Saturday, July 30, 2011

3 types of domain knowledge in finance IT

Domain knowledge is specialized, hard-to-find, and an entry barrier. I see 3 broad categories of domain knowledge -- Lingo (jargon), Math and Architecture

1) Lingo (Jargon) -- Technical or Non-technical professionals in a given trading system must share a few hundred terms, phrases, verbs and adjectives. Each jargon term often has a superficial "face" meaning and connects with other jargon terms. The full meaning in context often requires a wikipedia page. Some Random examples that came to my mind -- fixings; basis risk; option knock-in; tick DB; Basel; lockfree; move-semantic; rvalue ref. 

Roughly half the jargon terms involve math. An IT guy can either memorize the derived mathematical conclusions or examine the underlying math. Random examples of such jargon include -- volatility surface; yield; price sensitivities; yield's impact on FX options; when to use stress testing vs VaR. I feel many people in IT don't really have a firm grip on these. We go into a restaurant of financial jargon and look for fast-food. I call it fast-food culture, or quick-answer culture. Anything we don't easily understand, we like to say we don't need to understand. If we don't make a conscious effort, we will always stay a financial laymen. As a result, a "conscious" programmer completely new to finance for 6 months can understand concepts deeper than a 5-year veteran.

Rather than "Jargon" I prefer "Lingo" -- more general and less technical.

2) the Math part is a body of knowledge created by quants and PhD's, over the past 50 years or so, perhaps starting with bond math. Needs high school math and later some calculus. For many IT folks who left school 5+ years ago, even the high school math pieces are not a piece of cake. If I don't invest hours of spare time, i won't fully understand half the theories in bond math which is all high-school.

The math in finance looks simple but needs to be rigorous. I feel pricing calculations in fixed income and in options often use a precision of 5 to 10. A shallow understanding could overlook details.

Financial math is a sizable body of theory, but most trading IT developers need only the basics. If I could say that I needed 6 months to grow from zero-finance-knowledge to be competent enough to help build trading engines, then obviously my roles didn't need a lot of financial math.

3) architectures of trading systems -- components like pricing, risk analytics, high vol market data, pnl explains, stress test, visualization, exchange gateways, SOR, DMA, mark-to-market, trade capture ...
It's possible to talk about an architecture of a complete suite of components but I prefer to talk about architectures of individual components. I prefer this because architectures are vastly different in terms of volume and real-time nature.

Banks want to hire experienced developers to help them re-architect, so as to stay competitive in the "arms race".

Architecture domain knowledge changes faster than math or jargon knowledge. Just like jargon and math, architectural knowledge is specialized and not a commodity skill, so relatively few people in finance IT has it, creating a has-vs-hasnot divide. It's difficult to gain that insight and knowledge because developers don't need to know all the design decisions once made to fix up the live system they are now supporting. Team is set up such that you are given a lot to do just to get-things-done so you have no spare bandwidth to learn other components, but non-trivial insight into neighboring components are necessary for an architectural understanding.

I have seen a few impeccable blue-prints that fail in practice and need major changes.  Anyone can come up with great-sounding architectures but most of them are /sub-optimal/. Reason can be "hard to debug", "inflexible", "learn curve"... Therefore real world, proven architectural domain knowledge is rare and valuable.

Most architectures rely on solid, time-honored infrastructure software like Message-oriented-middle-wares, RDBMS, distributed cache and grids, cross-platform RPC/ORB, thread libraries, xml. Vendors always say "we are perfect" but good knowledge about their weaknesses and limitations are hallmarks of real architects.

Some say fixed income has more domain knowledge but that's true only in the math area. Equities (and FX?) probably have a larger body of domain knowledge in the architecture space.

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New York (Time Square), NY, United States