What is QCF?
Documentation on the Growth of Areas That Use
Quantitative and Computational Finance
Growth of the Sector that Uses Quantitative and Computational Finance
In the past decade there has been a tremendous increase in demand within the corporate, banking, insurance, financial services and manufacturing sectors to manage risk and structure investment strategies.
The growth in the development and usage of financial instruments for risk management and investment has been startling. The following organizations document
- the growth of the markets dealing with various exchange-traded and over-the-counter derivative securities;
- the size and growth of the mutual funds and pension funds industries;
- and the size of the top investment firms and of the top world banks.
Bank for International Settlements (BIS)
International Swaps and Derivatives Association, Inc. (ISDA)
Securities Industry Association (SIA)
Investment Company Institute (ICI)
Ohio State: finance overview
Careers in Business
American Banker
In particular, as some examples of this growth
- between 1992 and 1997, notional amounts of exchange-traded instruments increased 163.4 % and notional amounts of over-the-counter traded instruments increased 437.5 %;
- for the year 1998 alone, notional principal of outstanding interest rate swaps, currency swaps and interest rate options grew 75.6 % from $29.035 trillion to $50.997 trillion;
- between 1980 and 1996, the total number of options contracts traded on U.S. exchanges increased 204.3 % from 96.7 million to 294.3 million and the number of futures contracts traded increased 331.5 % from 92.1 million to 397.4 million with agricultural commodities and metals futures losing share and interest rate, energy products and equity indices futures gaining share;
- between 1980 and 1996, mutual fund total sales increased 6,803.0 % from $10.0 billion to $690.3 billion and mutual fund total assets increased 2,526.3 % from $134.8 billion to $3,540.3 billion;
- the top three money managers - Citigroup, Merrill Lynch Asset Management, and United Bank of Switzerland (UBS) - in total have over $3.8 trillion in assets under management, and the top US pension fund manager TIAA-CREF has $223 billion under management; and
- the rankings given in the documentation show the importance of the Wall Street firms in investment banking, but also show the importance of the Southeast US region worldwide among financial institutions.
The numbers describing this growth are difficult to comprehend. In another recent example, during a speech to a meeting of the Futures Industry Association in Boca Raton, Fla., Federal Reserve Chairman Alan Greenspan referred to the "$70 trillion over-the-counter derivatives industry", as reported by the Dow Jones News Service on March 19, 1999. This phenomenal growth is found in the activity centered around financial instruments, and also in the activity of industries centered around fund management and investment analysis. A finer analysis of this growth can be obtained by a closer analysis of these and related tables.
The growth and expansion of this sector of the economy is not just due to an increase in scale. Accompanying the growth of these risk management and investment activities has been an opening of new financial markets and development of new financial instruments to handle both old and new risks. Examples of these new markets and instruments include the following:
- Trading and marketing of energy derivatives has been spurred on by the deregulation of the gas and electricity markets. Many energy corporations have spawned new subsidiaries that develop, use and sell instruments to market products and reduce risks in these markets - examples of such corporations are Duke Energy, Southern Energy, Cinergy Power, Enron, El Paso, Columbia Energy Group and Louisville Gas & Electric.
- Trading and marketing instruments to reduce risks related to natural disasters and weather conditions has begun by insurance companies and new financial firms. This is related to the huge potential of other risk-reducing and income-producing financial instruments in the insurance industry.
- As problems have developed in '87, '94 and '98 with various particular investment strategies, regulators and market participants have seen greater need for additional quantitative models to manage risks due to extreme trading circumstances. Implementation of such models is now required in certain financial institutions by Federal regulatory agencies, and has lead to an increase in sophisticated models in this area of risk management. Additional research and implementation of models is taking place in areas of credit risk and liquidity risk.
- A growing number of diverse electronic exchanges and websites are being added to facilitate these financial activities.
The growth of this area of finance is not limited to the energy corporations, brokerage firms and insurance companies. The traditionally 'commercial' banking firms are also showing extensive growth in this area. Indeed, investment banking is seeing entry from traditional commercial banks, as the 1933 Glass-Steagall Act has recently been repealed. (The Glass-Steagall Act restricted commercial bank activity in underwriting equity and debt.) The following U.S. banks, for example, have already entered securities underwriting in a serious way: JP Morgan, First Union, Chase Manhattan Bank, NationsBanc/Montgomery, BT Alex Brown, and Citigroup. Significant changes in this Act will increase this commercial bank investment activity.
The growth of the financial sector that uses quantitative and computational finance has included growth within the Southeast region:
- The banking industry has an enormous presence in the region. From the promotional literature for Charlotte, NC at the website http://southernwinds.com/industry.htm "With $319 billion in assets, [Charlotte] is the 2nd largest financial center in the Nation. Nine of the nation's top 200 banks operate in Charlotte. Two of them ranking in the top twenty-five are headquartered here, 'Bank of America/NationsBank' and First Union." This is backed by statistics on rankings of 'World Banks'. Other institutions mentioned in the rankings of the world financial institutions are Wachovia Corporation (Winston Salem, NC), SunTrust Banks, Inc. (Atlanta), and BB&T Corp. (Winston-Salem, NC).
- Investment banking firms have increased their presence in the region.
- The Energy marketing and pricing sector has a strong presence in the Southeast region. Some of the major firms are Cinergy Power Marketing and Trading (Cincinnati, OH), Duke Energy Trading and Marketing (Charlotte, NC), FPL Group Inc (Juno Beach, FL), Louisville Gas & Electric Power Marketing (Louisville, KY), Sonat Power (Birmingham, AL), and Southern Company Energy Marketing(Atlanta).
Specific Demand for Quantitative and Computational Finance
The diverse growth and the increasing sophistication of the capital markets has spurred demand for financial professionals who have exceptional quantitative skills drawn from historically distinct areas, including probability and stochastic processes, numerical methods, optimization, simulation, statistics and financial economics. The interdisciplinary area of quantitative and computational finance, also known as 'computational finance' and 'financial engineering', has evolved to respond to this demand. There are several means by which one can further identify the content within this area and the demand for those knowledgeable in the area.
Documents That Define and Support Quantitative and Computational Finance
Some Firms That Use Quantitative and Computational Finance
Sample Position Descriptions in Quantitative and Computational Finance