INSIGHT, IIT-BOMBAY PRESENTS : THE INTERNSHIPS LIVE BLOG

Introduction

The London School of Economics (LSE) offers certified summer courses in various subjects ranging from economics and finance to management and law, for a period of three weeks. The summer school, which begins in the first week of July, has around 5000 students from various parts of the world, majorly from India, China and the US. The application procedure and other details can be found on its website: http://www2.lse.ac.uk/summerSchool/Home.aspx.

In Class

There are three levels of courses, which run in the same way as full semester ones. Most 1st and 2nd level courses do not require any major prerequisites. The teaching pattern is similar to ours. But with three hour lectures, supplemented with one hour tutorial sessions daily, each day represents a week of lectures at IIT. Professors are generally good and provide a enjoyable learning experience. This city campus is not very big but is still well-equipped, especially the library. Apart from classes, LSE also organizes public lectures delivered by renowned speakers. The course tuition fee is 1,100 pounds.

Outside Class

Major hangout spots include two pubs within the campus itself. LSE, located in central London, is at walking distance from the River Thames and close to many major landmarks of the city. LSE also has its own accommodation facilities with walking distance from the campus. Other accommodation options in London can also be availed. There are student union disco parties every Friday night on campus LSE also organizes a River Boat Disco party on the River Thames. Apart from that, London and its famous nightlife provide a lot of scope for having fun.

Overall

Insightful interactions with students from various backgrounds and countries, an enjoyable in-class experience and the life in the city itself, make the overall LSE experience simply awesome.

This summer I worked in the research wing of a hedge funds firm. The job description was simple: find new formulae to predict the movements of stocks. Sounds interesting? Well it is, until you run out of ideas.

Before the intern, my idea was that we would be taught methods of predicting movements of prices of various stocks in this intern and that people do this all the time and earn a lot of money. Well, that’s not how it works in that one cannot actually predict the stock price, but one can earn a lot of money here and that takes skill. What actually is done is you design some indicators that give you a “hint” as to which way the prices are going to move. Some simple examples are intuitive enough to understand like if the price steadily increased for many days, chances are high that it will go down the next day. Things like that and more. So you try to use the data that you already have and try to find such directions in which the market is headed and use it to your advantage. Only difference being that instead of people interpreting these indicators, it was the computer that was supposed to take decisions of buying and selling, of course based on what you have told it to do, but on thousands of stocks. So here’s what my intern looked like.

All of this starts with getting familiar with the terms used. There aren’t too many terms and most of them are very logical so there is no problem in grasping them. Others are statistical tools that gauge your performance. The most important one that I used for was the Sharpe ratio and the information ratio. After that came the indicators. The first week generally goes into understanding the basics and all. It’s not that it takes that long to understand it but it does take a while to actively apply them. What we basically did was get familiar to the most popular of the indicators and how they are used to judge the prices.

The second week went in understanding the basics behind the indicators. It’s easy to make one but it is essential to understand the working especially if you want to improve the indicator, which is what we are looking for. Any one indicator cannot be trusted all the time, especially in the markets today that tend to go in one particular direction…down. Indicators are generally best in a steady or “sideways” market, where there is not clear trend. If there is any direction, it’s a different story.

Next comes using these indicators to actually buy stocks of appropriate companies. What I did was deal with 3000 stocks in the US and occasionally in other countries like Japan and European markets and came up with what is called an alpha for each of the stocks. Alpha in simple terms is relative probability of each stock to go up (or down). Relative to what?? Well… each other. It’s easy to talk in terms of 2 stocks but when 3000 stocks are to be considered, things are not as simple. You give each a number, indicative of how much probability that stock will have of going up. Someone else may be assigned a higher or lower number, which means that between the two, the higher numbered has a higher probability of going up. It looks simple enough but coming up with a simple formula can be a tough job, and boring too sometimes.

