (Baruch MFE’13), and Muting Ren (Baruch MFE’08).

This was the first time a four way tie for 1st place was declared in the IAQF Student Competition; the other first-place teams are from Cornell, UC Berkeley and University of Illinois.

Congratulations to our winners!

Dr. Andrew Lesniewski named Curriculum Director of the Baruch MFE Program

Monday, March 23rd, 2015

Dr. Andrew Lesniewski joins Baruch MFE program


Professor Andrew Lesniewski, a renowned expert on interest rate modeling and celebrated in particular as one of the originators of the SABR model, who joined the Baruch MFE Program and the mathematics department at Baruch College in August 2013 as tenured full professor, has assumed the role of Curriculum Director of the Baruch MFE Program in January 2015.

Professor Lesniewski will continue working on keeping the curriculum of the Baruch MFE Program cutting edge, introducing three new courses in the 2015-2016 academic year, to go along more than fifteen new courses introduced since Fall 2010.

Since switching from an earlier successful academic career in mathematical physics, Dr. Lesniewski has had an very accomplished career in the financial industry, most recently as Head of Financial Engineering at DTCC, and prior to that as Managing Director and Head of Quantitative Research at Ellington Management Group.

Dr. Lesniewski has a PhD degree in mathematics from ETH Zurich and was Associate Professor of Mathematical Physics at Harvard University before joining the financial industry.

Baruch MFE’s Team Wins Fourth Place in 2014 Rotman International Trading Competition

Monday, March 10th, 2014

The Baruch College’s Master of Financial Engineering (MFE) program won 4th place (out of 52 teams from 48 universities) at 11th Rotman International Trading Competition held in February 2014 in Toronto.

This is the fourth year in a row a Baruch MFE team is in Top 5 at RITC (after winning the competition in 2012 and placing 3rd in 2011 and 2013)! This consistency unprecedented in the 11 years of RITC competition highlights the strength of our community – our students are prepared by dedicated alumni who participated in the competition in prior years, including Andrew Chang, Yike Lu, and Alexei Smirnov, and coordinated by Eugene Krel.

Congratulations to our students, John Han (team captain), Jun Hua, Dustin Moy, Fubo Shi, Bo Yuan, Peng Wu!

A record number of teams participated this year, including US-based MFE/Math Finance programs: UC Berkeley (3 and 15), Chicago (17 and 22), Rutgers (19), Stanford (26), Boston University (35 and 36), and undergraduate teams from Princeton (7), MIT (18), and Cornell (41), among others.

Dr. Jim Gatheral Named Presidential Professor at Baruch College

Wednesday, April 10th, 2013

Jim Gatheral joins Baruch MFE program


April 11, 2013. It is with great pleasure that we are able to announce that Dr. Jim Gatheral of the Financial Engineering Masters Program at Baruch College was named Presidential Professor at Baruch College, City University of New York.

Dr. Gatheral joined Baruch College in August 2010, after a distinguished career in finance, most recently as a Managing Director at Merrill Lynch, where he led the quantitative research group for 17 years. Before making his way to New York, Dr. Gatheral’s work spanned the trading and banking worlds, working out of London and Tokyo.

Dr. Gatheral,  one of the top quants in the world and author of the best selling book “The Volatility Surface: A Practitioner’s Guide“, has strengthened the Baruch MFE Program, propelling it to be included among the top five such programs by the end of 2011. Jim’s impact on the Baruch MFE program has been significant and multi-faceted, leading directly to not only increasing the program’s prestige and standing, but also attracting even stronger students who have since won international competitions, including the Rotman International Trading Competition and the Metaquotes Automated Trading Championship.

Baruch MFE – Third year in a row in Top 3 at the Rotman International Trading Competition

Tuesday, March 26th, 2013


The Baruch Financial Engineering Program won 3rd place (out of 48 teams) at the Rotman International Trading Competition held in February 2013 at University of Toronto.

