Numbers Game: The Rise Of The Quants

By Mehul Kapadia, Managing Director of F1 Business, Tata Communications. 

Mathematics has had a profound effect on a number of industries. However, mathematics, the abstract science of number, quantity, and space, has a habit of sitting quietly behind the noise created by those it brings success to.  

A classic example of this is known as the rise of quants, or quantitative analysts, in the world’s financial capitals from Wall Street to the city. When asked about the typical personality of the banking industry, most people would conjure images from The Wolf of Wall Street: an office filled with rows of pumped-up, loose-tied extroverts slamming phones and slapping backs as they shout their way to a juicy bonus.

The reality is, of course, quite different. The modern Wolf of Wall Street is more calculative than tenacious; analysing mines of data to spot key trends in buying and selling habits, pre-empt market-changing events and prepare for the impact of the next game-changing business model.

Mind over maths

Thanks to the World Wide Web, the culture of delivering news by the second, and social media, markets can boom or bust within seconds of relevant information being disclosed. We saw this with the hack on the Associated Press’ (AP) Twitter handle, when cyber criminals tweeted that two explosions had injured Barack Obama at the White House. Within moments a number of markets plummeted.

However, financial catastrophe was averted, not by human toil and sweat but by algorithms, which swept the web for inflammatory sequences of words that could affect the stability of the markets. It took seconds for the tweet to be deleted and the status quo was resumed. It was a crisis that was created and solved by mathematical algorithms; those used by the hackers to breach the AP’s Twitter account and those used by Wall Street to expose the information as bogus.

Yet, mathematics has not yet replaced the mathematician, and the importance of quants is not just driven by technology. Defining market-neutral investment strategies involves taking both long and short term investment positions to increase the return from making good stock selections and decreasing the return from broad market movements.

Investors now have a raft of data to inform these decisions and must strike a balance between short versus long term and company stock value versus general market trends. This requires an in-depth understanding of mathematical analysis; the technologies used to mine and organise data; and, of course, knowledge of stocks and markets. And that’s why quants are earning the big bucks of banking more and more.

Data + Maths = Success

While mathematics is increasing the speed and quality of human decision-making across all sorts of industries, there is one industry where these attributes take on a new level of significance – Formula One (F1) racing. On race day, it’s all about numbers. Engineers will perform hundreds of calculations to formulate the best race strategy which often determines the difference between winning and losing.

During a race, F1 telemetry systems are constantly collecting data on all manner of racing variables, such as oil and water levels and exhaust and tyre temperatures. Furthermore, there are numbers from outside the car to consider: temperature, humidity, air pressure, track temperature and moisture, for example. All these numbers collected form discernible parts of one big equation, the sum of which will inform what lap the driver is pitted and what tweaks will be made to the car.

Given the huge of role of data in F1, the stakes are high for the development of new technologies which make the process of calculating the necessary sums more sophisticated and efficient. To propel such innovation, initiatives such as the F1 Connectivity Innovation Prize challenge teams of innovators to propose solutions to current technological challenges posed by the sport.

The challenges are based on existing uses of technology within F1 such as displaying telemetry and climatic data in a way that streamlines the process of conducting real-time analysis. Participants must consider that the pit wall during trackside operations is one of the most extreme field-based engineering environments to work in, often with temperatures exceeding 40°C. The brief is designed to inspire would-be innovators to overcome technological, climatic and design-based challenges with a realistic solution.

While playing the ‘numbers game’ is a common cliché, the breadth of industries that are doing so in order to gain advantages in terms of agility and insight tells its own story. Whether it’s making sense of the speed of the global stock market, coming up with an effective marketing mix, or developing a winning strategy for a Formula One race, mathematics sits at the heart of innovation and success.

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