In the next week, we graduated to looking at blogs and articles on such things. By the end of 2nd week, I had taken to looking at chart patterns which I continued in the third week too. Chart patterns are basically formed by price vs. time graphs of a stock that are a direct effect of the psychology of humans. The “drive” that people get of buying and selling when someone like Harshad Mehta deals in a stock is a very good example of such a tendency. These are the factors that have nothing to do with the company or its performance or its expectation of doing good or bad. It’s just the herd mentality that we essentially have as traders. And analysing such patterns can be real fun.

Analyzing such patterns, I tried to make some of my own indicators, but landed up remaking a lesser known indicator. But it was great kick finding out that I was on the right track.

This went on for another week and by the end of it, I was begging my mentor for a change. So next week we took a break from this routine to do a small programming project. It involved making the best strategy for a famous casino game. Turns out even the simple games where you think casino can lose are made so that they never lose. The rules of the game ensure that. And doesn’t matter if the player wins or loses, at the end of the day the casino always wins. Unfortunately it took me a long time to realise that there was nothing wrong with the results I was getting in the simulations. I was meant to lose; I just had to reduce the loss. Once we were done with this in a couple of weeks, we got back to our previous task.

The next week I tried to combine more than one indicator, something that a trader usually does. Mostly, one would look at as many indicators as possible before one takes a decision. But doing this for thousands of stocks would take an insane amount of time or traders. However, if one can instruct a computer how to handle them correctly, one can trade at a higher frequency and for many stocks. The best multiple indicators for combining would be those based on completely different principles - things that do not have a common source of change. And if both of their predictions agree, then we would have a much stronger indication of an apparent trend. That being said, I really began to appreciate what our eyes can analyze in one glance because programming for just two indicators together was a pain. Only in the last week was I successfully able to combine two to make a useful formula.

In the end, I think I met most of the goals of the internship. I needed to make atleast 4 good formulae which I did, found out for myself that Bangalore IS expensive and got to know fellows from iit-d. It was a great learning experience.

Since Rohit has already written about most of the stuff that I am writing about, you might want to read this in conjunction with his piece.

An internship is that summer when your seniors suddenly transform from lukkha geeks into bonafide been-there-done-that studs, bursting with fundae, money, and for the lucky ones, PPOs. Case in point.

My 2 cents.

Where?

Barclays Capital, Mumbai.

How?

They came. They interviewed. And in a moment of colossal stupidity, they chose.

What?

Investment Banking, duh.

Ya, right.

Investment Banking is banking for the rich. That’s how somebody explained it to me, before the aforementioned interview, and I did not believe it. It could not be. That so many bright people led such glamorous lives of glorious debauchery doing such simple, mundane work. I cooked up several complex definitions over the last year, before coming full circle into understanding that I-Banking is indeed, banking for the rich.

• As an analogy with the regular bank people we meet, in I-Banking too, there are relationship managers, sales people and ecommerce platforms, that liaise with clients - corporates, governments, institutional investors, wealth management companies, hedge funds and other I-banks. Making gross simplifications, as with normal banks, these clients are looking to either a) Invest  money they already have or b) Get money (loans) to invest in plans they already have. What Ibanks do is try and move money from a) to b).

• As with banks, there are those people who help the sales people in suggesting a loan/product that would fit the client’s needs - the sales and structuring departments.

• And finally, actually executing the product. IPO, Bond Issuance in case of a loan (Category b). Trading in liquid markets such as equities (stocks), foreign exchange, other commodities,  in case of investment (Category a). Trading is done in the market in such a way that the clients get their required returns; The way in which it is to be traded, is decided by the structurers. The actual trading is done by, well, traders. Traders have some of the toughest and most stressful jobs in the industry. In very liquid markets, prices move very rapidly by the clock tick and trying to maintain a position, booking profits needs quick decisions, some algorithmic strategies, a good sense of the underlying economics, and common sense.

Is that all?

No. The above departments make-up the so-called front office of I-banks. As with any other bank / company, you would need an army of  people - the so called middle and back office.

• The operations guys - who actually execute all market orders, book trades, after sales/trading has given the order
• The product control guys - who check that nobody’s cheating the company
• Compliance/legal  - headmasters who ensure we are within bounds of the law
• IT - the software guys,
• Risk management - who’ll tell us whether or not we can take the risk of doing a particular deal with a particular client etc. etc.
• Research - who publish research reports for clients

Also, due to oversimplifying, I might have left out quite a few departments which do not come under broad classifications, one key example being Mergers & Acquisitions (M&A)

So, where’s the big deal?