This is the third year in a row a Baruch MFE team is in Top 3 at RITC (after winning the competition in 2012 and placing 3rd in 2011)! This consistency, unprecedented at RITC, coupled with the 2nd place for the Baruch MFE Program in the IAFE Case Competition, highlights the breadth of knowledge of our students at highly competitive levels.


Top 5:
1. Laval University
2. Chulalongkorn University (Thailand)
3. Baruch College
3. University of Toronto
5. BI Norwegian Business School (2012 winner of the European Rotman Competition)

The Baruch MFE team ranked in top five in four of the six parts of the competition:

Quant Outcry – 1st
Options Trading – 2nd
Sales & Trader – 2nd
Algo Trading – 3rd

A record number of US-based MFE/Math Finance programs participated this year: Baruch (3rd place), Berkeley (38), Boston University (29 and 37), Chicago (12 and 41), NYU (35), Rutgers (32).

Congratulations to our students, Andrew Chang, Juan Pablo Alonso, Kenneth Chan, Richard Postelnik, Kelvin Zhang, and Sean Zhang! (Kelvin and Sean were also members of the IAFE team.)

Baruch MFE Program – Second Place in the 2012 IAFE Academic Case Competition

Tuesday, March 26th, 2013

The Baruch MFE Program won second place in the IAFE Academic Case Competition, which was announced at the IAFE Annual Gala in February 2013.

Having our students at the very top in both trading competitions (winning the Rotman International Trading Competition in 2012) and case competitions is unique. The breadth of their knowledge and interests are one of the keys to their remarkable success on the job market.

31 teams representing 17 financial engineering programs entered the five weeks competition concluded in December 2012; UC Berkeley won first place; no other winners past second place were announced.

The case was a capital adequacy problem – how to allocate funds to maximize returns while complying with the regulatory requirement of Basel III, as well as suggest regulatory improvements for Basel III.

The Baruch MFE program entered one team made of six (first semester) students; two of them were also on the 3rd place Baruch MFE team at the 2013 Rotman Trading Competition:

Yi Kelvin Zhang (team captain; RITC team) Srinivas Kanepalli Jin Kong Ran Sally Liu Yujia Helen Sun Shixiang Sean Zhang (RITC team)

Congratulations to our winners!

Baruch MFE student JP Alonso – Second Place in the Metaquotes Automated Trading Championship 2012

Saturday, December 15th, 2012


Baruch MFE student Juan Pablo Alonso (Baruch MFE’13) won second place in the 2012 Metaquotes Automated Trading Championship held from October 1st to December 28th, 2012, and a $25,000 money prize.

Juan Pablo programmed a fully automated currency trading robot that ran without human interaction for the three months of the competition. The program was created using statistical analysis of historical EUR\USD data to find a trade algorithm that maximized the expected return.

451 traders from over 50 countries on all continents created trading robots that participated in the competition. In the top 20 were participants from United States, Spain, Russia, Belarus, China, Lithuania, Indonesia, France, and Italy. In true trading fashion, only the top three places received prize money.

Juan Pablo was the most followed trader of the competition; an interview with him is posted at


The Baruch MFE Program Wins the 2012 Rotman International Trading Competition (RITC)

Friday, December 14th, 2012

The Baruch MFE students won the 2012 Rotman International Trading Competition.

The Baruch MFE teams ranked first and fourth place out of 50 teams in the ninth annual Rotman International Trading Competition that took place in February 2012 at University of Toronto.

Top Five:

1. Baruch College
2. University of Rome – LUISS Guido Carli
3. University of Chicago
4. Baruch College
5. University of Waterloo

The final results can be found here.

Detailed performances per case:

Quantitative Event Driven Trading: 2nd and 4th place
Commodities Trading: 4th and 5th place
High Frequency Algorithmic Trading: 4th and 7th place
Sales and Trader: 5th and 5th place
Options Trading: 10th and 13th place
Quantitative Outcry: 12th and 22nd place

Our students placed particularly high in the quantitative and algorithmic cases.

