4. Can data really help you make better decisions?
Absolutely, and the importance of the data has increased tremendously over the past years. There are so many applications and innovations we have never thought possible before. However, the style of this dependence generally varies with the area of finance. For example, some would say that trading illiquid products, such as distressed debt, doesn’t rely much on the publicly available data (as usually it is scarce). At the same time, a market-making platform trading liquid products generally makes decisions only based on the available real-time data feeds. For them it is paramount to have the best information possible, which means processing giant feed of data in a fraction of a second, and doing it a smart way.
5. Why would anyone bother to invest in exchange-traded funds (ETFs)?
They are cheap! Many leading brokerages have reduced ETF trading commissions to almost zero even for their retail clients, who are usually paying the most. But even more importantly, ETFs allow investors to obtain complex and at the same time liquid exposure to diverse portfolios which would be way more expensive and time consuming to construct otherwise. It’s a legitimate short cut, really, – simple to use, and cheap to buy.
6. I want to go into finance; should I be learning to code?
There are many fields, such as investment banking or private equity, that are mainly driven by relationships and qualitative analysis. At the moment, they do not require analysts to handle large data sets or making automated decisions. In addition, a lot of the models for pricing complicated structured products, requiring both advanced stochastic calculus and fast numerical methods, have already been coded and are now a part of the banks’ pricing systems. Understanding them, along with their assumptions, limitations, and possible implementation and interpretation by the market participants – now that’s the skill that does not get old. With so many models and formulas ready available at the tip of your fingerprints, a real insight into them is essential for a good career in banking, be it sales, trading, or structuring new products.
But of course, there are many growing fields, such as algorithmic trading or some niche areas in derivatives, that employ complex IT systems for managing existing inventory, executing orders, or pricing portfolios of securities. Naturally, people working in these fields need to either develop the existing systems or conduct research involving analysis of large data sets. Excellent coding skills there are essential.
Svetlana Bryzgalova is an Assistant Professor of Finance at London Business School.
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