The amount of money, and the increasing complexity of products, is mind-boggling. With clients looking for smarter ways to invest more money, Ibankers came up with ideas to create extremely complex and sometimes outrageous products. This coupled, with the fast paced deal-to-deal based style of working, as opposed to a research or process based style, has led to a projection of glamour, riches, brains (not always - as seen in the recent credit crisis) and even a sense of mystery in media and peer groups.

Where do IITians come in?

IITians’ quantitative analytical skills make them ideal for the complex structuring and other trading based jobs, especially if the products in question are exotic derivatives kind of stuff. The job could include use of stochastic modelling of stock markets to predict returns, find probabilistic future payoffs for a product bought now, and models to calculate the fair price of a product. Or analysing data and using models and extrapolation to come up with research reports. Or building algorithmic trading strategies.

I worked in the Equity Derivatives Group as a structurer. My main project was to analyse feasibility and pricing a class of options (a type of derivative) called cliquet options using 2 mathematical models and suggest changes to adapt them to NIFTY. Cliquet options are  not sold in India currently. At the end of the project, I was to suggest a model to use to price and sell cliquet options on NIFTY in India. I had to make sure that the price wasn’t too conservative (too high), making it unsaleable or too competitive (too low). I used models used in Korean and UK markets and used a sort of trial and error method to come up with modifications. To test them, I applied the models to NIFTY historic data to come up with a safe fair price.

Lessons from the experience?

A lot. In terms of soft skills, life-lessons, this internship went a long way. If I had to enlist -

Professionalism - The foremost quality that any intern working in a decent professional environment would talk about. Keeping deadlines, working steadily and smartly instead of last minute night outs, rolling out complete usable-saleable deliverables, as opposed to half baked projects we do in IIT. A simulation of real-life corporate pressure if you are not delivering. Professional conduct and communication.

A lot about finance.

And the 2 most important tools in similar firms - Microsoft Excel and Microsoft Powerpoint.

Barclays as an experience?

Great. Barclays has in the past recruited for the Singapore IT office. Given that both of us were not very enthusiastic about the IT profile, we were lucky to be placed in a front office position.

There was a lot of time and money invested into our learning - there’s a two day training in investment banking from a reputed educational firm in the field in Singapore. A flat hierarchy meant that we got to interact with everybody upto Managing Directors, who not only gave a great bird’s eye view of the economy but also acted as guides in choosing career paths. The projects are actual products they are looking to sell and were great learning opportunities to understand the field and also know the state of the market. It was overwhelming to understand how such a huge globally spread behemoth works. For our projects, we could be talking to anybody from New York to Hong Kong to Tokyo on different days. Everybody is willing to take time out to help an intern.The best part, for me, was the people that we interacted with - some of the smartest, talented and most humble people who treated us with a lot of respect.

And it pays well.

Buzz Rohit, if you have any doubts. Apparently he is entertaining questions.

Why??

After having huffed and puffed my way through daunting shop floors and mundane assembly lines, all in the quest to complete the mandatory 8 weeks of practical training in a relevant organisation, I knew, beyond any doubt, as Moti said, what I DO NOT want to do in life. Sometimes, given the wide plethora of avenues that we would fit in, knowing what you DON’T want is also just as important. Now, given that engineering/tech/core companies were out of question, I jumped into the whole “Financial Bandwagon”, and if given the opportunity, was more than willing to give it a try. I did not know what to expect, but then I knew that it would be challenging, no doubt.
So here I am.

For the sake of completeness (Yawn!!)

Now IL&FS stands for Infrastructure Leasing and Financial Services, and I am in the Debt Syndication group, in the Financial Services section. The company, on the whole provides technical and financial advisory services for infrastructure projects, across most sectors. Mine would come under the umbrella of Corporate Finance.
For any project, from a financier’s perspective, apart from arriving at the budget estimates, a lot of thought goes into how the project would be financed. This would primarily be done by either borrowing Debt (loans from banks, etc.), or raising Equity (through an IPO, etc.). The Debt Syndication group does the valuation of debt pertaining to how to borrow, from where to borrow, multiple borrowings, the repayment structure, and risk mitigation.