The team was trained by Mr. Eugene Krel (Baruch MFE’09 and Quantitative Brokers; member of the first Baruch MFE team at RITC 2009) and was advised during the competition by Eugene and Professor Rados Radoicic.

Our success is a tribute to the great consistency and self-discipline of our team members, their intensive preparation for the competition, and their trading and analytical skills. Last but not least, our students demonstrated outstanding teamwork.

Congratulations to our Baruch MFE winners, Andrew Chang, Jing Chen, Alex Hawat, Gama Le Bouder, Tom Maloney, Yike Lu, Alexei Smirnov and Zhechao Zhou!

The Baruch MFE Team:

Mr. Andrew Chang graduated in three years, Summa Cum Laude, with a double major in actuarial science and economics and a minor in statistics and quantitative modeling from Baruch College. While a fixed income intern at Goldstein Capital, Andrew worked on the valuation and hedging of mortgage backed securities. Andrew has experience using Monte Carlo simulations in C++ for the valuation of both derivative securities and insurance products using copula models. In addition to C++, Andrew is proficient in C, VBA and R as well as implementing these languages for numerical pricing techniques. Andrew is working as a research assistant with Jim Gatheral.

Mr. Jing Chen has a bachelor’s degree in economics from Shanghai University of Finance and Economics (SHUFE). He has experience developing a financial software platform in the Financial Laboratory at SHUFE, and interned in the mortgage department at Citibank China. Jing is a quick learner and has strong mathematical knowledge and programming skills. His programming abilities encompass C++, C, VBA and Matlab. Jing already demonstrated very good problem solving ability and teamwork spirit, having his colleagues gravitate to him for help understanding the material.

Mr. Alexandre El Hawat has over eight years of experience in finance and software development. His experience in finance spans from financial advisory, investment consulting and private equity in the Middle-East to investment banking advisory at Lehman Brothers’ Communications and Media group. Alex was an application engineer at Schlumberger where he developed security applications for Schlumberger’s smart card division and its major energy industry clients. Before that, he was a software engineer at Tradanet where he managed the development of a retail-banks Supply chain Management software. He is proficient in programming languages (C/C++, Python, R, Matlab among others) and major financial systems (Bloomberg, Thomson One, Capital IQ and Reuters). Alex has over 10 years of experience in trading equity and options. His unique background and experience allowed him to understand the concepts of quantitative analysis and to efficiently employ his mathematical, financial and computer modeling skills to make pricing, hedging, trading and portfolio management decisions. He holds a Bachelor in Electrical Engineering from the American University of Beirut and an MBA with a Concentration in Finance from the McCombs School of Business at the University of Texas in Austin.

Mr. Gama Le Bouder holds a Bachelors of Science in Economics from the Massachusetts Institute of Technology. While an undergraduate at MIT, he worked in the Financial Engineering Lab as a member of the Traders’ Task Force, conducting monthly electronic trading simulations focused around fixed income securities, equities and futures. Gama is a two-time winner of the Rotman International Trading Competition as a member of the MIT team (ranked first out of 50 teams), and also placed third in the online DC Energy DegreeTrade competition. Gama has been exposed to working in emerging markets and has a broad perspective on global markets. He is very professional and couples an easy-going personality with razor sharp focus.

Mr. Yike Lu (Baruch MFE’12, B.S. Physics Caltech’09) designed the strategy for Baruch College’s first place algorithm for RITC2011 and works at QuantBot Technologies.

Mr. Thomas Maloney holds a bachelor’s degree in physics and mathematics from Cornell University. He was a consultant with Morgan Stanley Prime Brokerage, and has gained research experience while working at The Rockefeller University in the Laboratory of Neurobiology and Behavior. He has extensive experience analyzing EEG signals in Matlab using signal processing techniques. At Baruch Thomas has expanded his knowledge of C++, VBA, Python, and bash scripting; he has written Monte Carlo and Finite Difference programs to price various options and to estimate the Greeks. Thomas is a team-player and eager to contribute his skills in quantitative finance.

