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'Rocket Scientists' : Wall Street: Banking on a New Breed

September 27, 1986|MICHAEL A. HILTZIK | Times Staff Writer

NEW YORK — Meet the "rocket scientists" of Wall Street.

"Most of the people who do what I do are considered on Wall Street to be weirdos," said Stanley Diller, who taught higher mathematics for years at Columbia University Business School before moving to the investment banking business. Now he teaches traders how mysterious concepts such as "convexity" and "duration" should affect the business of buying and selling bonds.

Kenneth H. Sullivan joined the firm of E. F. Hutton armed with a master's degree in engineering from Rensselaer Polytechnic Institute. "When I came into this business in 1976," he said, "it was totally declasse ever to have even brushed up against a computer." Now the machines are indispensable in his job as head of new product development for the investment banking firm of Drexel Burnham Lambert, a job, he noted, that "didn't even exist 20 years ago."

Unlikely Team of Bankers

Proficient in five computer languages, Helen F. Peters heads an unlikely team of investment bankers at Security Pacific that includes a former Antarctic researcher, a software manufacturer, and an emigre Russian particle physicist. "Physicists, astronomers, mathematicians--as long as they've got scientific training, we can look at them," she said.

For the layman, the affairs of Wall Street have always had an air of the unfathomable. Over the last decade, the "rocket scientists" have fostered a major change: Now much of what goes on in investment banks is so complex that even the investment professional finds it unintelligible.

Investment veterans can be excused for believing that their business has been fairly overrun by former physicists, engineering students and advanced mathematicians. These "rocket scientists," or "quants" (for quantitative analysts), have wielded their skill with numbers and computer technology to assume some of the most visible and remunerative jobs in investment banking.

'Program Trading'

The first ones, who arrived in the mid-1970s, helped create strategies for trading futures contracts and stock options that have revolutionized the stock market. When the Dow Jones industrial average plummeted more than 120 points in two days earlier this month, a major factor was "program trading," a computer-driven system of shifting billions of dollars between the stock market and futures exchanges based on their complex mathematical models.

They opened the door to an explosive growth in the complexity of the stock and bond markets; just as laws often seem to be written so that only lawyers can understand them, many new securities seem to be designed so that only computer experts can comprehend them.

This increasing intricacy has even created a market niche for "rocket scientists" willing to hire themselves out as consultants. After creating Merrill Lynch's cadre of "quants," Helen Peters jumped to Security Pacific. There, her year-old unit, Security Pacific Investment Strategies, has 45 experts available to assist investors and corporations made lightheaded by the complicated presentations of investment banks, just as an independent appraiser might be called in to help a home buyer inspect a house.

In some quarters, an engineering degree is now regarded as a better qualification for an investment-banking job than a business-school education.

Consider Dexter Senft, a managing director with a six-figure income at the leading investment bank of First Boston Corp. From 1970 to 1973, Senft was a mathematics student at the rigorously scholastic Rice University in Houston, where the cult of rocket science was lent weight by the presence of the National Aeronautics and Space Administration's Johnson Space Center.

Science-Fiction Buff

"I wanted to do rocket science when I graduated," Senft, 34, said in his soft, high voice. "I liked 'Star Trek,' and I was one of those kids who stayed up until 3 a.m. to watch Neil Armstrong on the moon."

Senft was hoping to land a job at TRW Corp., a principal contractor in the space program, but he ran into a minor problem: He got his degree from Rice in December, and TRW was not hiring until June or July, when the conventional school year ended.

Senft had spent an earlier summer working for First Boston, where his assignment had been to program the firm's computers so bond yields would flash on the bond traders' screens. In computer terms, that was the equivalent of a menial task. But he decided to return to the firm to wait out the hiatus before he could move to TRW.

"I couldn't figure out if I'd be here for six months or 18," he said recently. "That was 12 years ago."

Before long, Senft and others like him were showing the investment banks what a computer could really do. Now, Senft is head of First Boston's bond analysis department, which had a single analyst when he joined but employs more than 80 now. He also oversees the firm's product development team.

Business Training Ranks Low

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