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Dark Pool Trading: MBAs To Capitalize On High-Frequency Hiring Surge

MBA and specialist master's students are expected to capitalize on a surge in hiring at high-frequency trading firms, as investment banks loose some of their lustre.

Tue Aug 26 2014

MBA and specialist master's students are well placed to capitalize on a surge in hiring at high-frequency trading (HFT) firms, as increasing competition at banks and a slower pace of investment division expansion takes its toll on graduates.

Electronic trading firms have stepped up hiring in the City of London, and have been poaching staff from large investment banks in the process.

But the practice has been controversial. UBS, Deutsche Bank and Credit Suisse have been drawn into a probe of banks’ anonymous “dark pool” trading venues, which many HFT firms operate in.

In July, Barclays was sued for allegedly misleading clients about the level of high-frequency trading activity in its dark pool venue, which allow investors to trade large blocks of shares anonymously with prices posted publicly only after deals are done.

However, MBA and other master's students possess the necessary finance education needed to work at these HFT firms, according to leading business school finance professors.

“The students would definitely need an excellent quantitative finance background with quite a diverse set of skills,” said Dr Ingmar Nolte, a high-frequency data researcher with the accounting and finance department at Lancaster University Management School.

He said that financial econometrics, statistics, and programing core skills are all necessary for a job in “electronic trading”, but wider finance knowledge in areas of market microstructure, behavioural finance, asset pricing and an understanding of capital markets – all common business school themes – are “indispensable”.

“These attractive quantitative finance students are still in short supply,” he added.

Dr Ingmar thinks that all of the core financial curriculum of MBA programs can be applied to high-frequency or algorithmic trading.

“Undoubtedly students need to concentrate on skills in financial econometrics, statistics, econometrics, and forecasting in general and data handling and processing,” he added, while asset pricing, market microstructure, and behavioural finance are also applicable to HFT.

His comments come at a time when these trading firms have been on a hiring spree. Algorithmic and high frequency trading firms remain amongst the most active areas of City recruitment, according Astbury Marsden, a recruitment firm.

At the same time, traders have begun fleeing investment banks to join specialised trading firms to escape tighter restrictions on pay and looming rules which ban proprietary trading.

In the US, banks will have to comply with the Volcker rule, which bans proprietary trading, by July 2015, while European Commission legislation prohibiting banks from trading on their own account could come into force in two years’ time.

European rules curbing investment banks’ ability to pay high bonuses and force them to pay out more in shares deferred for several years have also acted as a “recruiting sergeant”, said Astbury Marsden.

“Algorithmic trading remains a growth area,” said Jon Gilbert, head of the technology and quant practice at the firm.

Adam Jackson, Astbury Marsden associate director, told BB that an MBA is not a requirement for roles at HFT firms but it remains a “nice to have” qualification, while previous investment banking experience is helpful.

“If you have some commercial background – that’s good,” he added.

However Professor Steven Young, head of the accounting and finance department at LUMS, said that while MBAs with a background in engineering or computing may fit with HFT firms, students from specialist master's programs are likely to be a better placement.

“Specialist MSc programs in finance are likely to provide better coverage, particularly programs at the quant finance end of the spectrum,” Professor Steven said.

Dr Ingmar said that through the training MBAs receive while on Lancaster’s programs, the school does equip them with skills relevant for a job in an electronic trading firm.

London’s Imperial College Business School revealed that it is considering teaching HFT techniques because there may be a “huge demand”.

“This training is, however, more in-depth in a specialist Master’s program such as the MSc in Quantitative Finance, [rather] than in a typical MBA,” he added.

Meanwhile, graduates have begun looking outside the bulge-bracket banks for financial services careers.

Leading European business schools including INSEAD and LBS have published figures showing that their MBA students are going into the financial sector in fewer numbers, while investment banking was worst hit.

Even so, Dr Ingmar said the competition among MBAs has become fiercer, as banks require better students and investment banking divisions have expanded at a slower pace in the last couple of years.

Yet these banks say they have also found it difficult to attract talent, due to reputational challenges in the aftermath of the financial crisis.

Investment banks in particular have cut back proprietary trading desks in anticipation of the Volcker rule and regulation that reduces the capital available for proprietary trading activity.

A large number of former proprietary traders have left banks and have started their own small trading firms or joined larger specialised funds.

Jon said: “The pressure that investment banks are under from regulators and shareholders to reduce their risk-taking in capital markets means that the movement of personnel from the investment banks to the specialist HFT and other trading firms will continue.”

The higher salaries offered at HFT firms are also a huge draw for business school students.

Astbury Marsden said that staff at these firms will get paid more than their equivalents at investment banks – a senior technology specialist will typically have a base salary within the £100,000 – £150,000 bracket.

Bonuses can also be paid twice a year rather than once a year as in investment banks.

However, strong technical skills may be valued above all else, according to Adam. “We look for strong C Plus Plus development skills; real-time and low latency software programing [skills]; cutting-edge high performance tech and computing expertise,” he said.

Dr Ingmar said: “It is my understanding that electronic trading firms are trying to recruit more and more students from top quantitative and math finance programs, [rather] than recruiting students with related non-finance backgrounds, such as computer science, engineering, physics and math.”