Mr. Alexei Smirnov has a computer science and biology dual degree from Binghamton University – SUNY. As a member of the Baruch MFE team at the Rotman International Competition (3rd place out of 50 teams), he co-designed the trading algorithm that gave the team first place, by a wide margin, in algorithmic trading, and created the team’s news-based Natural Gas Futures trading model. Alexei also created the team’s practice environment, which was essential to the success of the team. Alexei is currently working on novel portfolio optimization techniques at Winged Foot Capital. He is experienced in conducting statistical analysis for financial applications in C++, VBA and R, and is interested in fundamental and quantitative trading techniques. Alexei is highly capable and focused on delivering the highest quality results.

Ms. Zhechao Zhou has a master degree in applied mathematics from University of Michigan and a bachelor in physics and mathematics from Bard College. She built jump-diffusion forecast models of the VIX index for trading strategies at a New York hedge fund. She also developed models analyzing the relationship of high frequency trading and equity pricing in research. Zhechao has an unusually vast experience in implementing numerical pricing techniques in C++, VBA and Matlab, and has strong motivation for personal achievement and team success.

Photo credit Mr. William Chiu

Baruch MFE Tenth Anniversary – September 2012

Monday, December 10th, 2012

New York City – Over 200 people celebrated the 10 year anniversary of the Financial Engineering Program at Baruch College on Monday, Sept 24, 2012. Recognized at the reception were major contributors to the success of the Baruch MFE Program, including alumni, faculty, friends from the financial industry, as well as leaders of City University of New York and of Baruch College and the Zicklin School of Business.

Brief speeches showcasing the history and the achievements of the Baruch MFE Program and its highly successful and close-knit community, were followed by an animated reception. More than 80 alumni, including alumni from each cohort graduated so far participated at the reception, and current students had the opportunity to interact with alumni and leading industry practitioners.

Major achievements in the first ten years of the Baruch MFE Program:

World-Class Excellence:
Rotman International Trading Competition: 1st and 4th (2012); 3rd (2011); 10th (2009)
Interactive Brokers Trading Competition: 2nd place (2006, 2008); seven of 62 winners from 13 countries in 2009 (final year) were Baruch MFE students
World class faculty led by Professor Jim Gatheral

Engaged Community: volunteering in Central Park; trips to NYSE, Morgan Library, MoMA, Metropolitan Opera, Planetarium – Natural History Museum, Yankees Stadium

Alumni Community
• One-on-one mentoring by alumni offered to all current students
• 50% of all alumni attended the April 2011 Baruch MFE Town Hall Meeting
• 43% of all alumni contributed to refurbishing the QuantLab (Baruch MFE student study lounge)
• Three alumni teaching in the program: Eugene Krel’09 – trading, Alain Ledon’08 – software engineering, Bob Spruill’07 – financial instruments
• Three alumni coaching team for Rotman International Trading Competition (1st place in 2012): Eugene Krel’09, Yike Lu’12, Alexei Smirnov’12

Interview with Jim Gatheral of Baruch MFE

Thursday, September 22nd, 2011

Jim Gatheral of Baruch MFE program

Dr. Jim Gatheral spent 17 years at Merrill Lynch in equity derivatives trading before joining the Baruch MFE program faculty full-time in 2010. He is the best-selling author of “The Volatility Surface: A Practitioner’s Guide“. As someone who hired quants at Merrill Lynch and has been teaching in the NYU Math Finance program since its inception, Gatheral talks to about his career, the challenges facing aspiring quant students and the fast changing landscape of global financial market.

Can you give us a recap on your education background and career?

My undergraduate degree was in Mathematics and Natural Philosophy at the University of Glasgow.  My PhD was in Theoretical Physics at Cambridge University and my thesis title “Infrared Divergences in Perturbative QCD”.  I joined Bank of America in London as a trainee loan officer in 1983 with the title of Assistant Cashier, receiving my first bonus of £400 in 1985.  I started trading currency options at BofA in 1984 and subsequently joined Bankers Trust to trade interest rate derivatives in 1986.  I ended up running currency options and then ran Capital Markets (effectively derivatives trading) in Tokyo in the early 1990s.  I joined Merrill Lynch in 1993 as global head of equity derivatives trading and set up the quant team in 1996, retiring from the firm earlier this year.