On the job

The first question that my boss asked me on my very first day was “Why finance while still in engineering??” which was quite ironical considering that he too had an engineering background. Now this is a question that a lot of us would face if we consider this as a career option. So rather than beating around the bush, it’s better to be frank outright. He knows it, you too know it, but just that he wants you to acknowledge it.
One thing that you’d notice at such a workplace (apart from a fairly unbiased sex ratio :P), is the excessive use of “MBA” jargons, even for the most trivial things. Coming to the work, I was asked, atleast over the last 2 weeks, to analyse road and highway projects (that was what was available :P), go through past reports (“Information Memorandums” as they call it), look into the “financial modeling” part(excel spreadsheets with complicated formulae), which was quite interesting nonetheless, and look out for “business development opportunities ” (nothing more than intelligent Googling). Another thing I realized is that finance doesn’t really involve a lot of coding as I had initially expected. Rather what is required is good “quantitative analytical” thinking (basically just an extrapolation of the maths that we have learnt), though knowledge of statistics is desirable.
One thing however that I’d like to mention is that if ever you are entering a completely different field (such as finance), from engineering, it is always better to ask beforehand, what is expected of you, if possible, even meet with the relevant people you would be working under before you join, and if there is any prerequisite reading/knowledge/skill set required, so that you don’t waste time at work reading stuff that you would have rather done at home. As I was pretty lax in this regard, most of my initial days were taken up by reading the basics of corporate finance, like how to read balance sheets, income statements, etc.
However, all said and done, as far as adaptability and aptitude is concerned, it’s really not “Rocket Science” that we are dealing with, and should hence be manageable by all of us.

The Workplace

The workplace, I must say is absolutely stunning. Since I work at the Head Office at BKC, makes it even grander. The lobby resembles more of a hotel lobby, with a CCD parlour on one side, and a library on the other.
The people you meet here are a set of highly motivated workaholics. Though “official” working hours are from 9 to 5:30, I was in the awkward situation of being the first to leave on my first day, that too at 6!!!! With small working groups and targets to meet, nightouts at workplace is not uncommon, atleast when the days were good. Now ofcourse things have slowed down a little. Even my fellow interns, most of them having finished 1 yr of their MBA, are highly averse to katoofying lukka. So I don’t have much of an option there. On the plus side however, weekends are off.

General Observations

• I strongly believe interns do have a LOT to offer to any organization and would not be wise to think otherwise. If you believe that you have nothing to offer to the organization, it’ll be reflected in your work, and you will ultimately be viewed as a liability.
• Its not the Aptitude, but the Attitude that matters. Initially you might be given menial and “mentally non stimulating” tasks like googling for stuff and doing menial calculations. But workplace demands professionalism and is expected in whatever work you do, however insignificant you think it is. Simple things like being punctual and well turned out makes a huge difference.
• Take constant feedback. Constant interaction with your boss can be really useful. It is understood that he’d be a busy man, but maybe not busy enough to even spare 5-10 mins a day with you. If you ask for it, he might even engage in a candid conversation with you sometime. Also the HR department is a good source of feedback, as in most cases they themselves take feedback on you from your boss. Also ask pertinent questions like what qualities do they look out for whilst interviewing candidates, to get an inside perspective.
• Talk to as many people as you can. Try to gather whatever you can about the company, in every aspect. Also try to get in touch with IIT alumni working in the company. Linkedin is very useful (as I am finding out ) in that regard. They would be the BEST people to talk to.

Signing Off

At the end of it, based on what I have seen till now, I’d definitely give it a thumbs- up. Agreed that you have long and uncertain working hours, agreed that it’s really not in the field of study, but I believe this is a grind that is worth it. You wouldn’t really know whether you liked something or not unless you tried it out. But in the process of trying it out, wouldn’t you rather give it your best shot anyway???