Future for quants: In-house v. Outsourcing

[Newsance]

Hi everybody!

If anyone would share his or her opinion on the following, I would be grateful:

How much of quant's work is now done in-house by the staff quants and how much is outsourced to consulting and sofware development companies? What is the trend?

 

[alain]

from the experience in my group, ZERO is outsource. You don't want to give away your secrets.

 

[Andy Nguyen]

I haven't heard of any outsourcing of quant job. Banks hire consultants to work on projects and usually, those consultants have to come in and work on-site. All the code resides on-site. Banks tend to have their own in house group to build everything.

So I find it hard to think about outsourcing any proprietary code to a third party/country. There are plenty of software shops that build quant models that sell to banks, hedge funds. I would not be surprised if those shops outsource to India but it's a different question altogether.

There are thousand of hedge funds and I can imagine some of them don't have the manpower to do everything in house and hire people to do it for them.

 

[alain]

There are thousand of hedge funds and I can imagine some of them don't have the manpower to do everything in house and hire people to do it for them.

They outsource everything (operations, marketing, etc) but the core business: strategies, prop code, risk management, etc.

 

[DominiConnor]

There is some use of consultants, but most of this based upon a manager using a contact he knows to be good. Intellectual property is an issue, but a bigger issue is the sheer effort in getting an external up to speed, relative to the payload of any work they might do.

At P&D, we have been gently working on "interim quants", which we expect to do well (ironically) during a downturn. This is because iQs aren't headcount and thus can be got on board quickly. It is not easy though since they have to be a close fit, and be trusted not to nick ideas.

 

[alain]

...and be trusted not to nick ideas.

Isn't that what NDA is for?

 

[DominiConnor]

Problem with any contract is enforcement. When someone leaves, how do you know if they are using something they should not ?

 

[VladimirBunicu]

At P&D, we have been gently working on "interim quants", which we expect to do well (ironically) during a downturn. This is because iQs aren't headcount and thus can be got on board quickly. It is not easy though since they have to be a close fit, and be trusted not to nick ideas.

Our managers won't outsource quant jobs; an edifying example: the manager outsources R&D to create a new strategy, the senior researcher comes up with something, back-tests it, paper-tests it, and then trades with the companies' money, improving the strategy to perfection without any risk for himself... and when the strategy is ready, the person leaves the company and trades for himself. And, as Dominic mentioned, "the problem with any contract is enforcement." Another problem would be maintenance, hence these guys must be in-house quants.

 

[foquant]

What about the firms that work in outsourcing either generic or value-added execution and liquidity systems. Groups like Capis (in Dallas) come to mind - they are an execution firm. AT Desk (in Mount Pleasant) was the same, but they were recently acquired (or invested in, about $60mm). Then there are service/liquidity providers like Liquidnet.

I doubt the big banks, at least for prop or quant ops, would use execution firms (Liquidnet maybe), but I would think even mid-sized hedge funds may. Anyone know anything more firm in this vein?