How did you end up in finance?

Some investment bank whose name I cannot recall approached me when I was still an undergraduate and so I got the idea that banking might appeal to me even before i embarked on my PhD.  When it was time to look for a post-doc position, for many reasons, I decided that i would have more fun in finance than in theoretical physics.  And even from my current vantage point, it seems to me that my decision was correct.

What do you consider as your accomplishments up to this point?

I think it’s hard to talk in terms of accomplishments in business.  If I hadn’t done this or that deal first, somebody else would have.  In other words, one doesn’t usually build anything of lasting value.  If I were forced, I would say that at Bankers Trust, I was involved in many firsts including the first lookback option deal and the first Asian option deal (well if not the first then at least one of the first).  And at Merrill Lynch   I put together a good quant team which played a major role in our leadership in various market segments such as convertible bonds and the variance swap business when it started booming in the late nineties.  In terms of academic accomplishments, I am happy to have been part of the NYU masters program since its inception and even happier with the recognition that my lectures on the volatility surface and my subsequent book received.  The biggest compliment I got was when a student told me “you helped me sound smart at my interview”.

If you have a chance to start your career anew, what would you like to do differently knowing what you know now? Would it still be in finance or some other field?

If I had a chance to start over, I would listen better and concentrate more.  As for whether my career would be in finance or some other field, I think that the answer to this question is a function of circumstances; In 2010, as in 1983, we have just witnessed a major crisis of capitalism, one of the many crises that capitalism has survived.  I just read a piece by an economist who said that the recent performance of economics was so bad because all the smart economists had gone into finance.  In the future, i hope that we will see some kind of reallocation of resources so that smart people can find the same kind of financial and intellectual rewards in other fields as are currently on offer in the world of finance.  However, if I were graduating now, I would want to be in finance because that’s still where the money and brains are.

You recently joined Baruch College as a tenured professor in their Math Dept after seventeen years as MD at Merrill Lynch. Tell us the main reasons for you to leave Wall Street?

Who says I left Wall Street?  I still have many friends there and I expect to continue to be involved in some fashion.  As for why I became an academic, it’s primarily a question of personal and intellectual freedom.  I can decide how to spend my time and be more or less my own boss.  If I decide to travel somewhere or spend a day at the museum, nobody cares.  And I can write and speak free of commercial considerations.  That said, I still have to turn up to teach and my lectures better be good.

What do you miss most about your time on Wall Street?

If there is one thing that I do miss, it’s the fun of running a trading book and the energy of the trading room.  But I am looking forward to concentrating on teaching and research – you can’t really do these and trade at the same time!

What would you say contributed to your successful career as a quantitative finance professional?

Luck was of course a huge element in my success but as they say, luck favors the prepared.  I think in my case, my willingness to act with less than perfect information along with a willingness to communicate openly with others were significant contributors to my success.  And I do think that I have a certain skill in communicating complex ideas.

Why did you choose to join the faculty of Baruch MFE program instead of other big name programs?

They wanted me!  Kidding apart, the department is small and friendly, the students are good and it’s a mathematics department as opposed to a business school.  So there will be more opportunity for me to teach and study the kinds of things I like.  And of course the department has good mathematicians from whom I can learn.  I guess I should mention the purpose-built trading floor that we can use for trading simulations and last but not least, Dan Stefanica is very persuasive to say the least!

Besides teaching and doing research, what other projects/initiatives you’d like to spearhead in the next few years for the Baruch MFE program?

I think that teaching and research are enough don’t you?  However, as part of that, I think we may see participation in some wider initiatives such as the new Initiative for the Theoretical Sciences at the CUNY Graduate Center and the existing monthly New York Quantitative Finance Seminar.

If you have a chance to rewrite/update your book The Volatility Surface: A Practitioner’s Guideafter the last credit crisis, what would you change?

I don’t think that the credit crisis as such would have caused me to change anything; equity derivatives models did fine during the crisis.  I wish the book were better written but then as my friend Bruno Dupire famously wrote in the blurb, I couldn’t have written a better book.  There is a lot missing in the book: hedging, model calibration and multiple timescale modeling to name just a few topics that are not really covered at all.

Your research has recently moved into Market Microstructure. Tell us what is significant about this area that captures your interest?

What is really interesting about this area is that nothing is yet well understood, and the timing is perfect because we now have access to huge amounts of high frequency data.  Obviously, with my physics background, I am particularly interested in the recent developments in econophysics.  From the theoretical point of view, I think we are closer than ever to a good understanding of the process of price formation and from the practical point of view, simple physics-style models have already led to the development of more efficient algorithms that minimize transaction costs.

How do you connect Market Microstructure to Algo trading?

The way I like to define things, market microstructure is the theory underlying algorithm construction.  That said, most algorithms are even now constructed without any theory – there is still a huge opportunity for quants to get involved.

What would be the area in quant finance that will experience most innovative research idea and product growth in the next few years?

If you will forgive me for talking my own book on this one, I think that the answers are market microstructure and volatility surface dyanamics.  More specifically, there is likely to be less emphasis on exotic derivatives in my view and more trading will take place on exchanges.  This means in particular that we won’t need models to compute the prices of financial derivatives because pricing will be transparent.   And if there is less inventory on dealer books, that means that options dealers will need to better understand and model the shapes and dynamics of volatility surfaces, just as option market makers attempt to do today.  Up to now, models have been largely normative: We come up with some plausible process, derive some pricing formula, and fit the resulting model to market prices.  In the future,  models will have to have realistic dynamics, consistent with observation.  Control of execution costs will also be critical and for that, a good understanding of market microstructure will be essential.

What would you advise people who want a career as a financial engineer?

My advice to such people is the same as my advice to anyone embarking on any career:  Keep studying and learning, keep up with the latest research and find people to work with who will teach you something.

Where do you see a growth for people with quantitative background?

Obviously, my background is finance and I do think that there will be continued and increasing demand for people with quantitative backgrounds.  I can foresee a time when it will be more or less impossible to get a trading job without a graduate qualification such as Baruch’s Masters in Financial Engineering.

Many have an unrealistic expectation or idealism of what a quant do, mostly from movies and books like “Wall Street”, “My Life as a Quant”, “Liar’s Poker”. What would you tell them?

I agree that, to me at least, “Wall Street” was not very realistic but both  “My Life as a Quant” and “Liar’s Poker” were pretty realistic I thought.  I take the attitude that most disappointments of this sort are not related to actual differences between expectation and reality but more to the individual’s view of reality.  I always insisted to the quants that they ran the business and I meant it: Changing a model changes the way traders behave – something that is very hard to achieve as a trading manager.  An alternative view might have been that these same quants were just producing models on trader request.  There is some truth in both views but the first point of view is life-affirming, reinforcing the quant’s view of his own responsibility to the firm.  The second point of view, taken to an extreme,  absolves the quant of any such responsibility.  One can easily see how two quants faced with the same reality can have very different levels of career satisfaction.

You have been involved with teaching and hiring many graduates of MFE programs, first at NYU and now at Baruch MFE, and in your role at Merrill Lynch. What do you think about the curriculum of these programs, the quality of the graduates and what would you like to change about it?

Different programs have developed different personalities and there are many good programs.  I would like to see more graduates develop more intuition for models and markets before they join companies.

Many students have viewed MFE programs as a quick pathway to a “get rich quick” job on Wall Street. In fact, the number of universities opening up this type of programs has increased the past decade. This leads to a wide quality disparity among people coming out of these programs. What would you advise aspiring students who plan to join these MFE programs?

I would advise students to pay careful attention to the content of a masters program.  The prestige that comes from being admitted to one of the top schools will get you through the first year or two but not necessarily further.  A masters program offers the student a golden opportunity to build a solid basis for his future career; course content and quality of teaching are crucial.

What would be the essential skill/knowledge every financial engineer should have?

Every financial engineer, in addition to what is taught in a typical masters course, should be able to communicate effectively with non-specialists and should have a basic understanding of business and financial accounting.

What other job options should one look at outside of Wall Street where quantitative skills are appreciated?

I’m no expert.  But based on the people I have seen hired as quants, bio-engineering and computational genomics are two areas in which highly quantitative graduates can find rewarding employment outside the financial industry.

SEC has charged Goldman Sachs with defrauding their investors in one of the CDO deals. What would be your comments?

It’s not at all clear that the SEC will be successful in their case against Goldman Sachs.  After all, which sophisticated investor thinks that the security that is being recommended to them is not being shorted by somebody else.  Moreover, Goldman’s case seems to be that the client was told that this particular CDO was being shorted by Paulson.  Nevertheless, Goldman Sachs is already guilty in the court of public opinion and this helps to prepare the ground for much tougher regulation of investment banking.

With the government stepping up effort to regulate Wall Street, are the days of “innovative financial products” over or will we see Wall Street remake itself to adapt to a stricter environment?

I think we will continue to see innovation in financial markets but pricing will be much more transparent than in the past with more trading taking place on exchanges and certainly much improved reporting of transactions.

Much has been said about “quant” in the media the past two years. Where do you think these financial engineers play a role in the credit crisis? What lessons can we learn going forward?

I don’t think that quants are to blame for the crisis but nor are they blameless.  Many quants knew that credit models were seriously flawed yet how many of them spoke out clearly?  Chuck Prince of Citigroup has been pilloried for saying “as long as the music is playing, you’ve got to get up and dance” yet all he was doing was to elegantly (and perhaps unwisely) articulate what everyone including quants knew, which is that to be in the game, you have to play the game.  Some quant lessons to be learned are that model risk needs to be estimated and that it is crucial to model the underlying dynamics as faithfully as possible.

What do you think about the financial reform bill in its current form? Will the Volcker’s rule hurt or help Wall Street business and ultimately the economic recovery?

As far as I understand it, nobody knows what reform will precisely entail except that we now know who will be responsible for regulating various aspects of the financial markets. The Volcker rule will obviously not help Wall Street business nor can it help financial recovery; the aim of the rule (whose execution is yet to be defined) is to lessen the probability that taxpayers will have to once more bail out a financial firm in the future. Everyone understands I think that in order to reduce systemic risk in this way, we have to pay a price; the price will be reduced efficiency and reduced profits. That said, efficiency and profits are not ends in themselves – society has a right and a duty to regulate financial markets in my view. And increased regulation will definitely come – but who knows what good regulation should look like?

Quantnet recently reported that Robert Merton has rejoined MIT to teach in their MFin program. What do you think about the current collaboration between academia and industry when it comes to research on financial engineering? How can this relationship be improved to benefit both sides?

In my view, collaboration between academia and industry in financial mathematics and engineering has always been good and over time, this collaboration has only got better. One can even identify a number of practitioners who are really more like academics and a number of academics who are really more like practitioners. Industry obviously directly benefits from academic research through implementation of the latest ideas and techniques. Academics benefit from this relationship by getting constant inspiration for new (and relevant) research. The short answer to your question is that I don’t think that the relationship between industry and academia needs to be improved.

What are your favorite books? Movies? TV shows? Music?

I like reading history, I love the Almodóvar movies, I like watching Anthony Bourdain on TV and I enjoy playing piano and listening to classical music.

What is something about you that most people don’t know?

I sincerely hope that most things about me people don’t know.

What other projects are you involved in?

Teaching and research are my only projects – other activities are just hobbies.

What would you imagine yourself doing 10 years from now.

Teaching, research, looking after students…

Thank you for your time, Dr. Gatheral.

Source: Interview with Jim Gatheral – QuantNet